Giving Deadlines

Last summer, while walking the streets of Kingston, I encountered a wandering horde of business economists, and joined them for drinks. We got onto behavioural economics and financial decision-making, and one of the business economics folks started talking about the charitable donations deadline.

It would be a good idea, he argued, to move the charitable donations deadline from Dec 31st to the last day of February, to coincide with the RRSP (Registered Retirement Savings Plan) deadline. Many people prepare their income taxes before the RRSP deadline, in order to work out how much to contribute to their RRSP. If, after making RRSP contributions, a person still has a large tax bill, she could then increase her charitable donations, and reduce her taxes owing that way. 

I'm pretty sure this idea would increase charitable donations. Right now I'm ignoring all of those emails with "Tax Deadline: Charitable Receipting" in the subject headline. I've got lots of other bills to pay. Income tax time is months away, so I'm not feeling any urgent need to reduce my taxes. Yet if I was staring at a large tax bill, the charitable donations tax credit would suddenly seem much more salient. 

On the other hand, is nudging people to donate more to charity and pay less in taxes a good idea? This all depends upon the relative merits of government spending and charitable spending. Some charities operate more efficiently and effectively than governments. Other charities spend large amounts on fundraising, pay high salaries to staff members, pursue projects of dubious social benefit, and are generally fairly ineffective. (To find out how well any Canadian charity performs, check out Canada Revenue Agency's charities listing here: http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html).  

On balance, I think I'm probably against encouraging people to substitute charitable donations for taxes, for three reasons. First, governments often have better information about spending priorities than individual donors. Take, for example, medical research. The Canadian Institutes for Health Research assess requests for funding across a wide variety of research areas. Experts evaluate the various requests, and fund the most meritorious proposals. The average donor gives to whichever health cause is most salient to her, or to whichever cause she cares about the most - breast cancer, prostate cancer, the heart and stroke foundation, cystic fibrosis. This seems to me to be a relatively ineffective way of allocating health care dollars.

Second, because governments are in a position to deliver broad-based programs, they are able to reduce administration costs, and achieve high take-up rates. For example, as an academic, I appreciate all of the donors who give to the university, and make it possible for the university to offer bursaries and scholarships to needy and deserving students. I give myself. Yet administering hundreds of individual scholarships, each with its own highly specific selection criteria ("best student in comparative economic systems" "best essay in a fourth year course" "needy Turkish-Canadian student"), is extremely time consuming. Universal government programs, for example, tuition rebates or loan forgiveness for students from low income families, have much lower administration costs per dollar of support given. 

Third, charitable assistance not infrequently comes with ideological strings attached. I give to the Ottawa Mission and Cornerstone Housing for Women because they provide direct assistance to this city's most needy and vulnerable people. But should food and shelter be bundled with a subtle Christian message?

Though there is one good reason to move the charitable donations deadline: doing so would provide a really cool natural experiment for some behavioural economics researcher to look at.

Comments

[Vlad]

One point I would add is that the term "charity" has a different meaning for legal and tax purposes. Canada largely follows the English common law tradition determining what is deemed a "charitable activity" One of these activities is the promotion of religion. A place of worship, as long as it's simply focusing on performing religious rites will have little trouble gaining charitable status. So, the tax paper is indirectly subsidizing the promotion of religion.

[Ryan Cousineau]

You did an excellent job of asking the right question ("do we really want to increase charitable contributions?") but, and I mean this in the nicest possible way, gave a supremely statist* answer to the question.

I think you're right that government is good at big, aggregated, programs, and I'll stipulate the low administration costs for this argument (I think you're probably right, even :). But the advantages of charities are several.

-charities can fail. If their donations and volunteer hours are insufficient to fund the administrative costs, the charity goes away (or at least shrinks to near-nothing). As long as there is a modicum of thought about charitable giving (and "administrative overhead" appears to be the phrase that pays in discussions about charities right now), then charities can be far more responsive to societal needs than government programs, which are slow to start and hard to stop.

-charities reflect the desires of givers. At the risk of torturing EMH, if there was a need for an Objectivist soup kitchen charity (to absorb the donations from do-gooding followers of Ayn Rand looking to feed the hungry) it would exist. Instead, you know, Sisters of Charity, who happen to be a good thing because...

-...charities absorb the altruistic fervor of people and channel it into socially positive activities at very low cost. Even if you don't like what a religiously-based charity believes, you may note that they are putting volunteer labor and their fundraising resources into an activity you can support. Whether their motives are purely divine inspiration, or good PR for their religion (Mother Teresa Wants You!) society still gets the homeless fed.

Charities, compared to governments, are responsive to donors, come at scales ranging from 1 person to international NGOs, and in aggregate, allow donors to respond fluidly to changing needs and desires (even if every charity is glacially unresponsive to how the world changes, the donor can change charities). Governments are very good at Public Good problems and administrative costs for extremely large, extremely simple projects (writing cheques, to a lot of people, repeatedly).

Maybe I'm saying I like the idea of charities applying pressure on the marginal expenditures of government more than I like the idea of governments applying pressure on the marginal expenditures of charites. But then, I'm not much of a statist.

*I have nothing specific against statists, some of my best friends are statists, &c...

[Sean Hunt]

Are you aware that there is a bill on the order paper in the House of Commons' (a private member's bill sponsored by Peter Braid) to move the deadline to the end of February?

[Determinant]

One point I would add is that the term "charity" has a different meaning for legal and tax purposes. Canada largely follows the English common law tradition determining what is deemed a "charitable activity" One of these activities is the promotion of religion. A place of worship, as long as it's simply focusing on performing religious rites will have little trouble gaining charitable status. So, the tax paper is indirectly subsidizing the promotion of religion.

The four Common Law charitable purposes are:

1) The relief of poverty
2) The promotion of education
3) The advancement of religion; and
4) Other purposes beneficial to the community as a whole that the courts have identified as charitable

Point 4 means you have to satisfy that your charitable purpose is agreeable to the spirit and intention of the preamble to the Charitable Uses Act, 1601 (Statute of Elizabeth).

Speaking of religion, most churches are registered charities. In the United Church, most congregations are charitable organizations as is our denominational charity, the Mission & Service Fund. The United Church has only one general charity outside of local congregations, which does all our mission and charitable work, it's been that way since 1925.

[Neil]

Many of your arguments are perhaps good if it were a $1 charitable donation vs $1 tax payment. But do the efficiency merits stand up when it's somewhere between $2 and $2.44 charitable donation for $1 in tax savings (depends on province, assuming you've already donated at least $200 in the past year)?

[Frank Restly]

Nick,

"On balance, I think I'm probably against encouraging people to substitute charitable donations for taxes, for three reasons. First, governments often have better information about spending priorities than individual donors."

Governments have access to capital markets, charities do not. With a government, the spending decision is independent of the financing decision.

[Determinant]

On balance, I think I'm probably against encouraging people to substitute charitable donations for taxes, for three reasons.

There is no substitution, in fact. The problem is that this sentence (and most people) confuse yearly accrued income with their cash income.

At year end, if I have given $300 cash to my charity of choice, I have actually given net $100 because of the tax rebate. I am only down $100 in income. But because the donation and tax credit are separated in time, often by several months, I lose $300 out of pocket, now.

Political party financing is explicitly sold this way. Cash donations of $400 or less receive a 75% tax credit, so it costs the donor $100. It's better to consider that the government subsidizes charities and political parties but the financing system requires a kernel of private funding ($100) to work. But the donor has to carry that $400 cost for a few months. You can eliminate this through the T1213 which reduces a person's tax deduction from their paycheque against declared deductions and tax credits. It's a little bit of a pain and it should be easier but it does exist.

Mike Moffatt did a post on political party funding and the several government tax credits, rebates and subsidies that which means a riding only has to finance 20% of its campaign expenses our of pocket. I ran that article past my NDP riding association; it convinced them that a monthly payment plan for members would be a great idea, $20/month from 20 members means we could spend the limit next federal election campaign.

[K]

Ryan Cousineau:

"charities reflect the desires of givers. At the risk of torturing EMH, if there was a need for an Objectivist soup kitchen charity (to absorb the donations from do-gooding followers of Ayn Rand looking to feed the hungry) it would exist."

Say what? If the objectivists "need" to give to a soup kitchen then that "need" will be satisified??? I feel so much better.

[rsj]

Am I the only one noticing the irony of assuming the utopian outcome in a post about charities?

[Donald A. Coffin]

FWIW, US tax law does (I think) allow deductability of charitable contributions up to April 15 (I may be wrong; the tax law changes often enough that it can be hard to keep up). But I am aware of no research showing that the move to a later deadline had any effect on contributions (and, if it did, wouldn't it be a one-time effect?).

[Frances Woolley]

Ryan: "charities absorb the altruistic fervor of people and channel it into socially positive activities at very low cost."

Love it! Though charitable doesn't automatically equal socially positive - some take a dim view of the activities of the Fraser Institute, others are very sceptical about the output of the David Suzuki Foundation, but both are registered charities.

"charities reflect the desires of givers" Not obvious - the average donor is in a poor position to monitor the behaviour of the charities they give to. Take, for example, the recent debate about the US Humane Society http://www.huffingtonpost.ca/douglas-anthony-cooper/humane-society_b_1943902.html. Some people donate to the humane society because they want to support their local animal shelter, not realizing the two are quite different.

Sean - here's a link to Bill C458 http://peterbraid.ca/c458/. It'll be interesting to see if it makes it through...

Frank - Nick's marking, this post was written by Frances Woolley.

Neil "But do the efficiency merits stand up when it's somewhere between $2 and $2.44 charitable donation for $1 in tax savings (depends on province,"

Yes, that thought crossed my mind after I'd posted. To some extent an increase in charitable giving would crowd out either saving or private consumption, which could be good or bad or neither.

[Frances Woolley]

Donald: " wouldn't it be a one-time effect?" - not if the later deadline results in increased salience of the tax advantages of donating.

[Determinant]

Charities and Governments are not and never were direct substitutes. Charities do not compete directly with governments, they provide things the government doesn't or act as instruments of the government, usually as service providers paid for by government. They are at best indirect competitors. Ryan Cousineau has it best that governments do a few things very well, like social welfare which consists of writing cheques under various conditions or paying for physician or hospital bills. Charities are not and never were "comprehensive", that is they don't target a problem and throw money at it until it goes away; they never have enough money for that.

Notably the Church of England turned over a large number of its own charities to the Government in 1948 when the Atlee Labour Government rolled out the Second Welfare State, the one everyone in the UK thinks of as the "Welfare State".

As for religious charities, generally those are the best out there, they have the lowest overhead rates in class. The moral pressure that people don't want to "steal from the church" is significant and even the pros take comfort in the moral compensation of doing "God's Work". That is exactly how the United Church's Mission & Service Fund works, and all other Canadian churches have similar operations.

On the knowledge problem, the United Church's decades-old solution has been that the Mission & Service Fund is the only denominational charity and the only one solicited for in services. M&S takes its direction from General Council, which despite its name is really a church legislature that meets every three years, the Commissioners are MP's.

The Church may not be a democracy, as the saying goes, but in Presbyterian churches like the United Church, it comes awfully close.

[W. Peden]

Determinant,

Might charity and government be non-competitors, while still providing substituable services?

"Charities are not and never were "comprehensive", that is they don't target a problem and throw money at it until it goes away; they never have enough money for that."

Who does?

"The Church may not be a democracy, as the saying goes, but in Presbyterian churches like the United Church, it comes awfully close."

Yes, this is true: Presbyterian churches operate in practice much like the Soviet Communist Party operated in theory.

[JB]

I also prefer government over the charity. Problems should be dealt with on the highest possible level in order to really solve them. Charity just focuses on particular thing, while it has to be controlled, which needs more administrative workers, field workers etc. The best way how to deal with this problem is an efficient government.

With Canada being the most educated country in the world I would expect that it would deal with the excessive cost of the tertiary education. But this goes more into philosophical than economical belief about certain values that can´t be measured by the amount of money you can spend.

[Frances Woolley]

Determinant: "Charities and Governments are not and never were direct substitutes"

Perhaps you mean "perfect substitutes"? Charities and government are substitutes in that they do similar things: relieve poverty, provide education, do things for the general good of the community. There is a very large economics literature on the extent to which government crowds out private charity - see, for example, Abigail Payne and James Andreoni's work e.g. http://www.jstor.org/discover/10.2307/3132117?uid=3739448&uid=2&uid=3737720&uid=4&sid=21101599657867. Generally there is found to be some, but not 100%, crowding out.

[W. Peden]

JB,

Do you mean the excessive cost of higher education or the excessive price of education?

[W. Peden]

* Excessive price of higher education.

[anon]

The charitable deduction is not really about "subsidizing charities", though. It's about equating the tax status of volunteer labor (which is untaxed, obviously) with labor that folks are paid for and give some of the proceeds to charity. This clearly increases economic efficiency by promoting the division of labor and allowing folks to specialize in their most productive occupations, regardless of the ends they're pursuing.

[Frances Woolley]

anon - I don't know if this is obvious, as it depends upon the extent to which cash donations and volunteer labour are substitutes/complements. Also charities don't necessarily operate with volunteer labour.

[Frances Woolley]

JB: "I would expect that it would deal with the excessive cost of the tertiary education"

I for one am watching what's happening in the UK and Australia very closely - Canada, UK and Australia often take similar policy initiatives.

[Determinant]

Determinant: "Charities and Governments are not and never were direct substitutes"

Perhaps you mean "perfect substitutes"? Charities and government are substitutes in that they do similar things: relieve poverty, provide education, do things for the general good of the community. There is a very large economics literature on the extent to which government crowds out private charity - see, for example, Abigail Payne and James Andreoni's work e.g. http://www.jstor.org/discover/10.2307/3132117?uid=3739448&uid=2&uid=3737720&uid=4&sid=21101599657867. Generally there is found to be some, but not 100%, crowding out.

Government guarantees that everyone will have their hospital bills paid under a medicare scheme are far better in that they are far more comprehensive than the hit-or-miss work of charities. Charities know this, which is why they move out of government-occupied fields. Government guarantees are for when failure can't or shouldn't happen; charities must accept failure and limited resources in a way that government's don't, through their power to tax.

Charity, from the point of view of the giver financially, is only a benefit if they *don't* pay. But not paying is a socially negative outcome. Specifying a choice between charities and government and then making an argument that charities are more optimal because they are voluntary is a fallacy of composition.

[Jacques René Giguère]

anon:"The charitable deduction is not really about "subsidizing charities", though. It's about equating the tax status of volunteer labor (which is untaxed, obviously) with labor that folks are paid for and give some of the proceeds to charity. This clearly increases economic efficiency by promoting the division of labor and allowing folks to specialize in their most productive occupations, regardless of the ends they're pursuing.
In my years in volunteer work ( autistic children especially),I found that sometimes it is more efficient for my benefactors to work at a high income occupation and give us the cash. But sometimes,volunteer work is more efficient if used properly. I'd rather have local businessmen using their skills and contacts to help me build an adapted vacation house for the children than wrapping gifts for their Christmas party. Though ,once in a while, a humble task is good for the soul...

[Bob Smith]

The characterization of a deduction for charitible giving as a subsidy depends on what you think the appropriate tax base is. If, for example, you think that that we should have a consumption tax base rather than an income tax base (which would be consistent with current policies like RRSP deductions and exemptions for TFSA), than providing a deduction for charitible donations is an appropriate policy in order to accurately measure the donor's(consumption) tax base. Providing a deduction for.charitible donation under that characterization is no more a subsidy that providing a deduction for the cost of inputs in computing your income.

Under that scenario, of course, charities are still subsidized (since their consumption isn't taxed), but that is equally true of charities in a tax system that taxes income.

Of course, our "income tax" system really has a hybrid income and consumption tax base, but there are reasonable arguments that we should be moving towards a consumption tax base.

[Frances Woolley]

Bob -

I would argue that, on the contrary, money given to charities is frequently a form of consumption.

For example, charitable giving can be a way of buying professional advancement. When I give to Carleton, I'm giving to the institution that pays my salary. At the various receptions for donors, I have an opportunity to chat with - or, at minimum, see and be seen by - the President and the Provost. Does this make a difference in terms of professional advancement? It certainly signals to the senior administration that I'm committed to the institution, and that's a good thing.

Charitable giving can provide direct consumption benefits. For example, I might give to a local environmental group which exists solely to maintain a park where I like to hike and ski.

The "warm glow" of giving can also be seen as a form of consumption. Suppose I give to a proselytizing religious organization, which uses my funds to convince other people to abandon their religious beliefs and adopt mine. Who has gained from this activity? Who has "consumed" the funds expended? It's not obvious.

[Ryan Cousineau]

Frances: regarding the problems of deception and the question of what is socially valuable, I think the problems are less dire than you fear.

As a sort of control, compare to the transparency and value of the average government program.

Back to charities, I'm sure there will always be better and worse charities. I doubt there's a long-term incentive for charities to deceive donors (as opposed to just doing what they say; it's not that hard, is it?) if only because being vulnerable to an exposé like that Human Society article is bad for one's donations. Charities attached to poor practices and poor goals are likely to lose popularity, relative to efficient, good ones. ("Charities can fail...")

As for the Suzuki Foundation vs. Fraser Institute dichotomy, we can happily disagree about which charities to support. Again, that's part of the benefit of charities, that they are more choose-your-own-adventure than government, and again, I think our disagreement is more about whether the present size of government is too big, too small, or just right (the marginal statist-libertarian argument, I guess).

This discussion might be well-informed by actual numbers: Canadian charitable giving amounts to about $10 billion per year, the federal budget is about $250 billion. My instinct is to raise the former number, not the latter, but reasonable people may disagree.

http://www.statcan.gc.ca/pub/11-008-x/2012001/article/11637-eng.htm#a3