Tax breaks for charity donations should be scrapped

In 2020 American households earning over $500,000 a year claimed more than half the cash that government spent on income-tax breaks for charitable giving. As AI mints a new crop of billionaires, yet more plutocrats will be able to use these schemes to reduce their tax bills. Most donations go to better causes than private art collections. Tax-advantaged dollars support hospitals and keep foodbanks going. They even support services that the state would need to provide if charitable funding dried up.

But it is right to call time on such tax reliefs. In America alone they are likely to cost over $70bn in forgone revenue in 2026 (roughly the GDP of Alaska). There is flimsy evidence that these schemes prompt significant extra giving, the money is often misspent, and the result is more power for the wealthiest.

Using tax breaks to encourage giving has a long history. During the first world war Congress was so worried that high taxes would sap tycoons’ generosity that it introduced income-tax deductions to encourage them. Today most rich countries have such schemes. In America you can deduct charitable donations from your taxable income on your tax return. In Britain charities can claim a portion of the donor’s tax payments directly from the government using a scheme called Gift Aid. (Higher-rate taxpayers can also claim a rebate.)

The key test is whether charities gain more in additional donations than governments lose in revenue. Academic estimates vary wildly. Although some are bullish and suggest that donations can exceed lost revenue, some recent studies are more equivocal. In 2024 Daniel Hungerman of the University of Notre Dame and his co-authors found that, if the government uses tax reliefs to make the cost of giving 10% cheaper, it incentivises donors to give only 6% more on average. The state gives up more than charities gain.

How incentives are designed matters. American reliefs are claimed months later, during the long dark night of the soul that is filling in a tax return. Studies suggest such rebates prompt less extra giving than when the charity itself makes the claim, as is possible in Britain. When a smiling teenager at the local donkey sanctuary proffers a form and mentions that the government will add 25% to your donation, it is hard to say no.

But every pound that the government gives to the donkeys is a pound less for its own spending priorities, whether teachers or torpedoes. Those suspicious of the state frittering away cash celebrate this. Saul Levmore, a law professor, argued in a paper in 1998 that charitable deductions operated as a form of voting, in which individual citizens (donors) choose how best to spend some of their tax bill. By harnessing the public’s collective wisdom, this could lead to a more efficient allocation of resources than that achievable by the state.

This seductive argument fails on three counts. The first is the natural bias caused by focusing on what is in front of you. When the volunteer at a crumbling English stately home asks if you want to claim Gift Aid, you think about how that extra money would help fix the leaky roof. But the costs of that nudge, in less cash for schools or defence, are far from your mind. Or, filling in your tax return, you think fondly of your chosen good causes, not of the public services with a few dollars less.

Then there is the ability to make decisions in the round. Taxation pays for public goods that the private sector would undersupply if left to its own devices. That means weighing competing collective priorities. The government might not be very good at this, but at least it tries. No philanthropist is seeking to spread their funding across the full range. They tend to focus instead on the causes that interest them and that they know about, leaving less glamorous necessities—think potholes—neglected.

The Gift Aid that keeps on giving

What’s worse, some people will prioritise causes that others find distasteful. In Britain Gift Aid is supporting a mosque where an imam last year said that “discipline in the case of rebellion” was one of the “rights of the husband over the wife”. In America members of the Oath Keepers, a far-right group, for years could claim tax reliefs on donations to an affiliated organisation.

The final problem is one of inequality. If charitable deductions are a form of democracy, it is one stacked in the favour of the rich. Mr Musk would have at least hundreds of thousands of votes for every one held by the average American. True, only billionaires have enough money to make big bets on underfunded causes and long shots, like curing cancer. But Mr Musk’s example shows how dependent this logic is on the preferences of the few.

Philanthropy is undoubtedly a force for good in the world. Evan Spiegel, a tech billionaire, and his wife have used their fortune to pay the medical debts of more than 260,000 Californians. People of modest means keep day centres and homeless shelters afloat by donating what they can. The warm glow that comes from giving makes everyone happier. But it comes, surely, from giving in itself—not from the taxman chipping in.

Subscribers to The Economist can sign up to our Opinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence.