What really angers me is that the coalition is misrepresenting how tax relief works – it is implying that it helps donors line their own pockets. But the facts are clear. A wealthy individual who earned a £1m bonus would ordinarily pay £520k in tax (assuming the bonus is wholly within the 50p tax rate and including employee national insurance) and keep £480k. But if they gave £100,000 of this away, they would be able to reclaim £37,500 in tax relief from HMRC and end up paying £482,500 in tax and keeping £417,500. In other words, they would lose £62.5k in take-home pay and be able to allocate some of their tax bill to a cause close to their heart (the charity would also be able to reclaim some extra money from HMRC). But the crucial and obvious part is that the philanthropist is not better off – he or she is worse off. His or her take-home pay is down, not up. That is because he or she is being generous, not engaging in a cynical act to defraud the taxman. Is this government financially illiterate?
Charity relief works differently to some other tax reliefs: by putting money in their pension, which remains their property (though they cannot touch it until they retire) taxpayers end up paying substantially less tax than they would otherwise have paid, and are therefore better off, post-tax, than if they kept the cash in their bank accounts. But charitable donations require a real sacrifice, regardless of tax relief. These attacks on generous folk – including many who work in business and the City – are truly astonishing. Whoever came up with such a strategy and thought it would be good PR for the government ought to be taken out and fired – immediately.
There is a good case to be made that in a drastically reformed system, with much lower tax and spending as a share of GDP, there would be no need for any reliefs. I have long supported a flat tax where – above a generous personal allowance – everybody pays the same, low rate on all labour and capital income. But that would be dramatically different to what is on offer today, and would trigger an explosion in wealth creation and charitable donations. The government, however, is not implementing such a reform – it is merely misrepresenting the motives of those building the Big Society it once purported to believe in in a desperate bid to raise more tax.
Another explanation for the coalition’s folly is doing the rounds. Apparently, it feels that some EU-based charities are dodgy, but that EU rules mean it cannot do anything about this. If so, why doesn’t it say so? It’s like the pasty tax: The government felt that it had to hike taxes on pasties to avoid an EU ruling that could have forced it to cut Vat on other warm food, such as fish and chips, and hand over billions in compensation. But if the EU is the problem why doesn’t it tell anybody? No wonder Ukip is surging in the polls (it is at 11 per cent in one), and Labour is substantially ahead. When it comes to own goals, the charity row is even more staggering than the coalition’s vicious “green” plan to penalise those seeking to build conservatories. What, exactly, is this government up to?