Removal of tax concessions ‘counter-productive’

Press, 21 July 1988, Page 4

Removal of tax concessions ‘counter-productive’

By

CHRISTOPHER MOORE

Tax revenue was unlikely to benefit significantly from the removal of tax concessions to charitable and non-profit organisations., according to an Institute of Economic Research report released yesterday.

The special report, commissioned by the Charities and Non-Profit Taxation Task Force, says that. the Government’s proposed tax changes removing tax concessions would be counter-produc-tive. The removal of concessions would impose ‘‘compliance costs’’ on charities and administrative costs on the Department of Inland Revenue — “real resources which would detract from over-all revenue,” the Institute said. “No detailed figures have been examined but it is unlikely that a change in the arrangement of transfer payments which entailed charities recording tax and receiving grants in return would result in non-profit organisations receiving the same funding at less cost to the Government.” A survey has suggested that a rebate on donations was not a significant cost to tax revenue. “Total direct taxation paid by individuals in 1983-84 amounted to $5626 million. Rebates on donations amounted to $3l million. This implies that if the rebate had not been allowed that year,

tax revenue would have been increased by 0.6 per cent,” the report said. “In the lastest year for which tigures are available, 1984-85, total rebates amounted to $34.5 million.” The removal of the rebate could also result in a greater proportional increase in the tax paid by lower income groups. “A widespread criticism of concessions to charitable donations and charities income is that they are subject to misuse fantax avoidance purposes. This is not a criticism which can be levelled against tax concessions in New Zealand since no provision is made for asset transfers.” Claims that tax deductibility on donations benefit the wealthy and their favoured charities were not viable in New Zealand, according to the study. The abolition of tax concessions would reduce the incentive to give to charitable organisations. Studies had shown that the granting of tax concessions affected incomes and prices. The removal of tax concessions for the trading of non-profit organisations could also reduce the surpluses for

disbursement to charitable activities. “A less obvious effect of the changes will be on the over-all level of social welfare within the economy. Economic theory indicates that the removal of concessions will reduce the utility enjoyed by individual donors. The level of oublic goods provision after the changes will depend in part on the relative efficiency of the public sector and non-profit sector in supplying such goods. “The possibility of bureaucratic costs, delays and inflexibility in the public sector suggests that in some instances it will not be the most efficient means of supplying or funding public goods,” the survey said. Tax concessions were seen as a source of revenue for charities to provide public goods which the commercial market economy had failed to supply in appropriate quantities. The absence of tax concessions would result in direct Government grants to retain the level of public goods provision.

“Such direct involvement may be politically awkward for a Government, particularly in re-

gard to worthy but unpopular causes. The collection of taxes from charities and the subsequent redistribution of grants from taxation imposes costs on the charities and administrative costs of Government which do not enhance the welfare of society,” it said.

Tax concessions allowed a degree of democracy in the provision of public goods. Donations reflected donor preferences while charitable activities responded to perceptions of need and preferences, providing a different approach to the provision of public goods from that found in Government bureaucracy.

Direct Government involvement in funding charities could become

counter productive, resulting in the “crowding out” of private donations.

“Of critical importance is the efficiency of the supply of public and merit goods by private and Government agencies and the efficiency of funding procurement. Theory suggests that in some conditions subsidy of private gifts to public bodies is preferable to direct Government expenditure.”