This is a major change in incentives for those writing their wills: leaving at least a tenth of an estate to charity means that there will be less for heirs, but this reduction is in large part, although not entirely, mitigated by the reduced inheritance tax.
Consider what happens to that portion of large estates taxed at the top marginal rate of 40 percent. If someone now chooses to leave all his estate to heirs, for every £100 in the estate taxed at the top rate, £40 will go to the government and £60 to heirs. But if he gives £10 of that £100 to charity, £36 will go to the government and £54 to heirs. That’s a 10 percent loss to government as well as a 10 percent loss to heirs compared to what they would get if there was no legacy to charity. The deal that is being offered is that if you’re willing to accept that your heirs will get a little less, the government will also take a little less in order to allow you to direct funds toward charities you believe in.
Apparently many British are ready to take this deal. At present only 7 percent of Britons leave money to charity in their estates, but this number is forecast to rise in response to these new incentives. The Financial Times reported that the amount lost to the British Treasury as people change their estate plans will be £170 million (US$265 million) by 2016. Although this is not a huge sum, for government willingly to implement a revenue cut in these times of fiscal austerity is a big deal.
The message conveyed to citizens by this change in inheritance tax law is that the government itself agrees that citizens may know better than government how best to spend resources to improve communities.
Moreover, political and financial leaders are setting an example. In January, the leaders of the three main political parties -- Conservative leader David Cameron, Liberal Democrat leader Nick Clegg, and Labour leader Ed Miliban -- jointly announced that they were each leaving a tenth of their estates to charity. Last week, several leaders in the City, London’s equivalent of Wall Street, announced that they too would leave at least a tenth of their estates to charity.
So in Britain the government and its leadership are encouraging philanthropy and conveying the message that citizens might know best how to promote social and civic goods. Is that the message we’re getting here in the United States? The Obama administration’s proposal to reduce the value of the tax deduction for charitable gifts was in the top spot on the Chronicle of Philanthropy’s list of top five challenges for nonprofits in 2012. While the British government is reforming inheritance tax law to increase incentives for charitable giving, the Obama administration is proposing to alter tax law to reduce incentives for charitable giving. The message of the Obama administration’s efforts to cut the charitable deduction is that government is a better judge than citizens of how to improve communities.
Of course, the United States has a much lower overall tax rate than Britain and government spending is a greater part of GDP in Britain than in the United States. However, in recent years the British government has been showing more signs of acting on the premise that the government isn’t the solution to every problem: for example, Britain undertook a much more austere approach to government spending in the wake of the 2008 crisis in comparison to the lavish stimulus spending our government undertook. And now we see the British government doing more to encourage charities and nonprofits. Maybe we need to look across the Atlantic for new policies about how to encourage citizen philanthropists.