Donation Economics

Really, you can't make stuff like this up...

Tax reliefs: Treat all donors equally

WHEN a person makes a donation to an Institution of a Public Character, a government-approved museum or a prescribed educational or research institution, he is entitled to a tax relief equal to 250 per cent of the amount donated.

An approved donation of, say, $1,000 reduces the donor's chargeable income by $2,500.

The impact of this varies for different donors, depending on their chargeable income.

If the donor's chargeable income exceeds $320,000, for which the marginal tax rate is 20 per cent, the net (after-tax) outlay to the donor is $500.

If his chargeable income is between $30,000 and $40,000, for which the marginal tax rate is 3.5 per cent, his net outlay is $912.50.

If his chargeable income is less than $20,000, for which the marginal tax rate is zero, his net outlay is $1,000.

This does not appear right.

First, a donation is a donation. The tax relief results in an inverse relationship between the net outlay of a donation and the donor's marginal tax rate. Why should a donation of any given amount become an outlay that is smaller after tax for a high-income donor than for a low-income donor?

Second, this distortion has been magnified as the tax relief was raised over the years. The tax relief was doubled to 200 per cent of the amount donated in 2002, and to 250 per cent in 2009.

Third, the lower a donor's chargeable income, the donation of any given amount forms a bigger part of his chargeable income and may be a bigger sacrifice for him.

The existing tax relief should be replaced by a tax rebate of a fixed percentage of the amount donated. In addition, individuals who do not pay income tax should receive, in cash from the Government, an amount equal to the tax rebate.

In this way, all donors will be treated equally and equitably.

Such changes should not discourage donations by the wealthy - if the donations are truly from their hearts.

David Boey

angry doc was reminded of the "Barstool Economics" parable when he read this letter; Mr Boey sounds like one of the gentlemen who now pays less for his drink, but is nonetheless unhappy that the richest are enjoying a bigger discount than he is.

Mr Boey ignores the fact that even with the bigger discount, the actual amount of taxes paid by those in the highest bracket remains much higher than that paid by those in the lower brackets. He believes that the a fixed rebate rate treats all donors "equally and equitably", yet has no problem with a progressive income tax regimen.

Ironically, the tax rebate which he proposes that donors who do not pay income tax will come mainly from those in the higher brackets - a man can choose to "donate" $1000, when in truth he donates only part of that, with the remainder being levied from those who pay income tax (with no choice in the matter). In fact, by having a rebate on donations, we are in fact making those in the higher brackets pay for a part of all donations made - we are in effect forcing them to pay for our donations! Is this, in Mr Boey's opinion, fairer than the existing system?