It’s a paradox that seems to reinforce every stereotype about greed and wealth: those with the smallest incomes donate the greatest share of their money, while the rich pinch their pennies. Among taxpayers who claim a deduction for their generosity, the proportion of money given away by low-income earners is 11 times higher than that of wealthy taxpayers.
The disparity, highlighted in a Fairfax analysis of the most recent data available (2010-11) from the Tax Office, shows those who claimed tax-deductible gifts in the lowest taxable income band – less than $6001 – donated an average of 22 per cent of their incomes. By contrast, taxpayers reporting $1 million or more of taxable income donated an average of 1.8 per cent of their income.
“Some people say this proves that low-income earners are more generous than high-income earners,” says Myles McGregor-Lowndes, director of the Centre of Philanthropy and Non-profit Studies at Queensland University of Technology. But other factors, including wealthy retirees, may be at play.
“We suspect that it’s to do with high net-worth individuals who may not have any income or little income but give away substantial amounts so they don’t have to pay income tax.”
The affluent gain more from charitable deductions than low-income earners. In 2010-11, tax-deductible donations returned more than $1 billion to taxpayers, 20 per cent of which went to the wealthiest 1 per cent.
If generosity were measured by who is most likely to donate – not who gives away the bigger proportion – high-income earners would be the winners. The wealthiest Australians are 10 times more likely to claim a tax-deductible gift than those who report the lowest incomes.
But there are pitfalls to equating tax-deductible gifts with generosity.
“People who have tax accountants … are more likely to claim deductions than those who don’t,” Professor McGregor-Lowndes says. Poorer taxpayers might not claim every $2 handed out on Red Shield Day.
But tax breaks are not the end of the story. Even the richest taxpayers end up with a net loss when they give away their money.
Freedom and control are driving factors, experts say. Taxpayers cannot control how public funds are distributed but because charitable donations are voluntary, they let people feel in control of at least part of the tax pie.
“High-wealth earners … have high motivation to control and influence,” says Christopher Baker, a research fellow at Swinburne University’s Asia-Pacific Centre for Social Investment and Philanthropy. “If you can choose to direct money where you think it is best spent rather than where the government determines it is best spent, then those taxation incentives drive that behaviour at the high net-worth end.”
At the heart of tax-deductible giving are cultural expectations about the redistributive role of government. ”The French are among the lowest private givers and that’s partly a culture and national psyche that says the state should be providing all of these things,” Dr Baker says. Whereas Americans, the world’s leading charitable donors, “have a pathological dislike of giving money to the state … [Their] culture is the role of government is pretty minimal and private funds should do the heavy lifting.”
Whether individuals are more effective than the government at redistributing wealth is questionable.
International research finds rich and poor tend to give to themselves. Low-income earners favour organisations dedicated to social justice and welfare; the rich donate to causes that reinforce privilege, such as universities, museums and the arts.
Studies also suggest exposure to disadvantage influences how quickly wallets open when the hat is passed around.
“People with higher income levels are less likely to identify with people who are down on their luck … [and] tend to be more disconnected from the broader community,” says Community Council for Australia CEO, David Crosbie.
Low-income earners, who may rely more on the community to get by, tend to “feel a sense of collective ownership of our wellbeing.”