How much do taxes matter if you’re giving to charity?

By · Published March 1st, 2013

Suppose you’re looking to donate as much as possible to charity, and are choosing between two jobs. Should you worry about the taxes in each location? Since you can claim back taxes on charitable donations, many people think you don’t need to worry about this issue.

In many western countries, charitable donations are in some way tax-exempt. In the UK the charity can claim back the normal rate of tax you paid on your donation, and you can claim back the higher rate tax you paid. In the US, you can use your charitable donations to reduce your tax liability in a similar way. So your charitable donations come out of your pre-tax income, rather than post-tax income. If you’re not going to be made to pay tax on your substantial donations, you’ve made yourself tax-exempt to a considerable degree.

You might think that the tax environment doesn’t make much difference to your ability to Earn to Give. But this isn’t actually the case, for several reasons.

Firstly, you do still need to earn some money for yourself, and you’ll pay tax on that. The lower the tax rates, the more you can spend on and invest in yourself – or, the lower the proportion of your pre-tax income you need to keep for yourself, so the more you can donate.

Secondly, it’s quite possible that the best charity to support won’t turn out to be a registered charity at all. What if you find a scrappy little start-up that’s going to save the world, but is currently just three grad students in a basement? Donating to this group wouldn’t be tax-exempt, so lower taxes will help you help them. Unless you think the government is always going to grant charitable status to the right people, this should be a concern; especially if you’re interested in gambles with low odds but high payoffs.

Finally, legal uncertainty. Recently, both Obama in the US and Osborne in the UK recently attempted to end or substantially reduce the amount of tax relief we could get on charitable donations. While they were unsuccessful, it’s possible that they might succeed next time. If you’ve invested a lot into a working in a particular area, and can’t easily escape, you could have a lot to lose.

True, if you thought your country’s government would do more good with your money than any other group in the world, you won’t be worried about taxes, as you’ll be donating all the rest of your money to the government anyway (to the extent that you’re altruistic). But this can’t be true for everyone. Even if (say) the Norwegian government really was the most effective organisation in the world, anyone who didn’t live in Norway would (at the margin) want to reduce the amount of tax they paid as much as possible, so they could give it to the Norwegians instead.

However, taxes rates obviously aren’t the only things that matter. While low taxes might encourage growth, rich areas have lots of wealth for the government to seize – hence why New York, with the captive wealth of Manhattan and Wall Street, can afford to have the highest taxes in America. While a higher portion of your paycheck will be taken from you, a job at a big bank might pay sufficiently well that it’s still better than the average job you might get in Indiana.

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