In defence of the Chancellor, he did not actually propose limiting donations as such. He wants to curb all forms of tax relief that are currently uncapped. That wider group includes measures to encourage, for example, business investment (completely unnecessary, of course, in today's booming economy). Reliefs such as pension contributions are untouched. The Treasury has noticed that "reliefs can be used without limit to reduce tax liabilities, so that some taxpayers with very high incomes have very low tax rates" (Budget 2012) — quite true, because that is what they are supposed to do. Anyone seeking to claim more than £50,000 will be limited to relief at 25 per cent of their income. "This will increase effective tax rates and help ensure that those with the highest incomes pay a fairer share."
It's all about balancing the books, after all. Perhaps also, balancing perceptions of a government which lowered income tax for high-earners. The net effect is a minimum income tax (of 20 per cent, if the top rate is 45 per cent), a pet project of Warren Buffet. It would have been nice for a government committed to transparency to have been a bit more open about that.
On a putative £100 donation, a donor will not be certain how much relief he can claim until he knows (a) the amount he will want to claim on all reliefs; and (b) his income for the entire tax year. So he does not really know how much he can afford to give. Charitable donations are directly competing with other demands, such as business investment. Perhaps they always were, but relief on one form of expenditure will no longer cross-subsidise another.
Consider some numbers. HM Revenue & Customs estimates the cost of exemption from tax on charities' investment income, and the Gift Aid relief that both they and donors receive, at £1,550 million for 2011-12. That dwarfs the cost of the principal investment reliefs, the other main target of Osborne's proposal, which come to £410 million. The Treasury estimates that, long-term, its relief-capping plan will raise about £300 million per annum. It is reasonable to assume, from the HMRC costings, that around £250 million of this will be borne by the charitable sector.
Of course the Treasury should reconsider all tax reliefs. But it has already done so. The Office of Tax Simplification published its Review of Tax Reliefs on March 3, 2011, which investigated the reliefs for donating investments and trading stock, and the zero-rating of VAT on sales by charities. The annual cost of these, according to the HMRC, is £250 million. The report concluded that the policy rationale remained valid and that they provided "significant benefits".
