The media storm currently surrounding the UK government’s budget plans to limit tax relief from charitable donations raises the question of how important tax relief really is for major donors and philanthropists.  And judging by the outcry from charities and philanthropists alike, I would say the answer is: very important.

What these proposed measures mean for major donors it that a) they will have to give more money to achieve the same impact or b) they will give less in order to avoid paying tax on their charitable gifts, thus hurting the charities they support (here’s a nice little illustration of how donations will work under the new rules).  The cynic in us might say, ‘So what, they have to pay a bit more in taxes.  That’s actually a good thing because their donations will achieve even more – money will go to charities and more tax money will benefit society.’

In other words, if a philanthropist’s giving remains constant under the new rules (and is above the tax relief cap), then more social good will be achieved.  But the donor will have less disposable income to spend on non-charitable expenses.  So, there are certainly arguments out there that the tax relief cap is beneficial and will make donor reassess why they’re giving in the first place.

The tax relief cap also raises wider political questions, like what role the state should play in society and wealth distribution and how much influence the richest individuals should have over social programs.  But whatever your politics, smaller donations from the largest donors will undoubtedly have negative implications for charities – especially since, for most nonprofits, 80% of their income comes from their top 20% of donors.  This again raises a question as to whether charities should be relying on donations as a long-term income/impact strategy, or whether social enterprises and impact investments might be a better alternative for scaling up to meet increasing demands.

All this to say that I don’t think the tax relief cap is as black and white an issue as many are making it out to be.