Trends in Tax Incentives for Donations: How Far Can They Grow?

• In Event: Donations and financial issues

Abstract

Given the characteristics of the contributions of civil society organizations, most Western countries have established mechanisms to promote the development of CSOs. These mechanisms typically involve facilitating the establishment and operation of such institutions, providing funding, and offering tax incentives for donations to CSOs. These tax benefits serve a dual purpose. Firstly, the existence of a tax benefit results in a "discount" on the price of the donation. Secondly, tax incentives also help reduce opportunistic behavior among donors, bringing donation levels closer to the social optimum (Irarrázaval and Guzmán, 2005).
It is important to note that, both in the international and Chilean context, donations do not constitute the primary source of income for civil society. Donations or philanthropy from individuals or businesses account for only 15% of the total revenue of this sector (Irarrázaval, Streeter, et al., 2017). Despite being a relatively minor proportion of CSO financing, donations play an essential role in the vitality of these organizations because these contributions are transferred within a framework of voluntariness with minimal conditions, aside from legal requirements and the fulfillment of the organization's institutional mission.
According to Bekkers (2022), donations and philanthropy are not just a source of financing but fundamentally a cultural phenomenon. Philanthropic action predates publicly funded services in Europe, and private contributions have enabled the development of healthcare, education, sciences, and the arts long before the establishment of the Welfare State. Tax incentives can also help compensate for insufficient levels of public goods and services provision (Clotefelter, 1985). The rationale for this mechanism lies in the fact that greater tax incentives promote higher donations. Evidence suggests that high-income individuals are more willing to donate; however, criticism may arise in that these individuals effectively receive lower relative prices on their donations (Arnesen and Sivesind, 2022). Nevertheless, when the purposes of donations are framed within the provision of public goods and services, donations have a positive redistributive effect.
This work analyzes trends in donations eligible for tax incentives in Chile from 2005 to 2021. Some preliminary conclusions are as follows:
While, in general terms, it could be argued that there is an association between the growth of GDP and that of donations, this association is not constant. Given the significant differences in the relative magnitudes of each variable, it is difficult to assert the existence of a statistical association.
In 2019, even though more than 80% of the total donated amount comes from legal entities or companies, donations from individuals are the segment that has grown the most in donated amounts and the number of donors. This indicates a trend toward greater democratization of the act of donating.
The relative fiscal waiver concerning the total amount can be understood as a multiplier effect of donations. For every peso invested by the state (through the waiver of taxes it would have received), private entities contribute double the amount through donations. In this sense, public causes covered by donation laws amplify the state's action.

References

Arnesen, D. y Sivesind, K.H. (2022) The effects of tax deductions on charitable giving: An incentive for the many or the few?. Obtenido de: ISTR 15th. International Conference. https://convention2.allacademic.com/one/istr/istr22/
Bekkers, R. (2022) The estate of research on philanthropy in Europe in 2022. Obtenido de: ISTR 15th. International Conference. https://convention2.allacademic.com/one/istr/istr22/
Calderón, P. (2010). Beneficios tributarios por donaciones. Revista de Estudios Tributarios, 1, pp. 97-131.
Giving USA Foundation (2022) Giving USA 2022: The Annual Report on Philanthropy for the Year 2021.
Irarrázaval, I. y Guzmán, J. (2000) El rol de los Incentivos tributarios a instituciones privadas sin fines de lucro: Análisis de la experiencia internacional. Estudios Públicos No. 77.

Irarrázaval, I. y Streeter, P. (2017). Fortaleciendo la sociedad civil: el rol de los incentivos tributarios en las donaciones. Santiago: Centro de Políticas Públicas UC y Fundación Chile+Hoy.
Servicio de Impuestos Internos (2018) Informe de Gasto Tributario 2017 a 2019. Obtenido de: https://www.sii.cl/sobre_el_sii/presupuesto_gastos_tributarios.html
Servicio de Impuestos Internos (2021) Informe de Gasto Tributario 2020 a 2022. Obtenido de: https://www.sii.cl/sobre_el_sii/presupuesto_gastos_tributarios.html

Author

• Ignacio Irarrazaval, Catholic University of Chile