No worries on Aussies’ generosity

The Australian welfare lobby often calls for increases in taxation. Presumably this is to fund increases in welfare expenditure.

Furthermore, the argument is that higher rates of taxation increase the incentive for very wealthy individuals to make charitable donations.

Others such as Daniel Petre, of the Petre Foundation, have argued that wealthy Australians should "start to pull their weight and give back appropriately to the society from which they made their fortunes".

But is it true that Australian high earners are stingy with their money? An analysis based on ATO data provides some surprising results. In short, wealthy Australians pay more than their fair share in tax and donate much more than their fair share to charity.

In the 2002/3 tax-year, 3.7 million taxpayers claimed $959 million in donations and gifts. That makes up 35 per cent of the taxpaying population making an average donation of $258.

How do high-income earners compare?

In these discussions much attention is placed on those super-wealthy Australians who rate a mention on the Business Review Weekly's rich list. I extend the analysis to those 2586 individuals in 2002/3 who earned more than $1 million.

It is reasonably safe to assume these individuals are "rich" even if they did not make it into BRW. According to the ATO, this group of taxpayers make up about 0.02 per cent of the taxpaying population; they earn 1.28 per cent of total income but pay 2.39 per cent of total net income tax.

Of these super-wealthy Australians, 64 per cent claimed a donation or gift. They contributed 7 per cent of total "gifts or donations". That figure is 350 times their contribution to population numbers and 5.5 times their total income share.

The average total donation for this group is $40,867. Based on figures such as this, it is hard to justify the notion that the wealthy need to be motivated to "pull their weight and give back appropriately".

Not only do high-income earners pull more than their weight in the area of philanthropy, they pull more than their weight in taxation, too. Of course, not all taxpayers claim all their charitable donations and consequently the analysis here is somewhat incomplete. Nonetheless, it is extremely unlikely that unrecorded donations and gifts will overtake the amount declared to the ATO.

The level of philanthropy in Australia is often, unfavourably, compared with that of the UK and US. I compared the level of charitable giving in Australia to 20 other OECD economies.

As a proportion of GDP, philanthropy in the UK and US is very high, with the US being greater than 1 per cent of GDP. Australian levels are about average at 0.34 per cent.

If I excluded the US , Australian philanthropy levels are above average.

As an additional piece of analysis, I calculated the correlation between tax rates and levels of philanthropy.

The two numbers are negatively correlated (-0.2262), consistent with the notion that high levels of taxation crowd out voluntary giving.

It is not surprising that Australia performs poorly relative to the US . By way of comparison, the top 5 per cent of income earners in Australia paid an average tax rate of 37.9 per cent in 2001-02, while the top 5 per cent of US income earners paid an average income tax rate of 22.95 per cent in 2002.

While charitable gifts are known to increase with income, the real issue is whether they would increase with tax cuts? In other words, do the rich make donations in order to avoid tax?

Answering this question requires economists to unravel confounding effects. Individuals give more the wealthier they become, but as taxes fall so the value of the tax deduction also falls — this is equivalent to an increase in price. One of these effects dominates the other, and it is the net effect we are interested in.

Here the economic literature is mixed.

Economists have found evidence for both increases and decreases in philanthropy following tax cuts.

In general, however, if we want individuals and corporations to donate more to charity, we should advocate policies that actually increase levels of income (and subsequently wealth) in the economy.

Instead the welfare lobby advocates policies that reduce wealth and opportunity. In this, and despite their rhetoric, they are motivated by envy and not by compassion.

Professor Sinclair Davidson is an Associate Professor in the School of Economics , Finance and Marketing at RMIT University .

This is adapted from his paper "Are There Any Good Arguments Against Cutting Income Taxes?", part of The Centre for Independent Studies' series Perspectives on Tax Reform, published today.