Comment: Charitable giving feels good—it brings a sense of fulfilment and joy, knowing your contribution has made a positive difference in someone’s life. Governments support the idea too, offering tax incentives to encourage philanthropy. But here’s the catch: my recent research suggests these tax incentives may not be as generous to charities as we’d like to believe.
The story of donation tax incentives is one shared by many countries. It’s a classic policy tool, with approaches ranging from tax deductions to credits and partial government matches of donation amounts. New Zealand has provided donation tax incentives since the 1960s, currently offering a 33.33 percent tax credit. Generous? Sure. Effective? That’s where things get murky.
Surveys paint a rather modest picture of the motivation tax credits provide. A 2014 poll by Charities Services revealed only 21 percent of respondents cited the credit as their reason for donating—far behind motivations such as the charity making a “positive difference” (71 percent) or spending its money “wisely and effectively” (65 percent).
In a 2024 regulatory review of the tax credit policy just 57 percent of respondents were even aware of the credit’s existence; 45 percent said it made them more likely to donate; and only 22 percent said it made them donate more.
Economists, always keen to watch what people do rather than what they say, have found more clarity in observing taxpayers’ actual behaviour. Early studies from the US—pioneered by researchers Martin Feldstein and Amy Taylor—found that each dollar in tax deductions stimulated $1-$1.40 in donations. But later research took some shine off those numbers, showing weaker responses as donors held on to more of the benefit themselves.
This brings us to New Zealand, where a unique natural experiment shed light on taxpayers’ behaviour and their sensitivity to donation tax credits. In a significant reform in 2009, the government eliminated the $1,890 cap on donations qualifying for tax credits.
It turns out that before the law changed, many taxpayers adjusted their reported donations to match the cap—a behaviour that vanished once the cap was removed. The data shows that smaller contributions grew at the same rate post-reform, but larger donations surged—that is, those previously constrained by the cap. Donations reported to Inland Revenue by individuals rose by 30c to 70c for every additional dollar in tax credits. A boost? Yes. But here’s the kicker: the increased giving still fell short of the government’s lost revenue.
For example, in 2023 the government paid $316m in tax credits for $949m in reported donations. But in the same year, the boost in revenue to charities from the tax credit policy would have been no more than $226m.
And these estimates probably exaggerate how much donors actually respond to tax credits. Before the cap was lifted, there was no financial reason for individuals to report donations above $1,890. Once the cap was removed, taxpayers gained from declaring the entire donation amount, implying that the reported increase in donations may be much higher than the real growth. This theory is backed by data from schools and charities, which weren’t influenced by reporting biases and which showed smaller increases compared with tax records.
These results raise an intriguing question: would the money the government spends on tax credits be better spent funding social programmes directly?
There’s also the question of who truly benefits from the tax-credit policy. In 2023, just 8 percent of New Zealand taxpayers claimed donation tax credits. Of these credits, 18 percent were directed to the top 3 percent of individuals earning over $180,000 and 58 percent to the top 25 percent earning over $70,000. Though this may initially appear inequitable, it could be argued that encouraging generosity among those with greater financial resources is worthwhile—even if they retain some of the benefit.
Rethinking charitable giving policies
Donation tax incentives may be a widespread policy tool, but from an economic standpoint they may not be the most efficient use of our resources and they also disproportionately benefit higher-income taxpayers. Policymakers face a tricky trade-off: direct funding may better achieve public goals, but empowering individual donors fosters a diversity of causes that’s hard to replicate.
Any shift in donation tax policies would inevitably create both winners and losers. Though private donations often gravitate towards religious, international aid, and animal welfare causes, government funding tends to prioritise education, health, and social services. The impact of donation tax policy changes would be felt across different sectors, reshaping the landscape of their financing.
What are the government’s choices? It could eliminate tax credits, letting donors donate independently, while reallocating funds to social programmes. Or it could reinstate a dollar cap or lower the 33.33 percent tax credit rate instead of removing the credit entirely.
Ultimately, the question is: what’s the true cost of giving? It’s not just about dollars and cents—it’s about deciding what generosity means in policy terms.
This article was originally published on Newsroom.
Amy Cruickshank recently completed a PhD in taxation at the School of Accounting and Commercial Law at Te Herenga Waka—Victoria University of Wellington.