Does inheritance tax encourage more donations to charity?
Voxeu.org, the portal for the Centre for Economic Policy Research, explored the issue in a recent article that looked at UK data to examine how estate size and the inheritance tax threshold influenced the decision to make a bequest to charity.
In the UK, giving to charities when you die is an “age-old phenomenon”. They are major income source for many charities, making up about a quarter of all donated income for the top 500. The analysts looked at what happened to estates worth at least £5,000 in Britain over a year, finding that about half the population die with very little to leave to anyone.
In Scotland, for example, only about 45 percent of people die with at least £5,000 to leave behind.
To leave money to a worthy cause, steps must be taken. The individual needs to have wealth to leave, he or she must make a will and the will has to include the charitable bequest. That legacy might be conditional, not absolute. It could be a cash amount or a share.
The researchers found the likelihood of making a will rose with wealth. Testacy figures were about half for the smallest estate to more than 90 percent for estates worth about £150,000 and up to 99 percent for estates larger than £3 million.
Overall, some 16 percent of wills included a charitable bequest, from 11 percent for the smallest estates to 14 percent for those worth about £150,000. For estates worth £300,000 and up, legacies increased to 22 percent and up to 51 percent for those worth m ore than £3 million. This means that half of very wealthy people don’t leave anything to charity.
On average, people leave about 2.8 charity bequests, including absolute and conditional ones.
The UK’s inheritance tax means that an estate’s excess above £300,000 has a levy of 40 percent to pay. The researchers’ model suggested a jump in the number of people making charitable requests when the estate reached the tax threshold. The percentage rose from 17 percent to 33 percent between estates in the bracket £250,000 to £299,999 and £500,000 to £999,999.
The researchers don’t claim to have identified a firm causal effect, but their results are consistent with inheritance tax leading to an increase in charitable intent.
Read the full article by Tony Atkinson, Peter Backus and John Micklewright.
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