Rhodri Davies, Programme Leader, Giving Thought

Rhodri Davies

Head of Policy

Charities Aid Foundation

The role of giving

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LAWS OF UNINTENDED CONSEQUENCES: HISTORICAL MISTAKES AND PHILANTHROPY POLICYMAKING

8 January 2018

The HistPhil forum (which brings together scholars  with an interest in the history of philanthropy, and of which I have long been a big fan), recently ran a series of commentaries by its editors on political philosopher Rob Reich’s new book Just Giving. These - together with the author’s response - provided immensely valuable food for thought about how we should approach some of the fundamental questions about the role of philanthropy today.

In particular, the discussion raised important points about the ways in which historical and philosophical analysis of philanthropy can complement each other, and how they differ. The distinction between a descriptive approach, which seeks to determine what role philanthropy has actually played in our society; and a normative approach which seeks to determine what role it should play seems crucial. Does history lead us inevitable toward the former, whilst philosophy aims for the latter?

 

Descriptive vs Normative approaches to philanthropy

Of course, things aren’t that simple. History can also be used as a tool to support normative arguments; assuming you can find positive examples to demonstrate how you believe things should be done, or negative examples to highlight how they should not. And Reich certainly avails himself of historical evidence in both of these ways. He makes use of interesting examples from different periods - stretching from Ancient Greece to early 20th Century America - in order to argue his points about how philanthropy should best be structured and how its role should be understood.

Despite this, each of the HistPhil commentaries on Reich’s book to some extent levels the charge that his analysis would benefit from being more deeply rooted in historical context and evidence. In response, Reich, argues that this criticism is perhaps misdirected, since he points out that, ”the main aim of Just Giving is to ask a question of first principle: What attitude should a liberal democratic state have toward the preference of an individual to make a philanthropic donation of her money or property?

The point being, that if we are attempting to approach philanthropy from the perspective of a political philosopher, we should not tie ourselves to any one empirical version of how giving is actually practised or to a particular historical model of the state. Yes, historical evidence is a useful tool to support our arguments, but if the principles we arrive at are intended to form the basis of a sound political philosophy they must be able to stand independent of any particular historical context. (Although, obviously, our perspective cannot be entirely a priori, since Reich points out that philanthropy must be seen as an artifact of the State; and thus we must make assumptions about the nature of government in at least some idealised form in order to undertake any philosophical analysis. In his case, this means Liberal Democracy).

In general, historical evidence provides real value in terms of shedding light on how philanthropy itself is practised. This can provide positive support for the adoption of certain theoretical principles, or - perhaps more often - cautionary examples which highlight things to avoid. But I have found that, in my experience, history tends to be less help when it comes to determining what policy approaches we should take in order to ensure the ideal role for philanthropy within society (or at least you need to approach the historical evidence in a significantly different way).

This is not due to some inherent flaw of historical analysis. Rather it is just that when you look at many of the major policy and legislation decisions that have shaped philanthropy throughout the ages, they do not tend to reflect clear theoretical principles about the role of philanthropy and its limits. Instead, they are the result of a patchwork of realpolitik, hidden contingent factors, personal animus and sometimes just plain error. Disentangling these myriad factors in order to infer underlying points of principle is often extremely difficult.

Take as examples, three key questions about the role of philanthropy that remain current today, namely:

  • the definition of acceptable charitable purposes,
  • the legitimacy of using philanthropy resources for political activity,
  • the justification for offering tax reliefs on charitable donations.

In the UK (and the US to some extent; and I am willing to hazard elsewhere as well), delving into the actual history of how key decisions came about relating to each of these questions is illuminating (and not always in a good way).

 

The legal definition of charitable purposes

The 1601 Statute of Charitable Uses is usually taken as the starting point for the modern definition of secular philanthropy in in the UK (and beyond). But in actual fact the legislation never attempted to set out a legal definition of charity. Rather, it is the Preamble to the Statute that has proven influential; having been reflected in all subsequent attempts to refine a definition of charitable purposes.

It is important to understand the status and purpose of this Preamble, and how it relates to the wider context. Firstly, as Holdsworth notes in his History of English Law (vol IV)...it is far from being a sober statement of historical fact. Rather it is an official statement of the numerous good reasons which had induced the government to pass so wise a statute - the sixteenth century equivalent of a leading article in a government newspaper upon a government measure.”

Secondly, as already noted it is not intended to be an exhaustive list of acceptable charitable purposes, but rather just a list of the sorts of things that should count as charitable. It is not surprising that these align very closely with governmental priorities of the day, since one of the main unspoken aims of the Statute and its Preamble was to help to absolve the government from having to implement the Poor Law legislation. Hence the Government had a keen interest in directing giving as far as possible towards causes that would achieve this goal.

There are also some surprising omissions from the list: most notably hospitals and religion. The latter is particularly odd, given that the vast majority of charitable giving at the time went to religious causes, and suggests that the Preamble was certainly not attempting to reflect philanthropic practice as it was at the time, but rather to shape it into something else. The omission of religion was most likely a piece of pragmatism on the part of the government, because it wished to avoid wider efforts to harness philanthropic giving to alleviate poverty getting bogged down in contentious debates about the distinction between ‘genuine religion’ and ‘superstition’ that were rife in an England that was still struggling with the aftermath of the Reformation.

Obviously this was not the end of the debate over how to define “charity”. But hidden motives and political imperatives continued to play a role in subsequent legislative developments too. Most notably The Statute of Mortmain (1786). This was designed to address concerns about people leaving gifts to the church in their will and thereby increasing the power of the clergy, which was a great cause of concern for the government at the time.

The Statute tried to solve this problem by introducing strict new rules governing the legality of bequests for charitable purposes. This introduced a bizarre set of perverse incentives: many charitable trusts went to great efforts to argue that they were not in fact charitable, so that deathbed gifts to them remained legitimate. Meanwhile, the government was inclined to interpret anything it could as charitable so as to minimise the amount of money not going directly to heirs. Since the balance of power lay firmly with government, the result was, according to Gareth Jones in his seminal “History of the Law of Charity 1532-1827”, that “The Mortmain Act (1736) persuaded the courts to preserve for posterity a liberal definition of a legal charity”.

What this hopefully highlights is the extent to which our definition of charitable purposes fundamentally rests not on a principled and objective attempt to define a specific sphere of activity within our society, but rather reflects Tudor realpolitik, the unintended consequences of the Georgian government’s tussle with the Church, and a myriad of other subsequent contextual factors.

 

Rules on political campaigning

Within the broader context of defining acceptable charitable purposes, the use of philanthropic money to fund political activity has long been a particular area of contention. Most countries have rules limiting the extent to which charitable organisations are permitted to engage in politics: the UK, for example, allows organisations to engage in political activity in pursuance of a charitable mission, but does not allow them to have purposes that are themselves seen as political. The US situation is very different, as they have multiple tax designations for non-profit organisations that carry different implications for their ability to engage in political activity. However, 501(c)3 organisations (which include public charities) are (for now, at least) governed by a rule known as the Johnson Amendment, which prevents them from campaigning for or against any candidate for elected public office.

These rules may seem as though they rest on clear points of principle, but when you dig into the history, you find once again that is far from the case. The rule prohibiting political purposes in the UK, for instance, can be traced back to a 1917 court case, Bowman vs Secular Society. This concerned a legacy to the Secular Society from a man named Charles Bowman in 1908, which was contested by his heirs on the grounds of being blasphemous and therefore unlawful. The charge of blasphemy was not upheld, but in the course of his summing up, one of the judges – Lord Parker – asserted that “a trust for the attainment of political objects has always been held invalid”.

The problem is - as noted by Matthew Harding in his book “Charity Law and the Liberal State”- that “it was far from clear that trusts for political purposes had invariably or even mostly been regarded by decision-makers as invalid” and that “the history of Victorian Britain reveals a strong tradition of charities pursuing political purposes of different types, with no suggestion that such purposes were impeded or constrained by charity law.” It appears Lord Parker’s assertion was largely based on a discussion in a late 19th Century law text that represented “an idiosyncratic view of the extant case law”. But of course, once this assertion had been made, it became part of legal precedent itself, and the foundation of a large body of charity case law that now provides the justification for decisions regarding the acceptability of political purposes.

In the US, the relevant development came even later. The Johnson Amendment was introduced in 1954 by Lyndon B. Johnson, when he was still a US Senator, following an attempt by a conservative non-profit group to unseat him by supporting a rival for his Senate seat. Given this, as noted by Michael C Hone in a paper for the Case Western Reserve Law Review, “it is unlikely that Johnson was motivated to propose the amendment because of logic or his understanding of the nature of501(c)(3) organizations. It is much more likely that Johnson was motivated by a desire to exact revenge on the foundation he believed supported his opponent and to prevent it and other non-profit corporations from acting similarly in the future. This political decision has significantly affected a large number of non-profit corporations.”

So, again, while there are many valid reasons for thinking that a rule preventing charitable organisations from engaging in political activity is sensible, looking at the actual history of how these rules came about suggests that matters of principle were not always at the forefront of the minds of those involved.


Tax relief on donations

The last example I want to give is the tax treatment of donations. This is a key part of Reich’s work, as one of his major arguments in “Just Giving” is that we need to understand far better the theoretical justification for offering preferential tax treatment to philanthropic donations within a liberal democracy, and what this means in terms of how we offer any incentives. Yet this is perhaps the instance in which we see the historical reality of how key decisions were taken diverging furthest from the theoretical ideal.

Many countries around the world offer some form of tax relief or incentive for gifts to charity by individuals, and the US and UK rank among the most generous countries in the world in this regard (although the systems they use to offer incentives are fundamentally different, as detailed in this discussion paper).

In the US, the charitable deduction was introduced in 1917 as part of legislation designed to raise revenue to support US involvement in WWI (The War Revenue Act). The aim was to maintain levels of charitable giving at a time when income tax rates were increasing enormously (from 15% to 67% in the case of the top rate). As such, the introduction of the deduction fulfilled a clear pragmatic purpose rather than reflecting a deep-seated principle. As the influential Commission on Private Giving and Public Needs (often known as the Filer Commission) explained in 1975, “The charitable deduction was enacted not only or even primarily as a matter of tax philosophy, however, but because of hard practical considerations.”

The situation in the UK is far worse however; as individual tax relief on donations was essentially introduced by mistake. There has been some sort of relief for charitable activities ever since the Income Tax was first introduced in 1799, but at first it was limited to charitable organisations. From 1842, however, donors were able to get income tax relief by establishing a Deed of Covenant with a charity. This allowed the donor to transfer their income tax liability for the amount of the gift to the charity – and since the charity had exemption the tax liability disappeared, thus resulting in an effective relief to the donor. This was only an informal arrangement, with the status of little more than a gentleman’s agreement, but it lasted for 80 years or so.

Then, in 1922, following repeated criticisms of the arrangement (particularly by William Gladstone) the government decided to address what had come to be seen as a problematic loophole in tax law. As the then CEO of Charities Aid Foundation, Dick Livingston-Booth, explained in a 1975 paper,

“The strange thing about deeds of covenant is that there is nothing in our laws which says “Let there be a deed of covenant”. It all began by accident when, in 1922, the Government resented the fact that too many people were claiming that they should not have to pay tax on a part of their income which, they said, they had given away. Consequently, government set out to limit this growing leakage of tax revenue, and legislation that year then decreed that freedom from income tax could no longer be claimed for casual gifts. However, it also provided that if the giving was to be a regular annual payment of a like amount for a substantial period (at that time capable of exceeding six years), and if the payments were made as the result of a legally executed deed approved by the Revenue, then those payments would not form part of the donor’s taxable income... And so, at last, donors had a recognised legal means of making tax-free gifts to charity, and the Deed of Covenant was born.’

So, we can conclude, as David Owen does in his “English Philanthropy 1660-1960”, that: ”It was no part of the Government’s intention to grant such a favour to donors. On the contrary, the concession was the wholly unforeseen result of a provision in the Revenue Act of 1922 designed to plug certain leaks in the flow of tax money.”

The point here is that looking to history to help us understand the theoretical justification for why a government might offer tax breaks on philanthropy is made much harder by the fact that governments themselves often do not seem to have thought it through particularly clearly before introducing the relevant legislation. There have been a number of efforts to offer post hoc justifications (although when it comes to charitable tax relief, still surprisingly few). However, the fact that the true motives of the policymakers and politicians who originally introduced the measures are often hidden - or clearly do not offer support for any one theoretical justification - leaves a great deal of room for interpretation and debate.

 

Conclusion?

Historical evidence has a huge amount to offer us in our attempts to understand philanthropy. The successes and failures of the past can be an invaluable guide when considering how to proceed in the future and what the pitfalls might be that we want to avoid, and they can inform policymaking designed to encourage and regulate philanthropy just as much as the practice of giving.

Where we need to be more careful, however, is in assuming that the policy decisions that have shaped philanthropy reflect underlying theoretical principles that we can or should take as axiomatic in developing a political philosophy that explains the role of philanthropy in our society. In many cases, these policy decisions were partly or wholly the result of a tangled web of contingent and subjective factors, and we need to be careful not to ascribe meaning or intention to them that was not there. They are a hugely important part of understanding philanthropy as it is, but we should not let them constrain our thinking about philanthropy as it should be.

 

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