Government Financial Support for the Charitable Sector in New Zealand
Governments have promoted the charitable sector as a way of leveraging private funding to support social objectives. In New Zealand, government funding of the charitable sector is in the billions of dollars each year, through tax incentives and direct funding. Assessing the efficiency of this financial support therefore raises important public policy questions. My thesis examines three main research questions: (1) What is the institutional context for charitable giving in New Zealand and what are the key trends in charitable giving, characteristics of givers, and charity income? (2) How do taxpayers respond to donation tax credits, and what does this imply about the elasticity of donations? (3) Do government grants to charities ‘crowd-in’ or ‘crowd-out’ non-grant income? The first question sets the context for the latter two questions, which have been the focus of much of the research on charitable giving considering their policy relevance. My thesis contributes new evidence using modern causal inference techniques and full population data from New Zealand.
As to the first question, New Zealand provides an interesting setting to examine charitable giving due to the seemingly high level of giving by individuals as well as policy reforms made in recent decades. Donations made by individuals to eligible organisations receive a tax credit equal to 33.33% of the amount donated up to a ceiling. The fixed dollar ceiling was increased in 2003 to adjust for price inflation, and then abolished in 2009. Following the abolition of the ceiling there was a 20% increase in the inflation-adjusted value of donations reported to the tax authority, suggesting a major behavioural response to the reform. When examining charity incomes, government grants and contracts are a more important income source for the charitable sector overall than donations, but donations are more important for charities involved in certain sectors, such as religious and international activities.
As to the second question, the 2009 reform of donation tax credits provides an ideal natural experiment to estimate the elasticity of donations using a ‘difference in-differences’ or ‘bunching’ approach. Analysis of unit record tax data shows a substantial behavioural response of reported donations to donation tax credits and implies an elasticity of reported donations of around -0.3 and -0.7 with respect to the marginal price of giving. The elasticity of reported donations provides an upper boundary on the ‘real’ donation response due to reporting effects. The absolute value of the elasticity is less than one, indicating that the tax credit is not ‘Treasury efficient’– the increase in donations due to the credit is less than the foregone government revenue.
As to the third question, matching data from lottery grant applications to the Charities Register allows me to compare income trends of successful and unsuccessful applicants. To estimate the effect of a grant award on charity income, I replicate the two-way fixed effects approach used in previous studies and employ the modern ‘CS difference-in-differences’ estimator to bypass potential problems with TWFEs in staggered treatment designs. The results exclude full crowding out and find effects ranging from grants having a neutral effect on charity non-grant income to modest crowding-in. Overall, my research results indicate that government grants may be a more efficient mechanism for the government to financially support to charities than donation tax credits.
