Thank you very much for inviting me to appear before this committee.
My testimony is based on 20 years of research on charities and donations. I am a professor of economics and director of the Public Economics Data Analysis Laboratory at McMaster University. I have a Ph.D. in economics from Princeton University and a law degree from Cornell University.
I encourage the committee to take a broad perspective when thinking about tax incentives for charitable donations. Whether and how much a donor gives depend on more than her preferences. Giving can depend on influences of other individuals, on the level of charity interaction with the donor, and on other funding sources such as foundation and government funding.
To understand these influences, my research focuses on the empirical analysis of large data sets. Canada has some of the best data for studying charitable giving. My background statement illustrates that we can observe using measures from these sources. Let me briefly summarize my findings.
To explore patterns of individual giving, I relied on individual tax returns that were aggregated and provided at a neighbourhood level. Between 1991 and 2010, the number of donors increased, but the number of tax filers also increased and at a faster rate. This faster growth rate in tax filers explains why we see declines in the share of tax filers reporting charitable donations. Put in this context, the question, should not be, “Why have people stopped giving?” but rather, “Why is the growth rate in donors slower than the growth rate in tax filers?”
One of the many plausible explanations is that as our communities have become more diverse, giving has fallen. While community diversity is a good thing, it is not uncommon to find that diversity leads to a decline in support for public and charity-provided goods. Our research finds that between 1996 and 2006, neighbourhood diversity increased an average of six percentage points, resulting in an average decline in donations of 12 percentage points.
Overall growth in donations in the last few decades has been in the higher-income areas. Giving by individuals residing in lower- and middle-income neighbourhoods has been declining. While part of this is likely attributable to economic growth during most of the period, the growth in giving in the higher-income neighbourhoods may also be attributable to changes in the tax treatment of donations such as publicly traded securities.
Next, what do we know about charities and their influence on private giving? Over the last two decades, the number of charities and total charity revenues from public and private sources has increased. Religious organizations count for the lion's share, both in terms of the number of charitable organizations and in the receipt of private donations. Charities involved in the provision of social welfare and community-oriented services are numerous, but they receive a low proportion of private donations, and while social welfare and community charities rely more on government grants, more government grants flow to charities in the areas of health and education.
Increasingly, foundation support of registered charities is important, especially for religious and health-related charities. But how do these other forms of funding affect private giving to charities? Much of my research has been focused on trying to understand how government grants to a charity impact private giving. The research suggests, at least for social welfare and community organizations, that charities play an important role in raising funds. Yet charities may care more about their mission than about things like maximizing revenues. We find on average that if charities receive an increase in direct government funding, private giving declines, but this decline in private giving is more attributable to a decline in charity fundraising efforts. There is some evidence to suggest that donors view direct government funding to a charity favourably.
For instance, the funding may serve as a signal of the important work being done by the charity, encouraging tax-receipted giving. Similarly, in preliminary work by one of my doctoral students, we are finding that if a charity receives funding from a foundation, the foundation grant may also serve as a positive signal and increase individual giving to the charity.
This leads me to my last finding. The number of foundations and their revenues have both grown significantly. Foundations represent approximately 12% of registered charities.
Between 1992 and 2008, reported tax-receipted gifts to foundations increased from $1 billion to more than $4 billion annually. This growth swamps the growth in tax-receipted giving to charitable organizations.
While revenues have been growing over the last two decades, not all charities have benefited from this growth. In any given year it appears that for every charity that experiences a growth in revenue, another charity is experiencing a decline. About one-third of charities experience a decline from one year to the next.
I recently conducted a survey of small to medium-sized charities. An increasing number of these charities reported a decline in revenue but an increase in demand for their services in recent years.
I have just provided you with a bit of information about charities and giving in Canada. I hope you can see how taking a broad perspective when evaluating tax incentives for donations will result in providing a stronger foundation to our charitable sector.
Thank you.