Effectiveness is Not Enough: The Total Effect of the Tax Policy Toward Charitable Giving – Boundaries, Take-Up, and Effectiveness

Tax benefits for charitable giving are widespread. Governments waive tax revenues, aiming to encourage donors to increase their giving to nonprofits. Accordingly, the effectiveness of tax benefits has been widely researched, asking whether the policy increases donors’ giving. However, policy exhaustion is overlooked; therefore, we know very little about the total effect of such policies. In this paper, I suggest we go beyond effectiveness to focus on policy exhaustion as well. That is, exploring the effect of the policy boundaries on the benefit ineligibility range and the patterns of benefit non-take-up by donors. I further suggest that the appropriate approach to assessing the take-up rate of the tax benefit for charitable giving is not calculating the percentage of taxpayers who claim a tax benefit (as sometimes done). Although donors can claim the tax benefit, the “true” target population of the policy is nonprofits’ beneficiaries. Thus, the policy seeks not to improve donors’ conditions but to induce them to donate more to nonprofits as the providers of services. Therefore, estimating the share of donations for which the benefit is claimed is preferable to estimating the take-up of the tax benefit for charitable giving. Based on administrative data and complementary surveys, studying Israel in 2018 as a test case, I find that 23 % of total donations are ineligible for the benefit due to its boundaries (ceilings, floor, and qualified nonprofits); that 41 % of total donations are eligible for a benefit yet a benefit is not claimed for them (non-take-up); And thus, donors claim a tax benefit for 36 % of their total donations. In this case, then, effectiveness is relevant to 36 % of total donations only, and it seems that the most acute weakness of the policy is its low take-up rate. Two main consequences of the poor take-up rate are discussed. First is the scope of donations to nonprofits: if all eligible donations are claimed for a benefit and if all money received via the credit is donated to nonprofits (resulting in neutral effectiveness), donors in Israel could increase their donations to nonprofits by 13 % without spending an additional private cent. Second, since almost 70 % of unclaimed tax benefits apply to individual donations below NIS 20,000 (about €5,000), this pattern significantly undermines the pluralistic agenda implicit in the tax policy, leaving the privilege of allocating public resources to fewer donors. These outcomes are problematic, especially in times of complex crises, such as the COVID-19 health and financial crisis, during which demand for nonprofit services grew while private resources were scarcer, or the current (since 2023) societal-political crisis in Israel in which the liberal democracy is threatened and thus the pluralistic allocation of public resources to civil society via donations’ tax benefit is a powerful tool to exercise pluralism. The comprehensive approach proposed in this paper yields a detailed picture that reflects the actual realization of the tax policy and allows for an informed public dissection.

This paper was written by Dרץ Osnat Hazan (ILP) and published in NPF (2025).

Read the full article here