Examples
In several countries, including Germany and Canada, small and medium sized donations are encouraged by tax reliefs, tax credits or matching grants, see Matching Grants. The technical details of the different schemes, though important, will not be discussed in detail since these notes will concentrate on the underlying principles.
A common device to encourage private donations to charities is to make them tax free. The public treasury subsidises such gifts by foregoing the tax that it would otherwise receive on that amount of money. The same device has been used to encourage donations to parties. In order to ensure that the system does not favour rich donors, the tax reliefs have been limited to relatively small donations.
In Germany, donations to parties by individuals are tax deductible up to DM 6000 a year per person. In other words, the amount contributed is subtracted from an individual's gross, pre-tax income. This reduces the liability for tax, depending on each individual's marginal tax rate. There is also a tax credit for donations up to DM 3000 per person per year. Corporate donations are permitted but are no longer tax deductible.
In Canada, there is a system of tax credits. Unlike the tax deduction, the tax credit involves a reduction in the actual amount of tax paid. Therefore, it does not rely on each individual's marginal tax rate. In Canada, individuals receive a tax credit of 75 percent for the first CAN$100 contributed each year. The credit falls to 50 percent for additional donations between $100 and $550 and to 33.3 percent for donations between $550 and $1,150. This system means that someone who contributes $100 dollars to a party receives back $75 as a tax credit and, in effect, pays only $25, the rest being added by the public treasury. Since the system was introduced in 1974, political parties have come to rely much more on small scale contributions. The importance of large contributions has diminished.
But what about electors who are on low incomes and who therefore pay no taxes? A system of tax reliefs on political donations does not benefit them. Consequently, political parties that gain much of their support from the poor arguably lose out from scheme of tax relief on political donations. To encourage political donations by persons on low incomes who pay no tax, a matching grant rather than a tax relief may therefore be used. Such matching grants are discussed in entry Matching Grants.
Another use of the tax system to benefit political parties is a relief from some or all forms of taxation for political parties. Though this helps the parties, it does not encourage donations to them. Such countries include Denmark (except for real estate), Germany (with the exception of business activities), Italy, Portugal, Spain, and the non-profitmaking bodies that administer party funds in Belgium. 28
Comments
Tax reliefs on political donations and matching grants have proved relatively successful and provide one of the most promising approaches to the regulation of political finance. In particular, they accord with the democratic aim of encouraging party activity and avoiding undue dependence on a few large contributors.
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