Mary Dejevsky: Even the super-rich should pay their taxes first

A state where 'little people' pay tax, while 'big people' endow scholarships, hardly constitutes a Big Society

What a wonderful, wonderful mess the Government has got itself into over charitable giving. If it had wanted to do just one thing to restore the reputation of the Conservatives as "the nasty party", it could hardly have chosen better.

At a stroke it has alienated charities, philanthropists and its natural supporters among the well-heeled – all of whom, of course, insist they have only the interests of the disadvantaged at heart. As a bonus, it has also cast doubt on the whole viability of the Prime Minister's pet project, the Big Society, to which contributing and do-gooding are key. Altogether, that is quite a price Messrs Cameron and Osborne are paying, if the idea was to compensate politically for reducing the 50p top rate of tax.

And the bandwagon of righteous indignation – on which the Business Secretary, Vince Cable, and the millionaire MP, Zac Goldsmith, became new passengers yesterday – speeds on, barely slowed by a few rare dissenters. After all, who would want to challenge those invoking the plight of the poor, the very young, the very old, the sick and the generally downtrodden? Not your average politician, certainly. Nor your average voter, who tends to feel warm and fuzzy inside about charities, even when not actually contributing much in the way of hard cash personally.

Yet the Exchequer's relatively generous tax treatment of charitable donations, like the definition of charities itself, should not be the criticism-free zone it has increasingly become. There are serious questions, drowned out by the past week's near-hysterical unanimity, that can and should be asked.

Let's start with the obvious. Why are charities so fearful that a limit on how much donors can offset against tax will reduce their income? This will only happen if the tax concessions of the past constituted a major – the major? – motivation to give. No limit is being placed on how much anyone may donate, only on what draws tax relief. If big donors are sufficiently committed to their cause, there is nothing to prevent them giving as before. If they don't, does that not suggest that the tax break was, if not being abused, at least a persuasive consideration?

This was indirectly confirmed by the founder of localgiving.com, Marcelle Speller, in a BBC interview. After insisting, in the face of quite aggressive probing, that people gave because they wanted to, she went on: "If you want to encourage people to help the communities and help society and do Big Society then you must give them incentives to do so." Which flows directly into the next question.

Granted that most governments regard charitable giving as a good thing and use the tax system to encourage it, how generous should any concession be? If it is so generous that big donors can essentially choose between contributing to the Exchequer (ie paying their due rate of tax) or supporting a favoured charity, has it not gone too far?

A state where "little people" pay tax to support the essentials of the state, while "big people" are free to endow a scholarship – for argument's sake – to Eton might not meet everyone's definition of the Big Society. Should even the super-rich not be required to pay their basic taxes first? That – no more and no less – is the burden of the Osborne reform.

A third question relates to the definition of charities. If there are, as the Chancellor appears to claim, charities whose prime purpose is to provide tax breaks, this clearly needs to be addressed by the Charity Commission. That is abuse more of charitable status than of the tax system.

But the whole system could do with another look. The arguments about charitable status for public schools have been well rehearsed, which should not exclude a new review. But the same considerations apply to universities, whose cause Vince Cable advanced yesterday. The rush of British educational institutions, and not just Oxbridge, to embrace the fund-raising model that anchors the finances of elite higher education in the US has been far too readily accepted. Remember Saif Gaddafi and the LSE.

But more obvious good causes have blurred the definition, too. In recent years, many charities have entered into formal contracts to provide services to local councils and other arms of government, to the point where these account, on average, for 40 per cent of their income.

As councils seek to cut spending, the adverse consequences of this symbiosis become clear. These contracted-out services may be among the first to go, with disastrous effects for both the service-users and the charities. It is reasonable to ask where the borderline runs between a charity and an agency of government. And are small donors aware that, in throwing cash into the "chugger's" bucket, they may, in fact, be subsidising the state by other means?

In trying to realign the tax system and charities, if only at the upper margins, Osborne has – perhaps unwittingly – brought down on his head the wrath of myriad angels. But he has also – equally unwittingly perhaps – shown that not all in the charitable garden is lovely. When the fuss dies down, he, the charities and donors big and small have some hard talking to do.

m.dejevsky@independent.co.uk