Mondo

Europe: Fiscal subsidiarity takes off in Eastern Europe

In Hungary & Poland there is the 1% law, in Lithuania the 2% law and in Slovenia tax payers can transfer 5 thousandths of their declared income to charity. So why has Western Europe lagged behind?

di Carlotta Jesi

The Citizen?s Vote, as it is known in Hungary, is a fiscal tax measure that can be availed of in many European countries and enables tax payers to transfer a percentage of their income tax to a social cause. But why is it not more popular in Western Europe?

In Hungary the ?1% law? has been around since 1996, but in 2000 researchers Eva Kuti and Agnes Vadja published the first study on the law?s impact and baptised it the Citizen?s Vote. Aptly so seeing as three years later, around the same time that a study was released showing that Hungarian state funding for NGOs was lagging behind the European average (28.4% against the EU?s 50%), the government announced that it would open a fund ? the National Civil Fund ? where it would equal the amount donated by citizens through the 1% law. This fund was to be administered together with leaders of the Third Sector elected across the nation.

Economic impact aside ? the Civil Fund today supports 10 thousand of the 50 thousand Hungarian non profit organisations ? the fund also stimulated neighbouring countries to look into fiscal subsidiarity as a means of financing the third sector. Between 2001 and 2004 Slovakia, Lithuania, Poland, Romania and Slovenia all imported, to differing degrees and with different rules (see below), Hungary?s best practice. The reasons behind the boom? Researchers at Onepercent.hu, a non profit organisation designed to monitor East European ?percentage philosophy?, say there is little doubt: civil societies emerging from the ashes of communism could not count on the support of foundations and enterprises in the same way that Western European organisations had. Taking Hungary as an example again, during the 90s, the only sponsor for the 40 thousand organisations that sprung up following the fall of the communist regime was the Soros Foundation. Which goes a long way in showing why fiscal subsidiarity is so widespread in Eastern Europe and so unpopular in ?old? European countries, where only Italy, Spain and Portugal have laws to regulate income tax donations. And even then, the rules are not quite the same.

The impact of these fiscal measures? Cultural, rather than economic, as Washington?s International centre for non profit law explains in a study called ?Explaining percentage philanthropy?. In 1999, 94% of Hungarian adults and 98% of Hungarian taxpayers knew about the ?1% law?; in Slovenia, a year after the percentage law was passed, 71% knew about how it worked and where it went. These numbers, taken from nations without strong philanthropic traditions, are demonstrative of the first steps towards the creation of a culture of giving. Steps that have been matched by increasing transparency within organisations who find that they must account for the money they are receiving. But in some cases the laws have also brought with them the end of tax benefits and incentives for donors.

This is the case in Lithuania, Slovakia and Poland, where the opportunity to give 2.2% and 1% of income tax respectively has been considered a more than sufficient means of funding the sector. Mistakenly, as the figures for 2006 show: despite being the third year that Polish taxpayers were able to give their 1% to charity, only 4.85% chose to avail of the option. The flop, according to Agnieska Rymsza, a sociologist at Warsaw?s Synapsis Foundation, is ?given by the fact that citizens had to front the expense of their 1% themselves, and wait to be reimbursed the sum they had donated?. Had to, because last year the government eliminated the unfortunate clause. However the controversy didn?t end there, as tax payers were still not allowed to state which organisation they wished to support with their 1%. In Hungary the situation is no less controversial, as non profit organisations only have until May 20th to convince taxpayers to give them their 1% and in 2007 only 4 tenths of Hungarians chose the 1% option. The stakes are high, because of the 2 million high income Hungarians who alone could bring 55 million euros to the sector this year.

Spotlight on Europe
Hungary. As of 1996 taxpayers can transfer 1% of their income tax to charity, and as of 2003 the government matches the total raised and supports the National Civil Fund, that it manages together with the third sector, with it.
Italy. As of 2006 taxpayers can choose which non profit organisations to transfer 5 thousandths of their declared income tax to. They can also transfer 8 thousandths to a religious confession.
Lithuania. Fiscal subsidiarity laws were passed in 2002. Taxpayers can give 2% of their income tax to non profit organisations registered on national lists.
Poland. 1% of income tax can be donated to a social cause since 2003. Until 2007 the taxpayer had to front the money and give it directly to their charity of choice.
Portugal. As of 2001 5 thousandths can be transferred by income taxpayers to public or private charities. But they cannot choose who their donation will go to.
Romania. The 2% law goes back to 2003 and allows transfers to non profit organisations.
Slovakia. Companies and individuals can, since 2004, choose to give 2% of their declared income tax to charity.
Slovenia. 5 thousandths can be transferred to unions or non profit organisations.
Spain. Tax payers can transfer 7 thousandths of their income tax to the Church or to other social aims, but not to NGOs and without being able to choose the beneficiary.

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