Dominic Lawson: Class warfare in the age of philanthropy: Stop bashing rich people who give to charity

When the Church of England accuses the Government of "carpet-bombing" England's historic places of worship, there are only two possibilities. Either our warplanes have been misdirected, in which case heads must definitely roll at the Ministry of Defence; or this is a metaphor. It is the second: epic hyperbole from the Cof E's press office in its attack on George Osborne's proposals to limit tax relief on charitable donations.

The Church is far from alone: the entire voluntary sector and most of the press have been engaged in their own rhetorical missile strikes against the Chancellor's plans, outlined in the Budget Red Book but which only percolated through to public attention last week. Yet the Government is refusing to retract, despite every prediction of a rapid U-turn in response to what is presumed to be universal hostility to this raid on Cancer Research UK, Macmillan Nurses and every other good cause you can think of.

Osborne is standing firm (though silent) because he understands something rather unattractive about the British, or at least that significant proportion which would rather see such charities suffer if it meant the very rich might have the smile wiped off their faces. It causes such people almost physical pain to think of the possible pleasure it gives to the rich when they tithe their income to charities of their choice, rather than in taxes to fund the state's own choice. The latter, you see, is "democratic" and therefore good.

The Government has also been appallingly successful at creating the impression that these wealthy philanthropists are not only benefiting psychically from their donations – disgraceful! – but also that somehow the current system of tax relief means they are keeping more of their own money than they would if they "paid tax like the rest of us".

The reverse is the case. As Lord Jacobs, who until recently took the Liberal Democrat whip in the Upper House, observes: "Limiting tax relief to £50,000 a year is based on a complete misunderstanding of the financial consequences of charitable donations. George Osborne implies that taxpayers can profit from the current arrangements but that is simply not the case. I have twice given a million pounds to charity. The tax relief at that time was about £400,000 on each million pound donation. Each time the net cost to me, after the tax relief, was £600,000. I do not call that making a profit." So Jacobs was on each occasion roughly £200,000 worse off because he had given the money to charity, than he would have been if it had been simply taxed at the then top rate.

It is true that money given to the charities of Lord Jacobs's choice was, to the extent of £400,000 in each case, money not available to the state to spend as it wishes – and if the donations were "gift-aided", then the state would have to cough up accordingly to those charities. This is the best case for Osborne (and indeed for Jacobs's own former colleagues, since the proposal owes much to the advocacy of Nick Clegg and Chief Secretary Danny Alexander). Yet if you are one of those who agrees with their proposal, then you would also have to believe that there is something socially irresponsible about ticking the gift-aid box when you make a contribution, to, say, a fund-raising drive by the Disasters Emergency Committee.

In fact, the state is already the overwhelmingly dominant player in what would once have been termed charity; this paradoxical and even unhealthy tendency is clearly one the Government wants to protect, for all its rhetoric about the Big Society – which, if it meant anything, was about releasing the grip of the state on the voluntary sector.

Five years ago the Civitas think tank produced a fascinating study on this, under the title "Who Cares?": it showed how many notable charities had become completely dependent on the state, rather than voluntary donations. The National Family and Parenting Institute (which was a particular favourite of New Labour ministers) received 97 per cent of its income from taxpayers – and don't tell me that you were consulted about that.

As a whole, the Civitas report revealed, the charitable sector actually receives more money from the state than it does from voluntary donations. As you might expect, the vast bulk of that state funding was directed at the largest charities, where the chief executives tend to be paid handsome salaries and which have "media affairs" and "government relations" departments expert at fighting the turf wars to retain and enhance their funding.

Their firepower is now being turned on the Government; but the charities we should be most concerned about are those small ones which have the least political clout, some of which could indeed be seriously damaged by Osborne's proposals, as they tend to be entirely reliant on a handful of genuine donors.

Of course, it might be possible for those benefactors to give much more, in order to make up for their and the charities' lost tax relief; but that would depend on personal circumstances, which cannot be known by the Government.

For example, I have a friend who gives over 95 per cent of his (considerable) income entirely to cancer research charities; those charities will certainly lose as a result of Osborne's proposals. Yes, more tax will be collected from this person – but I doubt the net benefit to the public good, however expressed.

There is, as you would expect, an argument about the scale of the damage. The Community Foundation Network said, "We estimate that if you add together those who would have given and others discouraged from being donors, the charitable sector would be £1bn worse off".

These days, £1bn is the standard invented figure used to impress or scare, according to choice. The Government seems to think that it will save around £100m by introducing a cap on tax relief for charitable giving –out of a total annual public expenditure bill of over £700bn. Bravo, but if the purpose is to reduce the national debt, why not do as the Indian government has generously suggested, and cease giving it £280m a year in aid – six times, by the way, the amount it receives from any other country.

That, however, would not just make the Department for International Development feel less loved; it would also fail to meet the Government's narrow political objective of appearing tough on tycoons and tough on the causes of tycoons.

d.lawson@independent.co.uk