Most museums, theater, opera, and symphony orchestras are ‘red ink’ businesses, costing more to produce and present than can be earned through the sources of income most directly available to them. So when a society deems these art forms important, irrespective of their challenging economics, the organizations that deliver them are given some form of legal status as charities, eligible to receive donations and certain tax benefits.
Both the U.S. and U.K. have legislative and fiscal frameworks and oversight mechanisms designed to do this, and make sure that in return for the tax breaks and public funding they receive, these organizations stick to their charitable objectives and that those who are responsible for their governance, i.e,. the board, do not profit as they would if they were commercial entities. In this note, we look at the differences between the financial support systems in the two countries:
TAX BREAKS
The difference is in the relative balance between public funding and tax-deductible contributions by individuals and corporations. In the U.S., the tax benefits to donors are formidable and the majority of ‘non earned’ income flows into the cultural sector via tax-incentivized giving, while in the U.K. the tax benefits are weaker (especially for the donors) and the government funds more directly. The difference is therefore not so much in the volume of public support – although it is often described that way - as in whether that support reaches the sector in the form of direct public funding or foregone tax revenue
PUBLIC FUNDING
In the U.K., public funding (from tax revenues and government borrowing) is channeled to cultural organizations from the U.K. Treasury, occasionally directly, but usually through the Department of Media Culture and Sport (DCMS) and its regional equivalents and, then via them to the regional arts councils, e.g., Creative Scotland. The Arts Council of England, for example, supports a portfolio of 828 National Portfolio Organizations on three-year funding agreements. A significantly smaller – and decreasing — amount of tax is also raised and distributed by local government, but overall, the system is highly centralized. Tax-deductible contributions by individuals are slowly growing and tax incentives are significantly more modest than in the U.S., and accruing more to the recipient rather than the donor, weakening the financial incentive to give.
In the U.S., direct public funding (federal, state or local) is much less significant, and tax incentivized philanthropy is far greater. Since 1917, charitable contributions have been wholly tax deductible, up to high ceilings. Today an unmarried individual may claim federal deductions up to 60% of their adjusted gross income. In other words, as a taxpayer you can either pay taxes up to the ceiling to the IRS or donate to a registered charity and receive a tax deduction. This represents tax foregone by government, with the decision on where the funding goes delegated to the individual, by the state. Meanwhile, direct federal arts funding, provided primarily by the National Endowment for the Arts (NEA), is tiny. While state and local arts funding varies enormously, it is often volatile and ‘in play’ politically. Florida, for example, recently ‘zeroed out’ all arts funding.
THE CULTURE OF GIVING
People debate whether the ‘culture of philanthropy’ in the U.S. is more or less important than tax breaks in encouraging arts giving. In the U.K.,, the debate is focused on whether the assumption that arts funding is a responsibility of the state is more or less important than the lack of tax breaks in impeding charitable contributions. The reality is that in both cases they are mutually reinforcing: the question then becomes the conundrum of the chicken or the egg. The laws and mores reflect respectively fundamentally different values in the two countries. Americans gave $484.85 billion to charity in 2021 (according to the National Philanthropic Trust), while Brits donated £10.7 billion (Charities Aid Foundation). The U.S. has roughly five times the population of the U.K., and yet Americans give 45x as much.
BOARD AND STAFF
American boards play a far greater role in giving and getting while in the U.K., staff play a greater role in wrangling public funding. This has a discernable impact on the balance of power between board and management in the two countries. This is true even though the broad distinction between governance and management is the same. American development departments are also correspondingly larger, reflecting the greater significance of contributed income.
PROGRAMMING STRATEGY
In both countries programming strategies need to appeal to funders – she or he who pays the piper calls the tune. The most powerful funders in the U.K. are public agencies with explicit social agendas informing their funding strategies. In the U.S., this is true of many foundations (like the Ford and Mellon Foundations) but not all. Foundations themselves are only a small and diminishing element of total philanthropy, as high net worth individuals and their family offices have grown in significance. As a result, there is a weaker link between national and local policy agendas and programming strategies in the U.S. compared to the U.K.
The highly centralized nature of funding in the U.K. means that changes in government policy or practice or levels of funding tend to affect the whole sector uniformly. Where there is significant direct public funding in the U.S., it is at local or state level, again allowing a degree of geographic diversity.