THE ROLE OF THE ONE PERCENT LAW IN A DEMOCRATIC SOCIETY

The strong influence of NGOs within CEE is often based on society’s lack of trust in the democracy model, how it has been presented, and the political parties associated with it. This opposition stems from the disillusionment of the populace—a common side effect during the initial stages of socio-political change from the implementation of an idealized free market democratic state model to the everyday realities of the situ-ation. The state is also perceived as an external force, which cannot be trusted, and is often hostile towards its citizens. This is not only the residue of several decades of

communist regimes, but in many cases a much longer period of governance imposed by occupations, hostile empires, or socially intolerable rule. Although these attitudes may be seen as threatening to civil society, they may also provide a foundation on which to rebuild social trust.

Development of civil society, however, is not the only solution to the inherent problems of democracy. Placing too much emphasis on NGOs rather than the outcome of democratic elections, or treating social activities as a substitute for civil obligations, may result in the splintering of society into a variety of small interest groups with an infrastructure too weak to support common interests. On the other hand, governments can benefit from the work of NGOs, and officials cannot expect NGOs to relieve them of their social responsibilities without providing some level of financial support.

The one percent law provides a legal remedy for supporting NGOs, but it may raise concerns regarding the relationship between the growth of the NGO sector and the development of democracy in CEE. It is not by accident that the one percent mecha-nism has only been introduced in post communist countries rather than in countries with long-standing democratic rule.⁶ The one percent law is a compelling experiment, which allows citizens who pay their taxes to partake in the distribution of a portion of public funds. Treating this as a kind of “power to the people” approach raises concerns as to why a taxpayer should only be able to determine how one percent, as opposed to 100 percent, of their taxes may be distributed. In addition, the one percent provi-sion is a system that allows only a portion of taxpayers, as opposed to the entire voting population, to redistribute public funds. The Hungarian Act on the “Use of a Speci-fied Portion of the Personal Income Tax” (also known as the “one percent law”) was designated unconstitutional shortly after it was passed by Parliament. The argument supporting the claim filed with the Constitutional Court states that only representative bodies elected through a democratic procedure are eligible to render decisions on the designation of public money to be allocated in accordance with state priorities. The one percent law hands this power over to a marginal group of citizens, which represent less than 50 percent of all voting members of society. In fact, this group was even smaller, due to the established tax threshold mentioned below, which means taxpayers who do not meet the threshold are prohibited from taking part in the one percent scheme.

According to the claim filed with the Constitutional Court, Parliament should grant all voting citizens the opportunity to allocate public funds. The court agreed with this argument, but it stated that the one percent law was not a system for redistributing public funds but a parallel system to the tax benefits program, which involved the input of individual taxpayers. One of the 11 judges disagreed with this statement, stating that the two tax incentives cannot be compared, because the tax benefits are applied before taxes, whereas tax designation is applied afterwards.⁷

It is also worth exploring the implications of the one percent system for NGOs. The main concern is whether or not this system constitutes a charitable activity, even if it does

not involve an individual’s allocation of their income for the good of the public. The precedent in countries were the one percent law has already been implemented proves that taxpayers who make these decisions are influenced by one of two factors: Either they believe that the organization being supported, such as private schools, hospital foundations, etc., will perform duties in the taxpayer’s best interest or in the best inter-est of the local community, or they are influenced by their emotions, which urge them to give support to such organizations as animal shelters, child care foundations, cancer research foundations, etc.⁸ This is a reasonable thought process, but, it raises ethical questions such as: Do we have the right to feel moral satisfaction if we spend money that does not belong to us on such noble causes? Or is it just an attempt to uplift one’s own self worth without paying the fee?

In June 2003, a Hungarian NGO called the Nonprofit Information and Train-ing Center (NIOK) preformed a survey in which it asked civil society organizations about the one percent law. It found that 29 percent of the organizations surveyed were satisfied with their one percent income, and 48 percent were only partly satisfied.

The organizations said that, along with the funding, the principal advantage of the one percent law was that several taxpayers acquired knowledge on NGOs and their activities. Almost 60 percent of the organizations surveyed complained that the one percent system kept donors anonymous, when these groups would prefer to establish a closer relationship with their donors.⁹ Support for the financial growth of organiza-tions was ranked fourth on the list of advantages of the one percent law. The first three advantages listed were: “drawing the attention of taxpayers to the nonprofit sector,” “evaluation of social support for NGO activity,” and “enhancing charitable and philanthropic activities.”¹⁰

The one percent law can be a useful tool for re-establishing a philanthropic culture within CEE. Unfortunately, when it was introduced in Poland, it was connected to rigorous limitations on tax deductions for giving to NGOs. A similar situation arose in Hungary, Slovakia, and Lithuania (see appendix II), even though income deductions were more favorable than the one percent system, for both the state and the general population.

There are different forms of tax initiatives to support nongovernmental organiza-tions. A tax deduction reduces an individual’s taxable income by the amount of the charitable contribution made. A tax credit lowers one’s tax liability by the amount, or a portion thereof, of the charitable contribution. Although in the progressive tax system, tax deduction favors the higher income brackets, and tax credits are considered more egalitarian, most Western countries (excluding Canada, France, Italy, and Spain) use the tax deduction mechanism.¹¹

The one percent system is a form of tax credit, in which the whole amount of the charitable contribution reduces the taxpayer’s tax liabilities. The tax deduction or partial tax credit, in which only a portion of the contribution lowers the tax liability, is clearly

more beneficial for the state. A taxpayer receives some tax breaks—depending on their tax bracket—in exchange for contributing to causes deemed by the state to be socially beneficial. This can be seen as a form of public/private partnership. Without the co-existence of the two mechanisms, the one percent system and tax deductions, it is likely that the most valuable element of the one percent law would be lost: the connection between the donor and the beneficiary.