In the US, if I donate $1000 to a charity or a church, and I earned $100,000 that year, I can deduct the $1000 and pay income taxes on only $99,000.  So, effectively, the government gives up tax income on the donation.

This year, the Federal government even allowed people to deduct donations to charities for the Tsunami victims on 2004 income, if the donation was made before the end of January, 2005.

I think the way the UK does it might result in larger payments to the "charity," though.  I might still donate the $1000, but that would result in a total of $1220 to the "charity."

A lot of donations are not "deductible" in the US, though. Political donations for one, any organization doing political advocacy, and if you get any service or product from the charity (like a newsletter, other publication or a coffee mug), the value of that is not deductible.

Also, gifts to individuals are not deductible.  So, people who give money directly to Prem Rawat cannot deduct it from their income for tax purposes, but the money given to Rawat is also not considered his "income" so he doesn't have to pay income taxes on it either.  There is a limit of $10,000 annually for any "gift," and if you exceed that you have to pay a "gift tax."  But, again, Rawat wouldn't have to pay any tax on it.