Cross-posted as usual from A Nice Place To Live.
Boalt Hall suggests a Choose-Your-Charity Tax. This would provide a tax credit of one dollar for each dollar of charitable giving, up to a certain limit, perhaps 10% of one’s incomes. So if a taxpayer grossing $100,000 a year donates $10,000 dollars to the charity of his or her choice, he or she would receive a $10,000 tax credit.
“A decision to vote for the Choose-your-Charity Tax expresses a willingness to endure significant personal sacrifice, but only willingness to do so if others match that willingness.
“And if others match, then the sacrifice is not a drop in the bucket, but a great wave of change – and the taxpayers know that. By matching contributions with over 100 million US taxpayers, it would be possible to solve vast problems. Roughly speaking, supporting such a policy is equivalent to being willing to give $1 when the personal price of giving that dollar is one-hundred-millionth of a dollar. This is the ultimate expansion of the proven “matching” tactic that has already helped increase donations to charities.”
For the average taxpayer, 10% of their income equals roughly $4,000 per year. Even those that agree with Singer’s ideas on charity might struggle to take that $4,000 dollars out of their own pocket and give it to a poor person. But with the Choose-your-Charity Tax, your $4,000 donation is matched by 100 million other American taxpayers, producing $400 billion/year in extra charity.
I don't know as much about economics as most people on this forum do so I don't know any reasons why this wouldn't work. What do you guys think? I hadn't seen this idea discussed anywhere.
This would create an additional (and large) incentive for people to funnel their money through faux-charities, and to create faux-charities that'll circuitously direct it back into the pockets of the donors, either fraudulently or legally, like Owen_Cotton-Barratt said.
There are responses you could make to this (watchdog organizations that monitor the effectiveness of various charities and governmental authority, tighter laws regarding charitable incorporation) but so far as I can see they're all subject to the principal-agent problem.
Other than that I like the idea.
It's definitely an interesting idea.
It may be more natural to compare to the situation where you have the same tax level but it's going to the government, rather than the case where the you have less tax. That way we don't have to consider the welfare or incentive effects of changing the tax rate.
Advantages compared to general taxation:
Disadvantages compared to general taxation:
I think this last could be a big one. If this tax were in place I'd expect to see a lot more money going to services (art galleries etc.) providing public goods in rich neighbourhoods.
The penultimate one could also be a problem. At least in the UK, government spending is meant to go past cost-benefit analysis. This keeps it doing a reasonable job of funding effective things and skipping ineffective things. This tax looks better the worse-run government spending is.
Even with good government spending it could end up having a beneficial effect if it increased the proportion of money spent on international aid. I'm not sure whether we should expect that.
Isn't that largely the case with government spending anyway? We have many government programs that merely sound good to voters/politicians without actually having much economic justification - from the ethanol mandate to the minimum wage to corporate welfare to the war on drugs to healthcare that fails RCTs to state funded art. My impression is the UK is in many regards similar to this. Whether replacing this with charity allocation would lead to more or less 'stuff that sounds good but is actually useless' seems like an open question rather than a clear mark against the policy.
During the policy comment project by the UMD effective altruism group, we found that in some government agencies there actually is a degree of cost effectiveness analysis and meritocracy. This leads me to expect that the government will do slightly better than the population at deciding where to give in a more direct manner. The government is less likely to actually go through with something like the ALS ice bucket challenge, but when you have this sort of tax system it seems to me that such things might get economically damaging levels of funding, and that this will discourage future donations and charity in general.
Effective altruism needs to be much more popular for this tax idea to have a chance of being a good thing.
Reading the original article, it seems his argument is basically
But this is an obviously fraudulent argument - it only works if you don't care about the huge costs being imposed on everyone else. That $299,999,999,000 has to come from other people, and all the additional associated costs. Once you take into account the cost to them, there is no matching, only value destruction.
Owen points out that you could instead hold tax levels constant and think of it as an alternative to government-directed tax spending, which seems like the more interesting half of the idea.
If people select efficient enough charities, the benefits might outweigh the damage of deadweight loss, and value destruction via higher taxes. The thing is, this charity tax doesn't seem to guarantee donation matching, it just increases the likelihood hat people will donate to something.
Maybe I am being confused by ambiguity, but the situation I imagined was that the government increases income tax between 1% and 10% and that the pool of money generated by this is given back to people who donate as a tax credit. If I donate $1,000 to AMF, I get $1,000 back from the government: but no guarantee that others will donate to AMF.
This sounds pretty similar to what we already have for tax deductions in the United States. Or did I misunderstand you?
I think how it works in the US is that you subtract the amount you donated (up to 50% of your income) from your income, and then the tax you pay is some percentage of that lowered income.
Example (over-simplified):
Income: $80,000 --> Taxes (15%): $12,000
Income: $80,000, Donations: $15,000 --> Taxable income: $65,000
So in this example, even though you donated $15k, your taxes only went down by $2,250.
Yeah, as Gina points out, tax deductions are different, they let you reclaim a fraction of what you donate. e.g. if you're getting taxed at a plausible marginal rate of like 40%, then, assuming you don't drop into a lower tax bracket, you effectively get 40% of the amount you donated back.
In the link, the proposal is that if everyone's getting taxed 40%, you instead tax everyone at 41%, and they choose where to send that extra 1%.
From what I understand, donations usually result in tax deductions equal to a portion of the donation (I think 15-30% in Canada) but the article suggests basically making them 100% tax deductible.