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When calls for taxation battle the need for charity

Omar Al-Ubaydli

Published: Updated:

Both taxation and charity have critical flaws as methods of assisting society’s less fortunate. Instead, we should encourage a hybrid, whereby people are legally required to donate a certain portion of their income to a charity of their choosing. This will ensure that wealthy misers do their bit while helping us avoid the corruption and incompetence bred by a government monopoly on taxation.

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Modern governments have many functions, but among the most important is ensuring a dignified standard of living for all. The primary method for achieving this goal is redistributive taxation: money is legally seized from the rich via taxation and reallocated to the poor via government programs such as income support, unemployment benefits, and so on.

The problem with this method is that in the absence of competition, the civil servants in charge of taxation and poverty relief tend to have low levels of performance. The revenues they secure from taxation are largely independent of the quality of their work, and accountability regarding their spending decisions is limited to bureaucratic oversight and the extremely coarse pressure that can be generated via the ballot box and other political channels.

When I go to a restaurant that serves terrible food, I cease being a patron, as do my friends and family, creating economic pressure that will either force the restaurant to improve or go bust. The government officials in charge of poverty relief are not subjected to the same competitive process: if I think they are doing a terrible job – be it out of incompetence or corruption – I still have to hand over my income, and I still have to watch them spend it as they see fit. Barring a massive political scandal that leads to heads rolling in the civil service, I am stuck with them.

One alternative that society has is private philanthropy: people voluntarily choose how much money they want to donate to assisting the less fortunate, and they select the charity that they think has the best performance in poverty relief. Here, the competitive process is extremely salient: if I think a certain charity is doing a bad job, like a subpar restaurant, I can withhold my custom, forcing it to shape up or ship out. The monitoring that the market provides is typically more effective than anything that a bureaucratic overseer or a ballot box could provide.

A general view of The Bank of England in London, Britain, March 19, 2020. (Reuters)
A general view of The Bank of England in London, Britain, March 19, 2020. (Reuters)

Yet the problem with private philanthropy is that people might not donate enough – many rich people prefer to hold on to their money than elevate the living standards of the poor, potentially condemning the less fortunate to a life of squalor.

A hybrid is to force people to allocate a certain portion of their income to poverty relief – analogously to taxation – but to allow them to choose the receiving charity; think of it as “taxarity”. In principle, this will introduce competitive pressure into the process of redistributive taxation, while still ensuring that a large enough volume of resources flows to the poor.

Countries like the US do partially operate such a system: when paying income taxes, citizens can earn deductions by donating to non-profit organizations. However, this system’s effectiveness as a poverty-relief mechanism is undermined by the fact that the receiving organization simply has to be non-profit, and need not raise the living standards of the poor. A stamp collecting club or a civil war reenactment society are just as eligible to receive tax dollars as are homeless shelters or orphanages.

What I am proposing involves placing tighter restrictions on the qualifying organizations, to ensure that enough money is channeled to poverty relief. However, there are a couple of caveats.

First, governments do more than alleviate poverty: they enforce laws, defend borders, protect the environment, and so on; and not all of these operations can be subjected to competitive pressure. That means that a certain percentage of tax revenues still have to go to the central government.

Second, even in the poverty relief domain, the government has some advantages over private charities stemming from its centralized power. One such advantage is information: by having access to your tax records, the government is sometimes better able than a private charity to assess if someone genuinely merits income support, and is less likely to succumb to a fraudulent claim.

Of course, the government should regulate private non-profits, lest rich people create a "poverty relief" entity that just kicks their "donations" back to them. The right model to think of is telecommunications: it is so much better to have the government regulating private telecommunications providers that compete, than it is having the government provide those services itself in the guise of a public monopoly.

It is human nature to take it easy in the absence of competition. By ignoring this fact, we needlessly waste considerable resources in the fight against poverty. We should always be thinking of smart ways of injecting competition into government processes. Giving people the power to choose how their poverty relief tax dollars are spent will surely raise the productivity of redistributive taxation.

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