Blackadder’s Lair

The home of many a cunning plan

Better Than Taxes

In the course of a recent post on Warren Buffett and the Efficient Market Hypothesis, Scott Sumner made the following aside:

Bill Gates essentially taxed middle class consumers all over the developed world, and is giving almost all of the money to the disadvantged in poor countries. That’s something governments don’t do, and yet for his “monopoly profits” he is despised by many on the left.

This prompted a hearty Amen from Arnold Kling, who added:

There is a huge contest going on between politicians and rich people over who should get to spend their money. Most of us have no direct stake in the outcome–as neither politicians nor rich people, we will not have the choice.

But I think we really ought to be rooting for the rich people. That is, we should root for lower taxes and less government spending. Government is one of the worst charities in the world. It advertises that it is going to give money to worthy causes, but very little money goes to programs that are aimed at people in need, and not many of those programs hit their targets. All of the bleeding hearts who are thrilled by the idea of government closing tax loopholes and taking more money from rich people should do an empirical analysis of who benefits from government spending and who benefits from the spending of rich people.

I’m not aware of any empirical analysis comparing the results of private charity versus government spending, but I suspect Kling is right that, dollar for dollar, you get more bang for your buck from private charitable spending than you do from government spending. If your average rich guy decides he wants to give away his money in the most beneficial way possible, he’s probably not going to just give it to the government, and I don’t think that’s just because he’s being foolish.

Of course, the counter-argument here is that the rich won’t give nearly as much away voluntarily as they now pay in taxes. Even if private charitable contributions are (say) twice as effective as government spending, if the government wasn’t taking the money from them they would only give away (say) 10%, which means tax and spend is still a better deal, all things considered, than is relying solely on private charity.

This argument, however, is made plausible only by a failure of imagination. If we really wanted, we could easily design a tax system that would get us the best of both worlds. For example, if the rich currently give 5% of their money to charity and pay 25% in taxes, one could raise the effective tax rates on the rich to 30% but allow taxpayers to subtract a dollars’ worth of tax for every dollar donated to charity.

That, of course, would be taking things a little too far. Presumably there are some areas (defense?) where a dollar of private spending is less beneficial than a dollars’ worth of government spending, and one would not want to apply this sort of credit system to taxes used to support that sort of spending. On the other hand, I would be surprised if most government spending turned out not to fall into this category.

While I think that this sort of idea has a lot of promise, I don’t expect anything like it to be adopted any time soon (indeed, the Obama administration seems to be moving in the opposite direction). The reason, I think, has to do with who gets the credit for private spending versus government spending. Politicians like to brag about how much they’ve spent on program X, Y, or Z. Saying that you made it easier for Mr. Moneybags to spend more on X, Y, or Z doesn’t sound nearly as impressive, and a good deal of the credit for whatever good this spending does will go to Moneybags rather than to the politicians. Likewise, the evidence suggests that among the general public advocating higher government spending is a substitute for actually giving to charity. Saying that you favor the above sorts of changes to the tax code just doesn’t have the same conspicuous compassion value as saying you favor higher levels of government social spending.

May 5, 2009 - Posted by | Charity, Government, Taxes

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