Arnold Kling  

Voluntary Taxes and the Relevant Margin

John Cochrane on Taxes... Alternative to Charles Murray...

Will Wilkinson writes,

Suppose I'm a utilitarian convinced that human consumption of meat causes a huge amount of animal suffering. And suppose I love meat, and giving it up would leave me worse off. I would happily comply with a no-meat-eating rule if I thought others would likewise comply. But in the absence of a mechanism (whether internal/moral or external/political) to enforce compliance, I rationally believe that my compliance with the no-meating-eating rule will have zero effect on market demand for meat. And suppose I rationally believe my heeding the rule will only make me worse off while making no animals better off. In that case it is perfectly rational to continue to eat meat even if I believe that it would be immoral to eat meat under conditions of general compliance with utility-maximizing rules. I think Matt's voluntary taxpayer case is exactly analogous.

Matt seems to think there's something significant about the fact that Americans contribute lots of money to charity, but I can't quite see what it is.

Unlike Will, I have a hard time coming up with a model in which it makes sense for Warren Buffett to refuse to contribute more to the government unless the rest of us also are forced to contribute more. In order to come up with such a model, I would have to assume some extreme "lumpiness" of public goods. That is, at the current level of government revenues, the marginal dollar produces no public goods, but a huge "lump" of new dollars would create a threshold effect that suddenly would produce a lot of public goods. That model strikes me as totally unrealistic relative to where we are today.

Also, I think that the fact that Americans contribute to charity is relevant. It shows that coercion is not necessary in order to get people to pay for public goods. An interesting question is whether at the margin we get more public goods (including income redistribution) from charitable contributions than from government.

Mark Thoma links to a post from Ed Dolan, who complains that religious charities do not do as much redistribution as one would like. But neither does government, if what you want is redistribution from wealthy to poor (it redistributes a lot from young to old and from poorly-connected to well-connected).

My personal preference would be to err on the side of letting each individual decide how much to give to charity and which charity to support. The alternative is confiscating money through the democratic process.

I think it is difficult to evaluate what happens to a marginal dollar that is confiscated or donated. I tend to believe that a marginal dollar donated will do more social good.

(As you know, I am not so high on non-profits. It would not surprise me if it turns out that a marginal dollar of Warren Buffett's would do the most social good if given neither to a non-profit nor government. It might be best invested in a profit-seeking firm. But you don't have to agree with me on that.)

I think it is worth imagining a world in which government competes on a level playing field with other charities. That is, imagine a world in which government relied on voluntary donations. In such a world, government would be smaller and other providers of public goods would be larger. To me, that sounds like a win-win.

I remember the old bumper sticker that says "It will be a great day when we spend billions on education and the Pentagon has to hold a bake sale go buy a bomber." I think it will be a great day when the government has to hold a bake sale to buy anything.

It is easy to come up with a model in which in theory voluntary contributions do not produce enough public goods. But in practice, I am not convinced that taxation produces an attractive mix of public goods. At the margin, if we had less taxation and more charitable contributions, might we be better off?

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CATEGORIES: Political Economy

COMMENTS (18 to date)
pyroseed13 writes:

"That is, at the current level of government revenues, the marginal dollar produces no public goods, but a huge "lump" of new dollars would create a threshold effect that suddenly would produce a lot of public goods."

This strikes me as the strongest argument against the position that "we all need to this together for this policy to be effective." If the outcome you hope to achieve is that at least someone is made better off from a wealth transfer, then it shouldn't matter if the amount is $5 or $5 million.

Tyler Cowen writes:

All the more, what government supplies is mostly not public goods. And if anyone can overcome a threshold effect, WB can.

Paul Crowley writes:

I must be missing something here, because it seems trivial to come up with such a model, even assuming that utility is linear in government revenue in the relevant region. As Warren Buffet, I am like everyone else somewhat selfish; I value a dollar in my pocket more than a dollar in yours. A $1 voluntary donation to government buys me a $1 increase in revenue at the cost of a $1 loss to me, which may not be worth it. However, a $1 tax hike buys a much larger increase in government revenue, for the cost of a $1 loss to me which I weight heavily, plus a $1 loss to many other wealthy people which I weight less heavily. It's therefore rational for me to support tax hike without personally donating.

Or is your point that there's no wholly unselfish model? This much seems obvious, but since there are no wholly unselfish actors it doesn't seem very important.

Becky Hargrove writes:

Yes, yes - a government traveler, with hat in hand, asking for citizens to care about the latest Washington obsession! Meanwhile in my ideal universe, we maximize our knowledge skills at the level of community, and choose our voluntary one in five skill 'tax' for the young and the old who cannot reciprocate their own.

The breakout of non-profit activity, which Ed Dolan showed, was a scary thing. I am reminded of the nuns who were just scolded by their religious authorities for spending too much time on the poor (although the actual wording on this I heard two ways) and not enough time on more important things like stopping abortions and gay marriage. One only wonders what the nuns might contribute to that.

Xerographica writes:

Here's a study that I just added to the Wikipedia entry on Tax Choice...

We find that allowing earmarks more than doubles both contributions and the likelihood of giving to government organizations. Participants give on average $1.68 from a $20 initial payment for general purposes, compared to $5.52 for cancer research and $4.04 for disaster relief; the likelihood of giving increases from 30 percent for general purposes to 66 percent for cancer research and 61 percent for disaster relief. - Do Earmarks Increase Giving to Government?
TA writes:

Megan McArdle has a theory of this in which people want to live in a society in which everyone embraces certain values (or is compelled to) -- in this case, helping others through collective action. The point is, it's the culture that's really important to them, rather than just helping others.

Peter A. Taylor writes:

But isn't the main argument for government that national defense is a public good? The other kinds of market failures (monopolies, irrationality, inadequate property definitions) are comparatively small beer. If you think that all public goods can be funded efficiently by private charity, doesn't that effectively make you an anarchist? At least, that's my understanding of David Friedman's argument in ch. 34 of The Machinery of Freedom.

Bryan Willman writes:

The real problem is that you want a donation, you want to buy particular things from government.

I don't know Mr. Buffet (and found it odd that he wouldn't pay any more taxes under the Buffer rule) but I presume that his goals for others paying more taxes will either enrich him, or reduce some kind of social risk. (As in, he wants all of "us" to pay more taxes so the lower 35% don't lynch "him".)

I do know Mr. Gates, and sometimes wonder if his efforts in relentlessly pushing for software to be better will have had more good effect in the long run than his quite respectable charitable efforts.

A very real problem with government is that if you allowed tax payers to only pay for what they wanted, a great deal of the edifice would collapse. As in everybody who owns anything would pay enough to be left in peace, and some variable set of people would pay variable amounts for other things. If your success at your goals (as a social activist, environmentalist, rent seeker) has been in getting government to do your work, then you fear this.

Seth writes:

@Paul Crowley - You are missing a couple things in your model.

1. Since Warren Buffett publicly advocates higher taxes on the super wealthy, a $1 voluntary donation from him to the gov't also gives him the benefit of appearing less hypocritical and leading by example.

2. Warren Buffett has set a precedent for #1 with his own donation behavior. He donates a lot to charity and leads by example to get other super wealthy folks to donate using his principles. It's not clear to me why he will lead by example in one case, but just flap his trap in the other. Actions speak louder than words.

David P writes:

When I give to charity, I can pretty safely say that 0% of it will go to continuing war in the middle east.

lurkingowl writes:

Any model where much of the wealth is spent on competitive positional goods will have this effect, right?

If Warren giving up $100 in status goods means he's $100 less cool than his friends, it's a pure loss for him. If everyone in his tax bracket gives $100 to the government, no one loses any status and the government gains $100*# of folks in his bracket. Similarly with other competitive goods like lawyers, financiers, and guns/security. Once the economic activity is essentially zero sum, having both sides give their ammo to the government is a net gain.

Ed Dolan writes:

Whether or not government does a better job of targeting worthy charitable causes than nonprofits is irrelevant to whether the charitable deduction should be maintained.

If you think the government does a better job of targeting charitable causes, then you would want to get rid of the charitable deduction, leave marginal tax rates unchanged, and spend the extra revenue on government-sponsored charity.

If you think nonprofits do a better job, then you would want to get rid of the charitable deduction, cut marginal rates by enough to leave total government revenue unchanged, and leave charity to the private sector.

If you think it is a legitimate purpose of government to provide a tax-based inducement for people to give more to charity, you should, at a minimum, be willing to support a narrower form of deduction that rewards only contributions targeted to true charity. (More on this in the forthcoming Part 2 of my post.)

Any way you look at it, the charitable deduction as it now stands is bad tax policy.

Arnold Kling writes:

Ed, you write

If you think nonprofits do a better job, then you would want to get rid of the charitable deduction, cut marginal rates by enough to leave total government revenue unchanged, and leave charity to the private sector.

I would say that getting rid of every tax deduction and lowering marginal tax rates is the right thing to do. In that sense, I would not want to argue with you. But I would not single out the charitable deduction as being worse than others.

Paul Crowley writes:

Seth: It's a shame about the emotive language in your comment. But addressing the rest: as far as I can tell considering charitable giving makes Buffett's case stronger, not weaker.

It's hard to really account for any charitable giving in a utility maximizing model by considering the utility gained by the recipient; nearly any choice of parameters leads to either giving no money away or making yourself a pauper. Even Toby Ord keeps too much of his wealth for such a model to properly capture. In the end, a "purchase of moral satisfaction" model is more predictive even for utilitarian donors who carefully choose efficient charities.

So if we consider Buffett to have a fixed budget set aside for altruistic giving, he likely considers his chosen charities to be a more efficient way to buy utility than donations to Government, so all his giving goes to them. It's likely that if he were paying more tax, he would reduce his giving, perhaps even dollar for dollar. However, many wealthy people are either not giving to charity or are giving to charities that Buffett considers much less efficient, so for him and them to be compelled to give can give a net increase in utility in his eyes that more than pays for the reduction in charitable giving that would result.

I understand that you may have moral issues with the compulsion that don't figure into this calculation, and indeed if you consider compelling people to have negative utility itself then it can outweigh the considerations above. However what Kling seems to be asserting is that even if you don't have an inherent moral problem with compelling people to pay the extra taxes, the utilitarian calculus can't recommend calling for raising taxes without recommending paying more voluntarily, and that's what I'm challenging here.

I think there are a lot of cases where it make sense to say "we should all be compelled to do X" while not doing X until the compulsion arrives.

Mike writes:

A great general will put himself at the front of his column even though he has no chance of defeating his enemy if his soldiers do not follow.

The responsibility of leading free men means exchanging the shield of rational self-interest and pragmatism for the banner of symbolism and inspiration.

Ed Dolan writes:

Arnold: Don't worry, I'm not singling out the charitable deduction. I'm working my way through them one by one, they're all bad. Maybe, though, with a nod to Bryan Caplan, we could have a tax deduction for voluntary contributions to government

MamaLiberty writes:

Maybe I missed it somewhere in all this... but I don't see anyone recognizing that the ultimate problem is theft and coercion, no matter what the loot might be used for.

Stop the theft!

Ryan P writes:

Saying all deductions are bad seems a bit strong. Eliminate them all, and the corporate income tax becomes a tax on corporate revenue. Which would cripple many perfectly reasonable & efficient firms, and strongly bias those that do survive towards small, very low overhead business models.

The point of saying "let's eliminate deductions" is to say the tax system should introduce as few distortions as possible and so we should minimize how much it is biased towards one activity over another. Taxing revenue instead of profit goes the other way entirely. (Ditto for taxing capital income like labor income, incidentally.)

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