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February 15, 2011 / David Woodford

Using taxes to support charity without the need for government involvement

Following from my post about the problems of the government giving to charity I’ve decided to think about a way in which giving to charity could be managed. Whilst I clearly belive it is wrong for the government to take your money and give it to a charity  on your behalf, because it denies you the choice of where you put your money, it is clear that there is a lack of donations to charities.

As I have mentioned before, charity can be considered a service which we buy by donating. The service being a society in which we everyone is provided with a minimum standard of living (this may be provided by the state or the voluntary sector). However, charity is a perfect example of a public good as it meets all three criteria:

  1. Non-exclusive: If your neighbour gives to charity they can’t stop you enjoying the benefits. You can enjoy knowing you give in a society where people don’t suffer without having to make a donation yourself.
  2. Non-rejectable: I don’t think any normal person would not want to live in a society where other people have given to charity but if they don’t it’s tough because they can’t enjoy the benefits.
  3. Non-rival: The fact that one person enjoys living in a society in which there is charity doesn’t reduce the ability of another person. This is because we are concerned with the people giving to charity not the people receiving it where it clearly is rival.

So this means that if we rely on voluntary donations to charity there will be a lower level of charity than we want. Like defense, charities will suffer from the free-rider problem where people who would be willing to give don’t because other people are already giving and it is impossible to withdraw the service from only them if they don’t donate.

The most obvious solution is for the government to provide the “charity” as it can ensure that everyone pays through taxes and because, it is elected, it should provide the level of charity (and taxes) that meets the wants of the most people. However, this causes other problems. There is market failure in the level of donations but, for a given amount of donations there is no reason why the market can’t decide which charities it is given to. If you had to donate £10 to charity you would be better able to choose where you want it to go than the government as the government has to try to please everyone.  People want to give to different causes and this is part of the problem with government control. They have to make a decision on behalf of everyone whereas if you let individuals make the donations they will give to the charities they think are the best. This will also increase “competition” between charities as it means that the charities would have to prove that they are offering the best value for money to attract donations.

So what we really want is a system whereby the level of money you “donate” is controlled through some democratic means such as the government but which charities the money goes to is controlled by the individual.  The simplest way I can think of for doing this would be to allow you offset your charity donations against your tax bill. To avoid confusion, this isn’t like the current system where charities can claim the tax back on donations but one where when you pay your tax bill you reduce it by the amount you gave to charity during the year. This would mean that the level of donations depends upon the level of taxes which are controlled by the government but which charities receive the donations is controlled by individuals. Since making a donation wouldn’t cost you anything it wouldn’t suffer from the free rider problem.

Clearly there are a number of different ways of implementing this. It may be chosen that only a certain amount of your tax bill can be offset as the government would want to ensure that it still receives its taxes to pay for other goods but this wouldn’t necessarily need to  be the case. Since you can consider much of what government does as charity work (NHS, welfare state, eduction, libraries, etc) as they are services which do not necessarily need to be provided by that state allowing people to choose to give their money to other charities would force the government to prove it is using public money effectively. Things like the redistribution of income would still occur because we could still have a progressive tax system where the rich are contributing more to society than the poor but these contributions don’t need to be to the government, they could be to charities instead.

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