Charitable giving is a very personal decision and the tax law surrounding it is complicated and arcane, so I start with some simplifying assumptions to make the problem more approachable. These are:
- Money given to charity is 100% tax-deductible.
- Each person lives for two periods, then dies, and their entire stock of wealth is donated after death.
- An individual's money earns 10% interest.
- To make the problem concrete, I'll imagine a person earning $100,000 in each period, and two different tax regimes: one with a 0% tax rate, and another with 50%.
Now imagine a tax rate of 0% (and if you're a libertarian, try not to faint with excitement). An individual earns $100,000 and keeps all of it, earns $10,000 in interest before the second period, makes another $100,000 then dies and gives all of it away. Total charity given is $210,000.
One could argue that this result emerges just from the assumptions made, which is partially true. However, as long as individuals can earn a higher return on investment than the government (which is not a controversial claim) and all money is transferred upon death (a de facto necessity) then the result, qualitatively, will still be the same. If you make the example more realistic, and envision a person making money then saving and investing it for more than just two years, the difference between the two tax rates becomes even more apparent.
Of course, someone might say there are distributional issues this exercise neglects. Maybe needy recipients of charity are more sympathetic than the undeserving heirs of some wealthy person. Aside from that, the general point still stands: when government takes money through taxes, the overall social "pie" becomes smaller. When individuals can invest it, they put money into productive activities which can generate more wealth, making the "pie" bigger. Even if higher tax rates drive some people to give more money to charity than they otherwise would, society in the aggregate is better off if that money can be productively invested by individuals instead. Charity is then a pleasant side-benefit of greater social wealth.
I would love to have been the wall in your house when you had this conversation with dear MOM :)
ReplyDeleteI sound much more clever after the fact than while I was actually arguing, believe me. :)
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