Chocolate and Gold Coins

Saturday, May 14, 2005

Leveraging Charity

I have to admit that I really love free stuff. I love the Internet because it’s free: no New York Times for me. I blog on Blogger even though it looks cheap because it’s free. I drive for miles to avoid paying a toll on a road: there’s something about a road that wants to be free. I love the Smithsonian, which is only a few miles from my home, because it’s really nice and (you guessed it) its free. Sometimes I even eat the free food/garbage that coworkers leave out by the coffee machine even though I know I shouldn’t eat it (but its free).

I like public goods. I think one of the five most exciting times in my life was watching Neil Armstrong land on the Moon. I love visiting national parks. I like roads and bridges and dams. I don’t like television but when I do watch it I watch public television. I do spend money to send my boy to a private school, but I fully support the idea that education should be based on the benefits to the child not the earnings ability of the parent.

In theory, there is no reason why any of these things cannot be funded by a private charity instead of the government. In fact, it might be possible to transform most of our government agencies into private organizations funded by charity. All we have to do is contribute to charity. If everyone contributes 20% of their income to charity, charities would have plenty of money to fund all of our public good. So you should do that.

But I won’t. I like free riding (because its free). If it is a choice between spending on the greater good and taking my little boy to Disneyworld, the greater good will suffer. I know my attitude is contemptible but I studied too much non-cooperative game theory to think any other way. I should feel guilty about it and I have scheduled a moment 30 years from now to experience a great sense of remorse, but I don’t have time for that right now.

It’s not that I don’t contribute anything to charity. Maybe I contribute 1 or 2 percent of my income to charity, like most people. But I’m not going to contribute 20 percent voluntarily; I need to be coerced.

The Idea

Here’s the idea: maybe we can change the tax rules so that we can leverage our existing charitable contributions from the 1 to 2 percent range to the 10 to 20 percent range. Ronald Reagan did that in a small way in 1981 when he changed the tax rules so that charity would be tax deductible. If your marginal tax rate is 33%, then it now takes only 100 dollars of your net income to make a contribution of 150 dollars, so your charitable contribution is leveraged a bit. But what if the tax rule was that for every 1000 dollars you contribute to charity, you could deduct 900 dollars not from your income but from your tax obligation. It would only cost 100 dollars from your net income to make a charitable contribution of 1000 dollars.

I don’t know about you, but I think my attitude towards charity would be completely transformed by a system that allowed me to make 1000 dollars in charitable contribution for the cost of 100 dollars in net income. I really love spending other people’s money. This is kind of like that, only without the guilt because it’s really my money. I know I would spend this money much more wisely than the government would, and I’m sure 90% of Americans could too.

Perhaps I would take the easy way and contribute most of my money to an organization I trust to redistribute the money effectively, but ultimately, it would reflect my choices, preferences, politics, and prejudices. In effect, almost all of my money would be spent in ways that depended primarily on the opinions of two people: my wife and me. And that’s how it should be.

I might contribute to politics, because now my money could actually make a difference. The special interests would see their influence divided by a factor of ten: I like that. Maybe intelligent people could then run for office: is Tyler interested?

The best thing about such a system is that it would really work to improve the efficiency of the production of public goods. Charities would be in fierce competition with each other to produce results or else people will not fund them. It will create a free market in public goods. I really like that idea.

Some Caveats

Now I will address the nay-sayers: yes it will work. Let me anticipate the objections and address them one by one:

How do we define charity? How do we know that this money will not just go back to the individual?

There are three categories of private spending: spending on immediate family, charity, and pure waste. We can make sure that money claimed as charity must be donated anonymously to an organization not controlled by the family of the individual. Also, a third party must verify all donations. Your bank can verify your donation and make the donation on your behalf anonymously.

Another criterion for being a valid donation is that your money should represent only one-tenth of one percent of the total charitable receipts of the charity. This way, your donation is just a drop in the bucket. Only ten cents of every 100 dollars will go back to you.

Some people will spend their money unwisely.

Yes. I guarantee it. There is a word for this: liberty. A free people are free to be stupid. Some people will donate their money to a charity that will try to convert Catholics in Latin America to “Christians”. This sounds positively ridiculous to me. But I know that people over time might learn to be less stupid. Governments already spend money on stupid things and politics guarantees that the government only gets dumber and dumber over time. When do you expect the government will finally realize that farm subsidies are stupid?

It is important to note that charity comes partly from your net income. This gives the individual a strong incentive to become wiser over time. It’s like a partner in a firm who puts up some of her own money into a venture: it changes the motivation considerably.

Charities might discriminate: we have to regulate them

Most people will not contribute to charities that are bad citizens. The few charities that are bad citizens will have very little influence. Consider a charity that only helps white people. Other charities will completely nullify their influence by donating exclusively to the people the bad charity doesn’t help.

People will spend the money on religion

Is this bad? Some people might think so but I don’t, even though I’m not too religious. I figure a person who is genuinely believes that he is beholden to a higher being - even if he is delusional – is more likely to be honest than someone who is rationally beholden only to special interest. I believe the religious charities would do a far better job helping the poor than the job the government currently does. And any charity, religious or otherwise, will have to deliver the goods over time or see revenue fall.

The money would be allocated poorly because most people don’t know how much money is necessary to do certain things

Over time, the money would be allocated much more effectively because people can sense when some cause is under funded or over funded. In any case, most people will trust their money to general charities that will do the hard work of determining how the money should be allocated. There is little chance that a genuine need will be overlooked. In fact, the market in charities will give incentives for charitable entrepreneurs to come in to satisfy a need for a public good that no one ever thought of before. For example, a charity might fund a service that repairs pot holes every night as soon as they form – saving millions of dollars in vehicle damage every year.

People will contribute to charities close to home, ignoring poor areas

Some people will contribute to national charities but many will try to keep the money as close to home as possible so that they will feel the benefits of this spending. That is a good thing. People will be using their own knowledge of the local needs to fund a charity that can satisfy that need.

I might contribute some of my money to the school where my son goes. I cannot contribute much without violating the one-tenth of one-percent rule. The reason why I send my son to that school is because it is really nice. I want others to benefit from this school. With more money, they could open another school, in an area not served by good private schools. I would be using my knowledge of local schools to help spread the best ones. And when you think about it, this is one way to do the vouchers that everyone could live with.

People will game the system by allocating all of their money to a pet project

You cannot escape free riding behavior completely. Some people will decide the charitable market serves the public well except maybe one area, and they will allocate all of their money in that one area. I’m not sure if that is a real problem or not. If it turns out to cause real problems, we can figure out a system of mild regulation, but I would rather not go there if it weren’t necessary. Most people will act in the best interest of society if others strongly disapprove of anti-social actions. I would prefer to let everyone be his or her own judge about how his or her money should be spent.

Charities will waste their money lobbying the government

I think this one really bothers me. I think we would have to spell out that any charity getting this money should not be lobbying the government. The charity is supposed to be the money, not influence the money.

Some Final Thoughts

This is a very long post and I thank anyone who made it through to the end. I have read some very interesting proposals for privatizing certain government institutions. Alex Tabarrok wrote about assurance contacts for guaranteeing that certain charitably funded projects are completed or the money refunded (of course, if the money is anonymous it cannot be refunded but you can specify the default organization). Different River has a nice suggestion for how charity can use trademarks to replace the FDA in regulating medicines. My suggestion for leveraging charity fits in with these ideas nicely.

The whole idea is to replace the tyranny of the majority with the sovereignty of the individual. I think that would be really cool.

Maybe there will be a charity that pays people to blog (an example of pure waste?). Every blog will will get a penny for every page view. In a week I could earn enough to buy a cup of coffee. Free coffee: I love it!


  • Charity isn't genuine if it's a government handout.

    The deduction for chartiable contributions should be removed entirely from the tax code. Too many people cheat and make up some fake amount of money they gave to charity.

    By Blogger Half Sigma, at 6:20 PM  

  • Hi Calico Cat
    I agree that it is necessary to verify that charity is genuine and not a fraudulent tax deduction. I addressed that concerned above.

    "Charity isn't genuine if it's a government handout."

    If you are saying that leveraging charity will trade quality for quantity, there's no doubt about it. But there is this same problem with government programs: you're getting quantity at the expense of quality. If you want quantity public spending, we need a certain amount of coersion to avoid free-riding.

    By Blogger Michael Higgins, at 7:58 PM  

  • Hi Noumenon
    Most charitable spending would not qualify for the subsidy because it needs to be anonymous. Also, the amount of subsidy plus charity must be enough to buy the public goods that people desire, so it would have to be a large sum of money (probably over a trillion dollars).

    Perhaps 9 for 1 subsidy is too high and we could do 4 for 1. That might be better. I would guess that it would be gradually raised and that government would reduce its direct spending on public goods as charity increases.

    By Blogger Michael Higgins, at 10:28 AM  

  • If you are saying that leveraging charity will trade quality for quantity, there's no doubt about it.

    By Anonymous Anonymous, at 4:30 AM  

  • To Noumenon:

    In his blog he writes that in donating a 1000 dollars, you could get 900 back, thus costing you 100 dollars. This is 90% "matching contributions," which increases your donation by 900%. This confusion of terminology caused an error in your math. You multiplied 158 billion by 900/33 to get your 4.3 trillion a year. If you wanted to do apples to apples, you needed to say that a 33% matching contribution of 150 dollar, for example, will cost the individual only 100 dollars and is therefore increased the donation by 50%. Therefore, you could say that the government right now is increasing everyone's donations by 50%. So, to get the actual increase to the government you should multiply the current cost of 158 billion by 900/50, which would give you 2.8 trillion in government costs a year. It's still a lot, but that's a significant difference to what your comment lead to believe. Just couldn't leave that unclarified.

    Your welcome,

    By Anonymous Anonymous, at 4:23 PM  

  • well it is true I love charities but some times I do not want to help because the people is using it for fraud I prefer to go directly with people and help them

    By Anonymous pharmacy escrow, at 1:46 PM  

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