Scenario A: Your taxable income is $1,000,000. Your tax liability is $200,000. You pay your taxes, you net $800,000.
Scenario B: Your taxable income is $1,000,000. Your tax liability is $200,000. You donate $200,00 to charity. Now your taxable income is $800,000 and your tax liability is $160,000. Your net income is $640,000.
The only scenario where a charitable contribution doesn’t lower your overall income is
Scenario C: you commit fraud.
Notoriously more difficult as the amount of financial leverage increases.
“I want to give a million pounds to charity.”
“That’s nice of you. You still need to pay tax first on that sum, though.”
“OK I want to give £600,000 to charity.”
You could think about if the owner of a business generously decides to give all his employees a pay rise - the government now receives less money because the employees pay a lower marginal tax rate than what the owner would have paid if he kept the money for his own higher salary. Should the government get involved here and claw back that lost tax?
If, for example, you were in the 30% tax bracket and gave a $100 deductible donation, you'd only reduce your tax liability by $30 (ignoring edge cases) - ie you're still $70 out of pocket.
I see some arguments along these lines here:
https://theconversation.com/explainer-why-are-donations-to-s...
Excerpts:
* The main argument for tax-deductibility of donations is that it is a form of government assistance or subsidy for what are considered publicly beneficial causes.
* A third argument is that indirect support mechanisms, such as tax-deductibility of donations, facilitates choice. So, taxpayers can direct a certain proportion of their tax to causes they choose, rather than the government determining how it should be spent.
Directing money to a charity, to avoid the money going to the government, is explicitly a way of directing your money away from the common good of the public (which is after all theoretically what the government would spend it on) and towards the specific spending goals which the donor supports. The idea that a wealthy person has a 'better' idea of how to spend their money than the collective will of the people expressed through government is fundamentally antidemocratic.
A billionaire spending money through a charity that promotes a particular kind of schooling, rather than paying the money as taxes into the general fund where it would be used to fund education as directed by a democratically elected government, is basically a way of using their wealth to obtain a bigger-than-one-vote say in how education spending works, and to bypass democratic decisionmaking about how to spend money for the common good.
Of course, democracies are imperfect decisionmakers and they may not always reflect the spending priorities that will maximise collective good - but at least as institutions they are intended to balance interests, and provide a measure of fairness and equality in how decisions are made. And why would we believe that individual wealthy charity donors will make better decisions on how to direct spending?
An individual billionaire deciding that all schools should work the way they would prefer might be a positive way to end-run around institutional inertia and advance the state of schooling for everyone; or they might just pay to have every school library stocked with books about how humans coexisted with dinosaurs. They're one person, unconstrained by how the rest of society would like to improve schools.
>> The idea that a wealthy person has a 'better' idea of how to spend their money ...
The word 'wealthy' can be taken out here. The said choice is being given to others too if we let go of the nitty-gritties.
I agree also that I have no reason to believe that donations should be entirely tax free. The optimal point may be at giving say 10% of the donation amount as rebates while the remaining 90% still is subject to taxes. May be that optimum is at 0% rebate also.
>> and provide a measure of fairness and equality in how decisions are made
Overall, I do agree to your point. Fairness in decision making is more important.
Equality however is different from fairness though. Equality and efficiency bear tradeoffs. See here: https://en.wikiversity.org/wiki/10_Principles_of_Economics
Also, I do not see how high earners being subjected to higher taxes is fair (to them). In my opinion, the very premise of taxes being proportional to income has flaws. See my comment here: https://news.ycombinator.com/item?id=27433973
>> is basically a way of using their wealth to obtain a bigger-than-one-vote say in how education spending works
If my viewpoint in the linked comment above of constant income tax is accepted, then the rich may not even have a bigger-than-one-vote to begin with. Overall, I agree to you though.
The fundamental model behind progressive taxation is that the pain of paying taxes should be roughly the same regardless of income level. The notion of "pain" in this context is closely tied into the concept of marginal utility of income: how much value does a given person get from receiving an extra $X in income (or conversely, how much do they lose by not having $X in income). Give an extra $1000 to person who only earns $12k/yr, and it's a pretty big impact. Given an extra $1000 to a person who earn $12M/yr and its just noise. Taxes follow the same principle, but in reverse. When we tax those with very high incomes, we want them to feel the same "pain" of taxes as those with lower incomes. Because of marginal utility, that requires different marginal tax rates.
> the very premise of taxes being proportional to income has flaws.
Taxes are not proportional to income. We have marginal tax rates, not all-income tax rates. Someone who earns $40k/yr pays the same taxes on the first (and only) $40k (likely close to zero) as someone who earns $4M/yr. Someone who earns $200k/yr pays the same taxes on that $200k as the person who earns $200M/yr.
Good point. I'll think more on this.
One thing though which makes this non-obvious: We are in an equibrium system where demand and supply rebalancing change things. Economic utility and purchasing power of $1000 is the same whether someone earns $10K or $10MM per month. For somplicity sake, if all are made to pay $30,000 per year in income taxes, those who earn less would stop working, however, the demand-supply rebalance would either raise their income levels or the industry would have a higher drive for innovating and inventing to automate those jobs. In a similar fashion, with lesser taxes for the super-riches, more people would incline towards doing startups, etc. When that rebalancing is considered, the point of equalizing pain does not remain obvious to me anymore, as of now. :-)
>> Taxes are not proportional to income. We have marginal tax rates, not all-income tax rates.
Yes, I had made an approximation when writing "proportional". Marginal tax rates makes the income taxes grow faster than proportional with the income, whereas I am arguing for a constant income tax. :-)
Marginal utility of the $1k is not independent of income, even if purchasing power (almost irrelevant in this context) is. This is just basic economics.
> more people would incline towards doing startups, etc.
This seems naive. The rich do not, in general, do startups. The super-rich in particular do not do startups. Maybe you mean "invest in startups", which is an entirely different thing, since it presupposes the existence of startups to invest in. There is zero evidence from anywhere in the world that reducing taxation on the super rich results in any notable increase in investment activity.
I have no idea what this "rebalancing" that you're referring to is. I see no evidence that economies in the real world are in equilibrium states, nor any reason to suppose that they would be.
> For somplicity sake, if all are made to pay $30,000 per year in income taxes, those who earn less would stop working,
This thought experiment seems fairly pointless. This isn't going to happen. And if it did happen, people would not stop working. People need to eat, etc. Depending on the enforcement of the tax, they would have to find more or less ingenious evasion methods.
I'll think some more.
If there are some mathematical works showing what you have explained, I would like to read. :-)
And what about when it is the government who wants to place these books?
All things you can do to affect government action that are unavailable to you to affect private philanthropy.
Yes, and donors should be whipped proportionally to the size of their donation – then we'll see who really, really cares about their cause.
> People should be giving to charities out of the good of their heart [...]
It's not up to you to decide people's motivation for being charitable.