The government, taxes and charity

(Re-posting of a piece I originally posted on

Recent forum topics have spoken about what giving to others should involve, and mentioned the government, etc. What I’ve thought for a while is that we sometimes miss the point when discussing these sorts of things, and often accepted ideas of charity are actually not all that useful for really helping people. So this post is about how I see the role of government, taxes and private giving fitting together. There aren’t many new ideas for what we should be doing, but maybe someone will find it interesting anyway. It’s also my opinion, so other opinions welcome!

Firstly, what is wealth/poverty? With the exception of retirement investments, simply having some money is a very poor measure of wealth. Rather, what matters is how much one earns. Very few people have more than a few months worth of income saved, and indeed most people are in debt for houses, cars, etc. In fact, the reason that they are able to have houses is not because they have money now, but because they are earning enough to have convinced a bank that they willl repay the loan. Many new businesses are also financed largely on loans, again because of the earning capabilities of those businesses. This is the economic background to the “give a man a fish vs teach him to fish” argument. Merely giving someone money will help in the short term (which can be crucial), but that person is still poor as they still earn little regular income. Someone can only really be said to have escaped poverty if he/she has a regular income, that can be documented and so used for loans, retirement saving, etc.

Given, then, that wealth is measured by the flow of money, rather than the absolute posession of it, it follows that wealth and poverty is NOT a zero-sum game — that is, one person being very wealthy does not in any way imply that there are other people who are poor as a result of that person “having all the money”. That is why the “wealth” of a country is measured not in how much money it has, but in its Gross Domestic Product — basically, how much all the people and businesses earn in a year. If GDP increases, the people in a country are getting, on average, wealthier, as a result of money flowing more around the economy. There is really no limit to this process (other than perhaps natural resources, though that is not a limiting factor either given new technology). Thus the existence of large disparities in income in a country is bad not because the rich people have become wealthy at the expense of the poor people, but because the process of building wealth has not been able to build it more uniformly. (As an aside, while GDP can grow rapidly, there is a limit to it, because it takes time for businesses to establish themselves before they start really buying goods. Thus if there is high unemployment, it is impossible for everyone to simply go and get a job. In South Africa, while some people might be “lazy”, the vast majority are simply unable to find work, because the economy doens’t provide enough jobs).

Capitalism, as a system, is the best way we have of developing a vibrant economy. Crucial inventions like the company, credit, and the laws that go with it have allowed large chunks of the human population to become far more wealthy than ever before in history. There is a tendency for wealth to “trickle down”, as high earners spend lots, creating jobs making goods and services for them, and so enriching others too. But that’s a slow and not always reliable process, and so one that is now helped by government action, and private charity work.

The government has three major functions when it comes to creating wealth. Firstly, it creates a societal infrastructure that allows people and businesses to survive and prosper, by making and enforcing laws, regulating all sorts of things, ensuring that the provision of education happens, building infrastructure such as roads, and making sure that amenities like electricity, water, food, railroads, ports and so on are all available.

Secondly, it acts to stimulate the economy, by (in South Africa’s case) running parastatals like ISCOR, and all spending on public works projects. Public spending can be quite effective, because each company that gets government money then buys things from other companies, and so on — I’ve seen figures that quoted a multiplier of around 3.5, that is each government stimulus Rand causes a GDP growth of 3.5 Rand. Of course, the government can’t do it all the time, else debt rises too high, and one gets inflation.

Thirdly, and most interesting for us, the government works to reduce inequity in society. Taxes are, in priniciple at least, designed to tax wealthy people a lot more than poor people. Thereafter, the government spends a lot on services for the poor; in things like housing, pensions, subsidised education, etc. Of course it’s not always very efficient at these sorts of things, because running large organisations eats lots of money in, well, organisation.

Thus our taxes serve some very useful functions. They aren’t lost to the economy at all; but more importantly they ensure that the country and economy can function (where would we be without laws, roads, etc. etc.), and they also help the poor as well as the wealthy.

Is reducing inequity a good aim, even if (as it sometimes does), it reduces efficiency in the economy? Yes, not because wealthy people have, by being wealthy, impoverished others; but because the vast majority of poor people are poor simply because of the size of the economy. The unfairness of disadvantage resulting from factors that the people concerned can’t control is, I think, morally inescapable.

So where does personal charity/giving fit in them, after taxes? Well, it is still vital, for a number of reasons. Firstly, it is difficult for the government to tax enough to really solve the poverty problem, because it is too damaging to international competitiveness. Investors too easily see interfering governments as bad (as they often are), and foreign investment is a great way of getting new wealth, essentially for free. So the country is much better off if people give voluntarily — also because the effectiveness of that money is higher, because it’s not dragged into bureaucracy. Secondly, the government misses vital causes, for instance the funding problems as a result of the lottery (which, by the way, is a terrible idea). Thirdly, it’s good for society, because it creates links between people and gets rid of misconceptions (which will, in turn, lead to more such giving). Lastly, I also think it’s good for the giver — money can become very addictive, which is not good for one. This is a great way to re-assert control!

So, what is the take-home message from this extended ramble? When deciding what to give money too, by all means alleviate immediate problems, but remember that only creating sustainable income is really alleviating poverty. If you are wealthy, you aren’t denying others by being wealthy, but you do have a moral responsibility to help create that state in others. Taxes do help the poor, but they also help you and don’t help the poor enough. So go out, and do something good, but make sure it’s smart too!

3 thoughts on “The government, taxes and charity

  1. A nice sketch of how the system works (“or should”)– and I wholeheartedly agree with the importance of putting a ‘structural’ emphasis on giving.

    I think, though, it is also worth addressing the issue of what gaps might (inevitably?) result from this kind of laissez-faire division between gov’t aid and private charity. As this past week’s Economist pointed out, the recent outpouring of aid for tsunami relief efforts has ironically highlighted the disparities that exist between different categories of aid. While it was a heartening turnabout from the usual state of affairs to hear organizations such as Doctors Without Borders saying they were so well-funded for their tsunami efforts that they found it better to stop accepting donations for that purpose entirely, their accompanying plea that contributions be redirected instead to “humanitarian needs in war-torn Darfur, Sudan, and elsewhere in the over 70 countries where MSF is working around the world” was something of a wake-up call as to the skewed nature of the world’s aid-distribution habits. Disasters, with their (seeming) moral simplicity and immediate emotional impact, are more “popular” options for international aid-giving than development or humanitarian causes, which tend to require a greater investment in terms of understanding the human-made context, and often imply an appeal for a longer-term commitment on the part of the donor.

    Thus it is with aid-giving decisions within a society as well. Some categories of aid will be inherently more popular than others. Sometimes, hopefully most of the time, because they are guided by different motivations, governments and individuals will make aid-giving choices that are complementary, with the gaps left by one source being made up for by the preferences of the other. But not always. As the Tsunami relief situation puts into, er, relief, there are situations
    in which the differing motivations of governments and individuals converge on the same disproportionate result [And you did not mention whether or not aid-giving is regarded as a zero-sum game, but there is certainly some concern now about the possibility of “aid-fatigue”; that some areas of giving might directly suffer from people deciding to redirect their gifts to this cause. Personally my guess is that within a certain range, aid-giving is not a zero-sum game (ie, giving this year is likely to be much greater than it would have been overall, despite specific areas that have been set up for a fall by redirection), though common sense would seem to say there is probably some practical limit to what people are able/willing to give]. While some “gap areas” underserved by both governments and individuals can be written off as isolated oversights of the system, I think it very likely that there are situations where a neglected gap (categories of aid regularly receiving short shrift from both individuals and the government) is an endemic consequence of how the system is set up. Of course, any system will be imperfect in some way, and will err in a way that is inevitable because of how it’s set up. My point is that any consideration of a system or comparison between systems would do well to include a projection of the ways it is likely to fall short, and an analysis of what systemic error actually exists (inherently, by nature of set-up, and not just because we haven’t managed to put the ideas into practice well enough yet).

    …And at this point the reader, will be absolutely startled by the revelation that part of this writer’s daily routine involves walking past a poster put up by my systems-engineer roommate, that is entitled “Introduction to Error Analysis”.


  2. Also, a brief devil’s advocate take on the morality of wealth: accepting the premise that, from an economic standpoint, one person having wealth doesn’t mean they’ve impoverished others, there are other angles which ought to be taken into account in evaluating whether it’s “okay” for there to be inquity of wealth in a society [and it should be noted that certainly no individual bears moral fault for profiting from a system that isn’t morally well set-up, so long as they themselves did not act immorally]. Particularly it’s important to consider that having wealth doesn’t just mean doing better for oneself materially; it’s also a form of power. As the US more and more infamously illustrates, wealth has a tremendous influence on the political process. Inequity can thus be seen as an “immoral” thing for society to allow, in the sense that it is anti-democratic, because it creates situations in which one person (or one entity– but bringing corporations into the picture would complicate the discussion considerably) effectively has more than one vote, because of their greater ability to influence political leaders and their decisions. This power tends to lead to corruption in other areas of society beyond the political realm as well.

    Also, as we have seen in the last century, disparity tends to engender a drive to greater disparity. Besides pushing for decisions that will propagate and expand the inequity of the system (which from an economic standpoint can be regarded as morally neutral changes), as disparity builds the wealthy class will increasingly push for decisions that have a direct and unarguably negative impact on the rest of society, because they themselves feel less and less reliant on public services at the heart of a functioning society, and therefore feel less and less responsible for taking part in supporting those services. Of course there will always be some segments of the wealthy class that will continue to support a higher tax rate, and programs which they know they will never benefit from directly, but in general the existence of wealth tends to drive a society toward division (as much as it can feel unifying for a particular wealthy person who uses their resources for generous purposes) and sets-up conditions to perpetuate poverty and suffering.

    (And here, the more we get into group dynamics, the argument becomes harder to make to a society that is oriented to wanting it’s policies justified from the perspective of social contracts with an individual).

    But to un-digress and reiterate: inequity is not just an economic phenomenon, and it seems disingenuous to think that a defense of a system that allows and encourages inequity could be made adequately on solely economic grounds.


  3. Your comments on diverting aid and gaps are very true, I think — I know that shortly before the Iraq war started, many aid organisations were in major trouble, as aid to a lot of countries was being trimmed by donor countries want to set aside money for the war aftermath. I’m sure similar things will result from the tsunami, though perhaps not to the same degree.

    But as regards the long-term disparities in aid, it really is a huge problem. I’ve been particularly conscious of the short straw the Congo has drawn over the last 130 years, and still almost complete absence of real help — though there are now a few UN peacekeepers from France, South Africa and some other countries. But it is often about what is in the news — as they say:

    “We feel for the cry of the bird, but not for the blood of the fish;
    Blessed are those that have voices.”

    (And yes, I am proud of that one).

    Also, good points on some other moral and political problems with inequality. It certainly is very hard, in my opinion, to justify large differences in wealth — though no doubt there are people who’d be willing to try!

    Both of these problems above are, of course, not being helped by the increasing ability to customised and sensationalise news, as wealthy people are increasingly able to ignore and/or selectively choose the poverty they hear about.


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