Redistribution and philanthropy

Joshua Gans points to this discussion of billionaire philanthropy by Robert Shiller. Shiller’s probably my favourite economist, and he makes some nice points, but I’ll leave them for later. I want to pick up a point made by Joshua, who says

Under a voting model, those governments will take from the median voter to give to the median voter. However, the alternative [poentially implementable by, say, Bill Gates – JQ] is to take from the middle to give to the poor.

Joshua has the model right, I think, but it doesn’t really describe the actual outcome.

Taking all taxes, and opportunities for avoidance into account, tax paid is roughly proportional to income. On the other hand, when you consider cash payments (which favour the goods) and public goods (where benefits generally rise with income) the benefits of public expenditure are fairly evenly distributed. So, roughly speaking governments take from everybody above the mean income, and gives to everyone below. Because of the skewness of the income distribution, more people are below the mean income than below, so this is a politically sustainable setup.

23 thoughts on “Redistribution and philanthropy

  1. Politically sustainable, but those who are “giving” have at least 2 options, which is the “giving” is too much, they will take one option or the other.

    1. Stop working so hard.
    2. Migrate

  2. John, is it really right that taxes as a share of income don’t vary across income groups? When I teach this, I use a 2004 NATSEM report that found that direct+indirect taxes were 21.9% of pre-tax income for the bottom quintile, and 34.9% of income for the top quintile.

    As to avoidance, we’ve never done a randomised audit study in Australia, but the US TCMP in 1989 found that tax avoidance as a share of pre-tax income fell as you moved up the income distribution.

    (BTW, you have a minor typo in your last sentence.)

  3. The gross income measure in the NATSEM study includes cash benefits. If you look at tax paid relative to private income it’s close to 35 per cent for all quintiles except the bottom, where it exceeds 100 per cent.

  4. As regards tax avoidance, I don’t believe this claim. Recent reports indicate that the use of offshore tax shelters (almost exclusive to the top decile, I’d imagine) has a tax cost of 7 per cent of total revenue, which is more than the total tax obligation of the bottom quintile. And that’s only the shelters that are allegedly illegal. In the US system, routine legal or quasi-legal tax avoidance must account for a lot more.

  5. Shiller is much too nice to Carnegie who seems, from Shiller’s description (I haven’t read it), to be justifying massive wealth on the grounds that the poor can’t be trusted to spend their money wisely.

    Private philanthropy is certainly a good thing in this world and I laud Gates and Buffet for their generosity, but it’s also fundamentally undemocratic.

  6. I don’t think I am inaccurate on redistribution. If you take a standard progressive income tax model with general public goods and a labour effort supply, the median voter will choose more progressivity whenever the income distribution shifts from the poor or median to the rich. This happens regardless of voter preferences other than the median for the public good.

    If the public good impacted more or less on the poor (as you suggest) this would not cause the median voter to vote for it. So there is an important sense in which philanothrophy will differ from democracy. Of course, it could go the other way too.

  7. JQ,

    “Recent reports indicate that the use of offshore tax shelters (almost exclusive to the top decile, I’d imagine) has a tax cost of 7 per cent of total revenue, which is more than the total tax obligation of the bottom quintile”

    Doesn’t this just highlight how much of the total tax take comes from the top decile? If their ‘avoidance’ amount is more than the total take of the bottom quartile…. wow… they certainly subsidise a lot of people!!!

  8. Joshua, I didn’t mean to suggest that your analysis was wrong, just that the median voter model doesn’t accurately characterise the observed outcome. I’ve edited the post to make myself clearer.

    Andrew, as the post shows in the first place, the reason the top decile pay a large share of tax is because they get a large share of the income. Tax paid is roughly proportional to income.

  9. PML, I’m an atheist and illiterate when it comes to C of E articles. Enlighten me!

    JQ, if the top quartile paid all of the tax instead of going offshore, they would pay a disproportionate share of their income. Isn’t that the point of progressive tax systems? At least some of them engage in philanthropy then, so they end up deciding where the money should go instead of the elected reps. As well, through philanthropy, they can get tax deductions.

  10. Sorry, I thought anyone interested enough would look for the material.

    From this site, we have (with a misprint, as noted):-

    Article XXXVIII

    Of Christian men’s good [sic] which are not common

    The riches and goods of Christians are not common, as touching the right, title, and possession of the same, as certain Anabaptists do falsely boast; notwithstanding every man ought of such things as he possesseth liberally to give alms to the poor, according to his ability.

  11. PML,

    If rich people would give money to the poor because of Article XXXVIII of the Church of England (or the Catholic Church or the Tora or the Koran)then, we would not hear about such acts of philoanthopy on TV or in print because it would be only for the eyes of God. This is not what we observe.

  12. Joshua Gans,

    I don’t have your paper. My questions are based on your statement:

    ” If you take a standard progressive income tax model with general public goods and a labour effort supply, the median voter will choose more progressivity whenever the income distribution shifts from the poor or median to the rich. This happens regardless of voter preferences other than the median for the public good.”

    My questions are:

    1) The term ‘labour effort supply’ suggests to me that you have only one type of ‘labour service’ in your model. Is this the case?

    2) How many sources of incomes (eg labour, rent, interest, dividends) does your model allow for?

    3) Does your model include a production sector organised by the corporate form of enterprise with at least 2 layers of managers?

    I am asking these questions because your result would not surprise me if there is only 1 type of labour and the only difference between people is ‘effort’.

  13. EG, why would we suppose that people are not giving? But, as it happens, we face a situation in which there is a fair bit of crowding out (influenced by cultural change, and so with a time lag). Given the existence of government intervention, people are far less charitable – they see the needs apparently being met, and are themselves burdened and have less discretion over resources and funds of their own. Result: bureaucracy, churning, lack of direct contact with need (and so lack of knowing what one is doing), and above all, a loss of the ethical values involved.

    But back to your point, what you observe is itself affected by distortions – and unfortunately the time lags mean that simply stopping governmental crowding out would not simply switch on better alternatives. (The ideal, of course, involves promoting people out of poverty and dependency, so the all up need is less to begin with.)

  14. John, shouldn’t “Because of the skewness of the income distribution, more people are below the mean income than below, so this is a politically sustainable setup. ” read :

    “Because of the skewness of the income distribution, more people are below the mean income than above, so this is a politically sustainable setup. “?

  15. Article XXXVIII: why would anyone want to look up such a load of mumbo jumbo? Notwithstanding the false boasts of Anabaptists (whatever they might be).

  16. You would want to look those up to see that only the jargon changes, that the same issues have been considered before. The false boasts of the anabaptists were pretty much what socialist ideology was pushing once that jargon had been invented.

  17. PML, The Australian public gave very generously at the time of the Tsunami in Indonesia and so did the Australian government on behalf of the public in general. This happened without any of the donors, direct or indirect, requiring a culture of ‘philanthropy’. By contrast, where were the philanthropists in the USA when hurricane Katrina destroyed New Orleans? Actions speak louder than words.

  18. Terje and Steve at the Pub; Karen Brown was charge because no public officer has the discretion to not do so for an indictable offence (i.e. murder or manslaughter), that being said 12 good men or women true provided the proper answer to the issue of an honest worker set upon by a vicious thug with intent to injure or worse, not guilty. Good to see the justice system at work.

    Onto more serious matters. Tim Flannery has come out in support of Nuclear Power, again probably selectively quoted, because even if we said yes tomorrow and replaced coal fired stations with nuclear ones, does anybody serously believe that you can use electricity to drive your car or make nitrogenous fertilisers for farming or plastics etc. The Easter Islander syndrome (Techonology to the rescue). Welcome to the ‘Long Emergency’ folks(credit to Kunstler for that one), from here on in we are in for a very rough ride. Pity the conservative economists amongst us forgot about the notion of ‘scarcity’ vis a vis the real world as opposed to the imagined one.

    Now the great Ponzi real estate bubble has been exposed, according to the great helmsman, it’s all your fault. Now with most EBA’s up for renewal before the next federal election will the voters be mugs enough to think that as the recesssion we have to have hits that Howard et al will be there for them, think seriously folks, your lifestyle depends on it.

    Last but not least on the weekend thinking spree. The Israeli’s are about to get done in Lebanon, it was a long time coming, but they have seriously underestimated their opponents ability to both be creative and innnovative and they do not have the resources to prosecute this one to the end. The wheel continues to turn. Have a good one.

  19. Mike,

    I think you are in the wrong thread. In any case I never said she should not have been charged.

    Regards,
    Terje.

  20. If as John suggests tax paid is roughly proportional to income earned then wouldn’t the simplicity of a flat tax offer a big improvement in terms of simplicity and efficiency.

  21. John must have a funny definition of proportional. The whole point of a progressive tax system is that the more you earn – the greater percentage gets donated to the communal tax pot. In other words – the more you earn, the greater incentive there is to find ways of minimising the tax burden. My experience is that most high-income earners are generous with their cash – but that doesn’t extend to the tax system (deep skepticism of how the money gets spent).
    The organisation I work for arranged a program recently to allow workers to donate some or all of the recent tax cuts to a range of charities. The take-up was very high.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s