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Government gratitude for charitable contributions

Thursday, October 14th, 2010

The government says thank you, in a tangible way, to people who donate money to charity. But there is no such thank you for people who donate goods or services to charity instead. Is that fair? Can we fix it?

One of the last things the last Labour government did to our tax laws was to raise the amount of charitable donations that a person can claim against their taxes. It used to be that, no matter how much a person gave to charity, they could only claim about $600 off their tax bill as a result. Now people can claim one third of their donations off their taxes, no matter how much that comes to.

The basic idea is that if someone is generous enough to gift some of her income to worthy causes, the government should say thank you in a meaningful way. The reasoning is that larger donations should always get louder a thank you. That sounds both reasonable and public spirited.

Only a very few people in New Zealand, however, actually give enough money to charity to benefit from this policy change. To get anything out of the 2008 law change, a person has to donate over $1,900 a year. Most New Zealanders simply do not have that level of spare cash sitting around, even as they strongly support the valuable work that our charities do.

The way that many people show their support charity despite a thin pocketbook is to give things other than money. Some people volunteer at a Citizens’ Advice Bureau or a soup kitchen. Others drive for Meals on Wheels. Still others donate goods to a Salvation Army Thrift Store.

The difference is that this kind of charitable giving does not attract a thank you from the government. If you give the Red Cross $10, the government gives you a little money in return. If you spend a weekend pounding the pavement helping the same organization, the government does nothing.

That is a shame, because the work is every bit as valuable as the financial contributions.

If the Meals on Wheels service had a lot of money to make meals, but nobody to deliver them, then needy folk would go hungry. Similarly, if the Sallies had the money to rent a retail location for a Thrift Store, but no goods to put in it, then it wouldn’t do much good. Donations of goods and services are just as vital to New Zealand’s charitable sector as are donations of money.

Is it really fair that the government gives a break to those who are generous with their money, but not to those who are generous with their time or their possessions?

I think this situation is not fair. I think the government should step up and said thank you, in a tangible way, to the small army of volunteers and bric-a-brac donators across New Zealand.

It would not be hard to implement. Donations of goods, if properly accounted for, could be written off against taxes at their fair market value. That already happens in the USA, where I live. Last year, my wife and I donated some furniture and clothing to a thrift store. Its market value was about $200, so we got a $200 deduction off our taxable income. That was a nice motivator while cleaning out the garage on a cold Michigan morning.

Similarly, donations of time can be written off against taxes at the rate of the minimum wage. For every hour that a person does volunteer work for a charity, they can write $12.75 off their taxable income. Simple.

The administration of this need not be burdensome. If you want the tax deduction, simply provide the (registered) charity with your IRD number. The charity then keeps a log of the hours you work or the goods you provide, along with their sales price to determine market value, then sends the list to the IRD each year. The IRD collated the spreadsheets and starts mailing cheques. Simple.

(Of course, the IRD will need to be on the lookout for cheats. But they are already on the lookout for cheats everywhere else in the tax system, so the extra workload need not be large.)

Even though this scheme amounts to paying people to volunteer, nobody would get rich this way. The actual pay rate would be something less than 33% of the minimum wage, depending on your other income. But nobody gets rich off the current law where people who part with $1 get $0.33 in return either, and everyone seems to think the current policy is an appropriate gesture of both encouragement and thanks.

Despite the small amounts of money at play, a policy like this would send the right signal about charitable work, namely that the government likes what you are doing and wants to show its gratitude for your contribution, no matter what form it takes. The most effective part of any incentive is the first dollar.

Maybe those few dollars would encourage some extra people to spend a day or two helping the less fortunate. That would be nice.

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A native Wellingtonian, Rob Salmond now lives in the US. He is Assistant Professor of political science at the University of Michigan, and is also currently a Visiting Scholar in the department of political science at Stanford University. Rob’s academic areas of interest include legislative institutions, political media, and political economy, all with a cross-national focus.

Rob’s previous posts for Policy Progress were Why the progressive movement should talk more about economics and A (Conditional) Progressive Case for Income Splitting.

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A (Conditional) Progressive Case for Income Splitting

Wednesday, August 18th, 2010

There has been much chatter about Peter Dunne’s income splitting Bill. The common refrain on the left, most recently from The Frog and Stuart Nash, has been that this Bill represents yet another unaffordable give away to rich folk, and therefore it should be opposed.

Not so fast. The two oft-cited problems the Bill, its fiscal cost and its distributional consequences, are both fixable. They don’t represent principled progressive reasons for opposing income splitting as an idea.

Progressives around New Zealand rightly lauded the previous government’s move to consider family income, not just personal income, in determining net taxes. This idea lies behind the Working for Families package. A family with a two kids faces the same costs, whether both the parents earn $40,000 or one earns $25,000 and the other earns $55,000. The Labour-led government recognised that, and made good progress on fixing the earlier inequities through Working for Families tax credits, which are based on family income.

Income splitting works on the same idea. Just as the two families sketched above face the same costs, they also make the same qualitative contribution to our country. Why, given their broad equality as families, should they have an after tax income that differs by around $900 per year? Do we really want to be penalising couples for having unequal individual earning powers? I cannot think of a family-friendly, progressive principle that supports this distinction. I would love to see comments defending this as an issue of progressive principle rather than practicality.

Having sketched out a simple theoretical case for income splitting, I do agree the current Bill has consequences that progressives should oppose. The current proposal is so bad that even Bill English calls it “badly targeted.”

Income splitting would cost around $500m each year, and there are many other good ways to use that money. As much as income splitting is a broadly good idea, I’d choose contributing to the NZ Super Fund over income splitting every time. That is an even better idea. I would also choose early childhood education subsidies, GST reductions on certain goods, or keeping our public services strong over income splitting.

Given that it is Bill English, not us, who will ultimately choose what gets cut to fund income splitting, we should be very concerned.

And the current Bill does represent a fiscal transfer. The money comes from [somewhere to be decided by Bill English later], and goes largely to wealthy families with one earner. The family that does the best out of this Bill is one where one person earns $140,000 and the other person earns $0. They gain by around $9,000 a year. Compared to the other family above, they have 75% more income and 900% more tax benefit. One recent estimate suggested that over half the benefit from this Bill go to families making over $120,000 a year.

High-income earners in New Zealand will shortly have the lowest top tax rate among rich OECD countries, and the lowest overall income tax burden as well, so it does seem a bit over the top to cut $500m worth of [something Bill will announce later] in order to give them another tax break.

As the legislation stands, these two practical issues would overwhelm the in-principle attractiveness of the proposal for me, and I would vote against it.

Both of these problems, however, are readily solved through amending the Bill.

The amendment would pay for the $500m cost of income splitting by instituting a higher income tax rate on incomes over $100,000. (This would bring us back into line with tax practice in almost all those OECD countries we like to measure ourselves against.)

The fiscal transfer would then travel away from wealthy folk without low-earning spouses, and travel to wealthy-folk with low-earning spouses (and also to non wealthy families with unequal earnings to a lesser extent). And the government wouldn’t be able to use income splitting as an excuse for any further cuts.

I would vote for that deal. (If it were up to me, I would also amend it to exclude the “only if you have kids” provisions, because there is already a good programme for providing tax credits to families with children, and the principled arguments in favour of income splitting don’t require the distinction. But that is a second order consideration.)

I’m sure a legislation-guru can correct me, but once a Bill with fiscal implications has government permission to be considered by the House, I think the House can consider it and amend it freely. So the amendment would be technically doable. Even if it weren’t, it would be fun watching Gerry Brownlee fumbling around to try and throw it out.

If I were advising the Greens or Labour right now, here is what I would suggest:

  1. Oppose this Bill as it stands, for the reasons you have already given, in the very realistic hope of giving National cold feet;
  2. If National does pull the plug on the Bill, then offer Peter Dunne the deal above. I reckon he is more in favour of income splitting than he is against tax increases for the really wealthy, and he may even vote for it in the House in order to express his displeasure with National;
  3. Watch the proverbial fly within the government. The Bill in that form would likely not fly (NACT 63 beats LPGUFM 59), but it could cause a decent stink for the government on the way down.

I think this represents strategic gain with no dilution of progressive principles. Certainly the parties have step one underway. But will we see steps two and three?

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A native Wellingtonian, Rob Salmond now lives in the US. He is Assistant Professor of political science at the University of Michigan, and is also currently a Visiting Scholar in the department of political science at Stanford University. Rob’s academic areas of interest include legislative institutions, political media, and political economy, all with a cross-national focus.

Rob’s previous post for Policy Progress was Why the progressive movement should talk more about economics.

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Why the progressive movement should talk more about economics

Wednesday, June 9th, 2010

Many people think that economics is a right-leaning discipline. They are wrong, and we need to tell them.

One common caricature of politics is that the ideological right attracts a homogenous cadre of serious-yet-uncaring bean counters, while the left attracts a rag-tag mob of caring, sharing mush-heads.

Stated this way, the caricature is obviously silly. But many progressives do not help their own credibility when they avoid talking about economics, thus lending credence to the false notion that all economists support the right.

While there is a pretty strong consensus in favour of free trade among academic economists, there are in fact sharp divisions within the profession on all other important matters of economic policy.

Yet the false perception of a right-leaning consensus endures, for two reasons: selective reporting of economists’ findings by some entrepreneurial commentators; and a preference among many progressives to talk around rather than about economic policy.

This particular think-site, of course, suffers from no such economic shyness, and nor do one or two of the authors at The Standard. But the strong economic analyses on these websites are sadly not reflected around much of the rest of the progressive movement.

If folk on the left are to challenge the caricature that they are economic illiterates swimming against the tide, we need – all of us – to confront economic issues much more directly.

Helpfully, four of the world’s most prominent economists have recently suggested progressive solutions to the world’s largest economic problems. That should help us to stop being coy.

Nobel laureates Joseph Stiglitz and Amartya Sen recently spearheaded a French economic commission that made a remarkable recommendation. After decades of measuring human progress using a purely financial measure (GDP), Stiglitz and Sen suggested that we instead measure human progress more broadly.

This recommendation draws on a wider “happiness economics” research agenda, which holds that human action is successful only in as much as it makes humans feel better about their lives. This is actually a pretty standard economic idea – the idea of utility. All people are doing with happiness economics (or, if you prefer, with Genuine Progress Indicators) is measuring utility better. Any attempt to measure the success of an economy using only financial measures like GDP misses this wider point.

The heroic assumption that more money necessarily makes people happier has been shown untrue in a large number of circumstances. For example, the near doubling of American GDP since 1950 has had no impact at all on their collective happiness. And in a recent ranking of “happy life years,” the top five nations were Costa Rica, Iceland, Denmark, Switzerland, and Canada – none of which crack the top five in terms of material wealth.

The right of course, has mocked happiness economics. A mere poll of feelings, they argued, was an impractical and fanciful way to judge progress (although that never stopped them when it came to measuring “business confidence”). Despite this shallow critique, Genuine Progress Indicators are catching on, and progressives everywhere should be singing their virtues.

Paul Krugman, another recent Nobel laureate, recently showed how the right’s belief in the “efficient markets hypothesis” lead them to completely misdiagnose the recent financial crisis. The efficient markets hypothesis says that the price of any asset is an accurate reflection of all available information about it. But it has no way of explaining the panic and implosion that engulfed major sectors of the American markets in 2008. The journalist Michael Lewis has made similar observations.

Any economic theory that misses the big real-world events, needless to say, is of only dubious usefulness. Social scientific theories are only as good as their empirical validity.

One especially welcome innovation in the area of explaining panic among supposedly rational economic agents is to juxtapose traditional economic theory with recent practical work on human behavior. Whereas traditional economists had tended to just assume that people are individually economically rational, behavioural economists have gone and tested those propositions against real world experience. And when we look in the real world, non-rational behaviour is surprisingly easy to find.

Jeffrey Sachs, a Full Professor of economics at Harvard at the age of 29, will likely win the Nobel Peace Prize for development work in Africa. A former darling of the right for his developmental prescription of “shock therapy” for third-world governments, Sachs has also recently “gone mushy.” He has embraced an activist role for both national governments and the UN, and has also explicitly rejected the claims from the right that expansive Scandinavian-style welfare systems are a drain on the economy.

These four stand at the pinnacle of the global economics profession. They all propose progressive policies and oppose neoclassical economic orthodoxy. Their stances show that economics is no guaranteed friend of the right. Progressives need to seize on these and other developments within economics, including the influential book The Spirit Level, to help us think about policy and to better make our case to the New Zealand people.

Links:

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A native Wellingtonian, Rob Salmond now lives in the US. He is Assistant Professor of political science at the University of Michigan, and is also currently a Visiting Scholar in the department of political science at Stanford University. Rob’s academic areas of interest include legislative institutions, political media, and political economy, all with a cross-national focus.

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