Blog post

Doing your fair share: why paying taxes is not giving to charity

9 min read
7 Aug 2014

If you’re anything like me, when reading the paper or the news online you may be drawn to sensationalist headlines concerned with aid expenditure, international aid being delivered at the expense of local needs and the plight of the taxpayer. These headlines can provoke public outrage at the perceived cost of foreign aid to the taxpayer, often resulting in the formation of a generally negative (though often ill-informed) consensus about the value and repute of aid and international development initiatives. As a consequence, one may come to believe that by virtue of paying taxes they are doing their “fair share”.

Some of the world’s wealthiest make claims tantamount to asserting that paying taxes and making charitable donations or gifts are pretty much the same thing (examples to follow). Those who earn the most are taxed the most, so it is easy to see how this deduction is made. However, the argument I am going to lay out outlines why I don’t believe that paying taxes and giving to charity are the same thing. I will present it using three myths.

Myth 1: If people were taxed less they would give more

This myth concerns the demand for greater governmental disclosure and accountability for where exactly taxpayer dollars are being spent, and the belief that the public's money would be better spent on altruistic causes if left in their own hands.

The idea that paying tax and charity are essentially interchangeable crops up in the news from time to time. An example of this is when Mitt Romney tacked his charitable contributions onto his tax returns when stating the percentage of his income reported and paid on his 2010 return. He used this same tactic once more when defending his record regarding his previous refusal to release past tax returns.

In fact, one of Romney’s core aims has been to lower tax rates in the US in order to free up more money for individual charitable spending. His reasoning is that individuals can make better decisions about where to give and what society’s needs are than the government. An example of this viewpoint might go something like this “I know my own community better, and I am therefore more sensitive to where my money would be better spent than some far-removed government bureaucrat”. The problem with this logic is that although it may hold some truth, it does not apply to everybody. Research conducted in the US shows that people from more economically diverse communities are more likely to give to pro-social causes than those living in homogeneously affluent areas. People in affluent areas tend to adopt a more insular perspective, with donations predominantly going into non-profit organizations that serve a direct benefit to themselves or their direct community. As such, donations from the very wealthy tend to be channeled into elite colleges and universities, arts organisations and museums.

When challenged on the disproportionate amount of voluntary giving compared to the wealth of a given individual or family, people often respond with the claim that they would give more (and better) if they were taxed less. Although research on this phenomenon is limited, some US studies report that when taxes go down, people actually give less generously. Scholars refer to this as “the price of giving”, and it means that when the price of giving goes up, the value of the tax deduction per donated dollar is less. Whilst reducing taxes would certainly increase the amount of discretionary money available to the very wealthy, it is unfortunately not a reality that this money would go into charitable causes, it tends to just increase the amount of personal wealth the individual lays claim to. Therefore, although lowering taxes may seem like an attractive proposition to increase charitable giving, this would be unlikely to translate into any real behaviour change. It is simply not the case that taxes provide the biggest barrier to giving, it’s the philosophy behind giving that matters most.

Myth 2: A large proportion of my taxes are being spent on the developing world:

The gross overestimation of foreign aid expenditure appears to be one of the most pervasive and challenging beliefs to dispel in public opinion. One research study revealed that the average American believes that as much as 28% of the public budget is spent on foreign aid, and believed that the appropriate amount of foreign aid would reside in the region of 10%. In fact, the actual federal budgetary allocation for poverty-focused development aid in the US is less than 1%. Even at its highest estimation the entire international development budget only sits at >2.6%.

To give you an idea of what this works out to per American taxpayer, the amount of tax dollars spent in 2012 on the developing world was $80.37. One might still argue that this seems a lot. In response, I think the following illustration proves useful:

If I asked the average person “what matters most to you? Chocolate or a starving child?”, I expect that most people would agree that a starving child is more important. If I then took that question one step further and asked “Given the choice, how much would you spend on chocolate per year compared to helping that child in need?” I would predict that even the biggest chocoholics amongst us (myself included) would prioritise the hungry child above a love for chocolate. However, if we were to compare the actual expenditure on “candy” per year per american in 2012, it far exceeded expenditure on foreign aid, with candy expenditure estimated at a cost of $101.76 per person. A further $126.02 was spent on lawn care and $204.78 on soft drinks in the same year.

By comparison, the UK is the world’s third biggest donor, with the Prime Minister pledging to commit to 0.7% of the national budget into foreign aid in line with the Millenium Development Goals. With a British population of approximately 62.6 million, the 0.7% target would equate to an eventual annual cost of £137 per British taxpayer. According to current British overseas spending, this works out as £52 per taxpayer. When asked in a recent poll, 59% of Britons surveyed voted for a total decrease in international aid expenditure by the British government. However, if we go back to the chocolate example, annual British spending on chocolate and confectionary was £114.40 per person in 2011, which works out as more than twice the foreign aid contribution per taxpayer for that year. As a society, what does it say about us that we would favour giving even less to help the world’s neediest than we would spend on chocolate in a given year?

To me this expenditure gap represents a massive judgement lapse in the prioritisation of need, and I believe we can and should be doing better for the developing world than this. I will go as far as to say that according to candy/ lawn care or soft drink expenditure, it would appear that most of us in the developed world still have space in our personal spending budgets to help those in need without much sacrifice to ourselves, and the moral case for making that small sacrifice appears strong.

Bill Gates recently addressed the impact foreign aid spending has in a blog post. Compiling aid spending on health since 1980 divided by the number of children’s deaths prevented in the same time, he arrived at a ball-park figure of approximately $5,000 USD per child’s life saved. Bear in mind this figure didn’t include resulting health improvements to improve quality of life, so impact is even greater than this figure suggests. Although $5000 may seem expensive, it is important to keep in mind that the U.S. government values an American life at several million dollars. Additionally, Gates notes that healthy children do more than simply survive. Given the opportunity, surviving children can get an education, find employment, help economic growth and become self-sufficient in their communities. By employing this perspective, one could argue that aid is a bargain buy.

Myth 3: Charity starts at home: taxes to the developing world are being delivered at the expense of local needs

A common misconception exists that asserts that any international aid efforts divert resources away from local communities in need. In times of domestic economic austerity, many people believe that local governments and charities should be channeling all their funds into meeting local needs instead of the “far away” problems of another land. However, Tanner makes a convincing argument to the contrary responding to calls to axe international aid saying “Whatever way you look at it, it is wrong on at least three fronts. Firstly, it assumes the aid budget is too big. Secondly, it suggests that dealing with suffering in Britain can only be done by compounding suffering elsewhere, and thirdly, it ignores the realities of government.”

In the UK, with a 0.7% foreign expenditure allocation and at least 99% of the remaining budget being spent locally, the idea that international aid takes away from the notion of “charity starts at home” is unfounded and damaging to aid efforts. For the relatively small amount of money the UK designates to international aid, the difference that is made is substantial compared to the potential difference that money could make locally. For example, Britain currently sends 5.3 million of the world’s poorest children to school in developing countries for only 2.5% of the cost of sending the same number of children to school in the UK. The time has come for us to evaluate why the 99% of fiscal inland spending is not effective enough, rather than calling for the 0.7% foreign aid budget to be reallocated domestically. The point I am not making is that aid is perfect, but rather that it does not present as sizeable a drain on resources as one might think.

Furthermore, it is often the case that domestic aid efforts and expenditure fly under the radar of the public eye, and the media attention that international aid garners can sway public opinion without substantive evidence. The British Red Cross recently responded to claims that they do not mobilise enough resources towards tackling local problems. They released a statement claiming that although local rescue efforts may not attract as much press attention or occupy the center of their public media campaigns, local expenditure still exceeded foreign expenditure at £28.1 million vs. £25.1 million last year.

Moreover, the idea that “home” (wherever that is) exists as an isolated entity independent of any overarching global problems is short sighted. For example, it is predicted that the energy-related carbon emissions of developing countries will exceed those of developed countries by 127% by 2040. Therefore, the neglect of global issues or people via political or cultural labelling could have potentially devastating effects on a global scale. This is not merely limited to climate change, but impacts population control, immigration, global disease burden, water and environmental and economic sustainability. We are all equal stakeholders in the welfare of our shared planet, and the current reality is that some of us have more financial means than others to address these problems. It would be wrong to assume that the benefit is exclusively one sided, so we need to start thinking of aid less as a rescue and more as an investment.

To make my final point, as Rosenman writes, all those in favour of a common good need to challenge the notion that private avarice is a substitute for both public and moral responsibility towards serving that good. The answer to global poverty is unlikely to lie in the diversion of tax money into millionaire’s pockets, the axing of foreign aid or a libertarian state. So, instead of citing tax-induced poverty or that we’re doing “our fair share”, let’s start spending less on chocolate and more on those whose lives we can change for the better.