Could philanthropy ever replace tax?

The New Ism founders Mel Young and Alex Matthews discuss whether tax could ever be replaced by philanthropy.

MY: There was a very interesting discussion at the World Economic Forum in Davos this year when one of the speakers, Rutger Bregman, talked about the imperative for companies – particularly big corporations – to pay tax. There was push back when he said the lack of tax was hindering growth and causing poverty: one corporate employee said that, thanks to lower tax rates, there was lower unemployment than ever and that poverty was falling. The next logical step in his argument was that we shouldn’t have a tax system. What do you think of that concept?

AM: To me that feels like a get out clause – research shows that there is no direct correlation between how low taxes are and the number of jobs created by corporates. These companies benefit hugely from the state – it looks after their employees, for one thing, and a myriad other advantages, so they should have to contribute back to the state.

MY: Tax is collected by governments and trust in politicians and governments is falling. It’s almost like people are saying we don’t trust governments with our money and that everything should be based on philanthropy where rich individuals and big companies take on a role in society and pay for the services which government is currently responsible for.

AM: It worries me that the wellbeing of society is then relying on the good will and good nature of people and entities who to date have not demonstrated that they have either of those qualities in abundance. While trust in governments and politicians may be falling, at least they have an obligation, at least in theory, to act in the interests of the people who elect them. If we rely on philanthropy, it feels too flimsy, like we’re hoping they’ll be nice – and if they’re not – we’re screwed!!

MY: So, the current tax system may not be perfect but there is no real alternative because as you say if you reply on people’s goodwill then there is no guarantee people will deliver. Some will, some won’t. Then you might be into forcing companies to do it through legislation which is really another way of forcing people to pay tax!

But it was interesting what Bregman was saying in Davos – in the 1950s, the top marginal tax rate in the US under President Eisenhower was 91%, and the economy boomed. I have heard Warren Buffett say this before – he believes that rich people must pay tax because it improves the economy and then everyone benefits. He was saying this not from a philanthropic point of view (although he is a philanthropist), but from a purely capitalist point of view. People who avoid paying taxes are damaging the economy, he seemed to be saying.

AM: I was listening to a podcast called ‘Reasons to be Cheerful’ the other day, the episode was about how to tax the ultra wealthy. They were talking to a guy called Nick Hanauer who was one of the original investors in an online bookstore called Amazon… He has made a lot of money but believes that the wealthy must pay their fair share of tax – indeed, he believes that they aren’t taxed enough – he says

“There can be no moral justification for [the wealthy paying less tax] beyond the discredited neoliberal dogma that if everyone maximizes their selfishness, the world will somehow be a better place. It has no economic justification, either. In fact, it is economically self-defeating, as the ordinary people who drive a prosperous economy are instead impoverished in favour of the bank accounts of billionaires.”

He now spends very little of his time trying to keep or grow his own money, and the majority of his time campaigning for tax measures that would help society. For example, he bankrolled a 2017 levy campaign to raise $275m in property taxes to combat homelessness, which was unfortunately unsuccessful. If all capitalists were like him then perhaps we could rely on philanthropy instead of tax!

MY: Fascinating. There is a general view that everyone should pay as little tax as possible. I had an unsolicited LinkedIn request recently where the person opened by saying that I should join his network because he would show me how to pay much less tax! He was making out he was a good guy – perhaps he was – but if we all pay less tax, how do we pay for the services we need? There is a huge debate in UK right now about the cause of the increase in knife crime and most people agree that the main cause is the cuts in local services for youth, which has been caused by government austerity policies. If you don’t collect tax then you can’t provide the services and society suffers. As seen in UK in this example, no-one picks up the slack when council services are reduced. We surely have to have a tax system which is fair and efficient and which people shouldn’t feel bad about paying into.

AM: I agree – the other advantage of having one organisation – the government – investing is that they have oversight and can think more systematically than a philanthropist who might just have an interest in one area. The knife crime problem requires more police but also better services for young people, addressing income inequality etc – different bodies need to work together and the government – with its spending power – must be the one to bring them together and invest in them collectively.

Another worry I have about philanthropy in place of tax is that philanthropists can choose where to spend their money and which areas to support. For example, they might choose to invest in their local area, which is likely to be a city or at least a large town, which means that rural areas would get left behind. To give another example, would you be able to persuade a philanthropist to mend potholes or broken sewers?!

MY: Well you never know – someone might become a hero for fixing the sewer system but I doubt it. So, we are saying that tax needs to work, philanthropy can work but not as a replacement for tax but then what is the role of charity in this? Does charity replace services when government reduces tax? Or are charities just a short-term fix rather than a replacement? Do charities also distort the system like you are saying because they can be good in one area and not another or are just single issue which makes them inefficient?

AM: In an ideal world, I think a successful country wouldn’t need charities. I’d be interested to know what the charity sector looks like in places like the Nordic countries where taxes are very high and people seem to trust the government to spend their money well. Surely if a government is doing its job properly, there is no need for charities?

I think the problem with charities is, as you say, that they focus on the more appealing areas – so there are lots of charities for cancer, for children, for animals etc. These are all great and many of them do important work, but I do wonder if they couldn’t do even better work if all the cancer charities became one big cancer organisation, avoiding duplication and streamlining funding. And then of course there are the areas that get left behind – the diseases that not many people have heard of, for example.

MY: Yes, this is an interesting area of discussion. I don’t believe in a modern world that anti-poverty charities should exist because there shouldn’t be any poverty. These charities should be doing themselves out of business. For health charities, it is different: governments should be running core health services but charities add value by providing specialist work, particularly in the area of research, for example. So, I don’t think there is a straightforward answer. But I don’t think charities should be used to replace services which government should provide and which are paid for from tax. The question is, what are the core services that government should pay for and which aren’t? The Scandinavian model is interesting, say compared with USA. Their economies are both based on the capitalist model but the role of government and hence tax is completely different. Norway has surplus funds and the USA has a huge deficit!

AM: I would argue that, as far as anti-poverty work goes, the government/global organisations such as the UN/EU etc should be taking responsibility, and that it shouldn’t be left to charities at all.

Regarding the Scandinavian model – it’s tempting to wonder why not all countries adopt it – but of course those countries are unusual in many ways that drive greater trust: relative homogeneity, high quality governance, historical egalitarianism… There’s also less of a ‘need’ to demonstrate your success with wealth – they tend to focus on other metrics.

MY: This is fascinating area which is quite complex but comes back to identifying the values that we want our economic system to be based on. Is there any alternative if there is no tax system? There doesn’t seem to be. What now, Alex?

AM: I think that there is a lot more to explore on this topic, but I think we both agree that tax is an important pillar in this discussion around a new ism. It’s an issue that we’ll be exploring further with experts in this field in our podcasts and at our live events which are starting up this year – there will no doubt be some pretty fiery debate!

Listen to our guest Rick Aubry talk about the role of tax in The New Ism in episode 18 of the podcast.

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