Wealth, Philanthropy, and Welfare

The Economist magazine recently published a survey (an in-depth exploration) of wealth and philanthropy. It presents many interesting perspectives on how the super-wealthy use their wealth for helping the poor and really illustrates how the super-rich aren't all so bad.

The most important change over the past fifteen or twenty years has been the culture of giving, particularly among the super-wealthy. Ever since the Reagan '81 tax cuts and the huge explosion in disparity between the poor and the wealthy (the top tax bracket was slashed from 70% to 37%, in case you were wondering), there has become the very real question of what should the super-wealthy do with the money that they don't need to spend on real estate, education for their children, health care, luxuries, and gaudy scupltures?

This is where Andrew Carnegie, captain of U.S. Steel, comes in. As he said:

“This, then, is held to be the duty of the man of wealth: First, to set an example of modest, unostentatious living, shunning display or extravagance; to provide moderately for the legitimate wants of those dependent upon him; and, after doing so, to consider all surplus revenues which come to him simply as trust funds, which he is called upon to administer, and strictly bound as a matter of duty to administer in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community /the man of wealth thus becoming the mere trustee and agent for his poorer brethren, bringing to their service his superior wisdom, experience and ability to administer, doing for them better than they would or could do for themselves.”

In other words, those who have excess wealth have a moral obligation to use whatever's left over to improve the well-being of those who are not so fortunate and to do so in their lifetimes. Not exactly a ringing endorsement of an established aristocracy, that.

Let's face facts, though - with exceptions few and far between, the super-wealthy didn't really invest particularly much in philanthropy between Carnegie's time and that of the past twenty years or so. One reason in particular is because there weren't that many in the first place; during World War II there was an extremely high tax placed on income; the highest tax bracket reached 90% of income.

A quick sidenote: for those of you complaining that giving one-third of your income to the federal government is too much, it could (and has been) a whole lot worse.

With an income tax that high, there aren't many people who could earn enough to really pass on copious amounts of cash and estates to their children. That high-tax regime lasted until 1961, when President John Fitzgerald Kennedy cut taxes on the wealthiest taxpayers from 90% to 70%, where it stood for another twenty years. And yes, I do mean the Democrat.

Even with that tax cut, the number of people wealthy enough to give large sums of money to philanthropy was quite small. The following graph displays the Gini Coefficient (a measure of income inequality) of the a number of countries from World War II onward. The lower the number, the more egalitarian the distribution of wealth. Under a true egalitarian system, the Gini coefficient would be zero. (For a more detailed explanation of how Gini works, check out Wikipedia's entry on the subject) What this graph should basically explain is that wealth has become increasingly distributed upwards; that is, mostly to the wealthy. What does all this talk of genies actually mean, though?

Well, first let's get it straight: it's Gini, not genie.

Second, why do people need to be philanthropic in a high-tax regime? Presumably, a great deal of that tax revenue is given to the poor in the form of education, health care, welfare, etc. But there are important sociological differences at stake: welfare from a mandatory, government-enforced tax is extremely difficult than from a voluntary, prestige- or humanitarian-based donation.

No, I'm not going to go off and say the same token should be applied to polluters. That should be a cap-and-trade system of carbon emissions credits. But that's a discussion for another day.

This is a question of economic redistribution; using someone else's tax dollars to give to someone else. This is not something to be taken lightly. What happens when perceptions about those who are being helped by the tax dollars of the wealthy are seen as lazy, unkempt, unmotivated, directionless, and hopeless? Are the wealthy, armed with top-dollar accountants and tax lawyers, going to willfully hand over their tax dollars to the government, who they see as giving handouts to the sloths and parasites of humanity? Unlikely, particularly when being busted by an IRS audit is more likely if you're poor than if you have wealth.

This, then, grants us a choice:

• Promote government welfare as the primary source of payouts to the poor, financed via taxes;
• Promote private charity as the primary source of payouts to the poor, supported via tax credits and/or incentives.

For reasons of simplicity, I'm going to set aside medicaid spending and focus on the more conventional measure of welfare, Aid to Families with Dependent Children (AFDC), spending of which occupies some 1% of the federal budget and-

Oh wait. It's called Temporary Assistance for Needy Families (TANF) now. It's basically the same program, just with a different name and in block grants instead of whatever it was before. Trust the government to expend plenty of energy to change a name. Anyway, moving on. Still occupies about 1% of the federal budget.

Contrast that to private charity, which provided about $250 billion in proceeds last year. That's about five times the federal input for TANF. So federal spending is dinky compared to overall private contributions, yet it also constitutes one-eighth of the current budget deficit. That money could be used to...say...reduce the deficit. Or go towards improving crumbling schools. Or increasing the NASA budget by nearly threefold. Chances are that it would go to old people in the form of new bionic arms to play their shuffleboard for them or something. But in any case, it would go somewhere else.

Why, then, is TANF so damaging? Again, think about social perceptions. If there is the widespread belief, particularly among those who would otherwise provide significant charitable donations, then they are unlikely to support what they already see as subsidized welfare via their tax dollars. Would it total the sum lost by the elimination of TANF? Perhaps, perhaps not. But think of the intangible advantages:

• Peer Pressure. Thanks to the example begun by people like Bill Gates and Paul Allen, who showed that you didn't have to be a loony Hollywood lefties, there's a significant number of the creme de la creme of the super-wealthy who donate copious amounts of their funds to charities. The Walton family of Wal-Mart fame, for example, have given over a billion dollars in charitable donations. Michael Dell, chairman of Dell Computers and a devout Republican, has donated nearly a billion. There is now a culture of having your name on a chairtable foundation, and the competition can only result in more giving to worthy causes.
• Recession-proof. Purely by definition, the super-wealthy aren't as likely to be short on cash during a recession, when the number of those who need charity is at its highest. In a strange, twisted way, times like this are when government has the fewest resources to help the swelling ranks of those in need, as recessions lower tax receipts and the ability of governments to make payouts.
  

I wanted to make a mention of Stephen Nickell's paper, Unemployment and Market Rigidities: Europe versus North America, because unemployment and welfare are so intertwined. However, that paper deserves its own separate mention due to its depth, so I'll save that for next time.