The economics of charity

Last week I wrote about the economics of cheating. In some ways, charity is the opposite of cheating. By cheating, one does the wrong thing to gain a benefit. By donating to charity, one suffers a loss in order to do the right thing.

But is giving to charity really the right thing? Ayn Rand didn’t think so. Howard Roark, the protagonist of The Fountainhead, looked down upon charity. Taking this idea to a ridiculous extreme, in the ideal society of Galt’s Gulch in Atlas Shrugged, giving anything away at all was forbidden. (In my opinion, here’s an example of Ayn Rand taking a meritorious idea to a ridiculous extreme. The right to own property is the right to do whatever you want with it, even to give it away to someone.)

Charity seems like illogical behavior. People give but get nothing in return. Of course, people never really do anything without some benefit. People giving to their church probably expect to receive some benefit in the afterlife. In the case of secular charities, the benefit is feeling good, guilt alleviation, or social stigma avoidance. The latter “benefit” occurs when someone calls you on the phone and asks for money. You don’t want to seem like a bad person or a cheapskate in the eyes of the solicitor. Although why anyone could care what a telemarketer thinks about them is beyond me. The social stigma effect is more powerful when the solicitation is in person, especially if you know the solicitor. This is why shaking down office co-workers for charitable donations has proven to be an effective fundraising strategy.

But not all charity is truly devoid of material benefits to the giver. In fact, giving money to charity, if done the right way, can be an effective way to raise one’s status. Those in the fundraising business understand this very well. Charity dinners, for example, allow the dinner attendee to hobnob with the right crowd. The higher the cost per plate, the better the crowd you get to hang with. At a $100 per plate dinner, you may wind up sitting at a table with a school teacher or a chiropractor, but as you move up to $1,000 or even $10,000 per plate dinners, you get to hang out with the elite and raise your status accordingly (and also make some valuable business contacts).

A very large donation allows you to sit on the board of a prestigious cultural or philanthropic institution. And with even more money you can get a building named after you.

We see that effective charitable giving requires one to give in a public matter. Giving in the privacy of one’s home is a complete waste of money. It’s like the proverbial tree falling down in the forest where no one is around to hear it fall. Charity only helps the giver when other people know about it.

This discussion should set to rest the notion that charity is strictly about altruism. Therefore, I don’t see why it should be tax deductible. Why should middle class taxpayers fund the status seeking activities of the rich? This is yet another example of how the system is rigged against the middle class.

Comments

[Michael H.]

Hi Half Sigma
You seem to have a very cynical view of charity. I think that many people gladly donate to charity without any thought of getting a reward. Sure, the very rich are really buying status by getting stuff named after them. If this really bother you, we could easily ammend the charity deduction to include only anonymous charity. Anonymity was a key aspect of my post on leveraging charity.

I like the idea of encouraging charity because charities can be more entrepeneurial in solving social problems than government can. Charity does a much better job of helping the poor in this country than does the government. Most of the people who donote to the charitible organisation that help the poor never expect to get anything in return. They just want to help others. What's wrong with that? Why shouldn't somebody like that not get the same tax break that his neighbor got for having a ridiculously large mortgage?

If anyone wants to read a contrarian view on charity, read my post on leveraging charity.

[drtaxsacto]

Your view of charity is misguided. An underlying assumption of the charitable deduction does not relate to donors but to the larger public purposes charitable entites assist. Charity helps to define how a society operates and also - in the best sense - creates a set of institutions that is less answerable to government. In a number of areas charitable activity presents a real alternative to government provided activities. Indeed a better view would be to make charity completely deductible - as it was for a short time before the 1986 tax revision - and recreate an above the line charitable deduction so that all taxpayers could deduct their contributions regardless of whether they use the long or short forms.