An oversimplified argument for why “Virtue Signaling” is a good thing.

“These people are just virtue signaling”; in the popular internet discourse this has come to mean “these people are just doing a useless activity to impress their friends”.

But there is a stronger argument that “virtue signaling” is a good thing… People to do good for a social reward is how our society works (Adam Smith Institute’s Bowman makes a similar point).

An oversimplified explanation from Economics/game theory:

• “Signaling” can only work if the action that sends the signal conveys information about an individual’s type
• For it to be informative, only those who are virtuous must want to do the action that sends the signal
• Thus it must be more costly for the baddies to do this action than for the goodies.

Which actions will tend to be less costly/more beneficial for the virtuous than the baddies? Actions that promote the social good, e.g., voting in an election.

If we imagine a continuum of preferences over ‘love of promoting the social good’…

• the most saintly types will vote even if they didn’t give away “I voted” stickers. For them the good-feeling alone exceeds the cost.
• The medium-good types (like you and I) will vote only if we get the sticker because ‘the reputation benefit plus the good feeling’ exceeds the cost.
• The baddies will never vote; they get no good feeling from voting, and the reputation benefit is not worth the cost. This is the ‘separating equilibrium’. Here the “I voted” stickers get more people to do good, as they offer a meaningful reputation benefit.

A corporate skills bake sale?

Large companies generously offer to support employee ‘pro-bono’ work and volunteer work, offering set-aside days and even donations matching hours; (documented in my “innovationsinfundraising.org” database here).  They are in general more willing to do this than to donate directly, or to match employee contributions.

However, there is often a skills mismatch; few people can be as productive when volunteering for a charity as they are in their main job (although orgs like BeyondMe try to improve things). There are many skills that simply have little value in the charitable sector, or that are very company-specific.

Furthermore, most volunteering is local by nature. In contrast, the charities that are most effective at saving and improving lives and reducing poverty and suffering are working in poor countries.

But volunteering (rather than donating) is popular because it feels good and allows for “virtue signaling” by individuals and companies. It is simply less socially acceptable to boast about one’s donations than to say “whew, I’m so tired from a hard day serving soup to orphans”.

A proposed solution: the Corporate skills bake sale

Many people (myself included) and companies be hesitant to hire an expensive financial advisor, legal advisor, marketing analyst, web designer, process consultant, luft gesheft. There are a variety of reasons for this. I don’t like the idea of money going into these deep pockets, I am deeply skeptical of the value provided, I may have pride in “doing it myself”, and it may not be acceptable to my company to outsource this. The big-5 firms will never get this business. On the other hand, if I could get this service in exchange for making a donation, I might be willing to do it!

There are also particular services deemed repugnant or unfair; see child.org’s valet service for festival-goers. Again, you would feel icky paying a company for this, but you might feel OK doing it in exchange for a donation.

Hence the Corporate skills bake sale: The employer offers its workers the opportunity to “volunteer” for a large “White List” of list of clients and organizations (or individuals), to provide the services in exchange for a set donation per-hour (or per-task) to the chosen charity. Presumably this will be below the usual billed rate, but still well above the value the employee would add through traditional volunteering.

For example (spitballing):

• A PWC auditor provides a day of expert guidance to a local construction firm, in exchange for an £800 donation to the Against Malaria Foundation
• An engineer at Google takes a three hour meeting high-level design advice to an idealistic startup in exchange for a $600 gift to GiveDirectly
• A KPMG partner offers pension fund advice, in a series of phone calls and emails, to a private university, in exchange for £2500 directed to the Fistula foundation

 

Compared to subsidizing “regular” volunteering, there are pros and cons

Downsides and barriers include

• Legal obstacles to allowing this (?),
• possible cannibalization of existing future revenue sources (if you choose  the wrong White List),
• and this may not be as inspiring/relaxing/solidarity-building as an activity like serving food to the homeless, building a house, or cleaning a park.

There are also relative benefits to the firm, especially:

• this may provide a foot-in-the-door to new clients,
• it may builds critical employee skills and help them discover new environments,
•  it may attract the highly-analytical and technically skilled cohort of EA-motivated employees.

Let me know what you think.

A bridge towards open-access

Has anyone ever considered…

Asking existing (e.g.) Elsevier academic editors  to take a ‘pledge’ to handle and review papers for ‘journal equivalents’; e.g.,

I agree to handle submissions, and send this out to reviewers who will review this as if it were an article submitted to Nature, and if it makes it through the peer review process it will be published on an open-access site with the certification “This paper has been peer reviewed and accepted as of equivalent quality to a paper published in Nature”.

… I imagine this as a way for some disciplines (like Economics) to transition away from our existing structure. Perhaps we should ultimately move to something like Arxiv.org, but this could be a step in the right direction. We know the ‘meaning’ of (e.g.) an  publication in the Journal of International Economics as a signal of a certain quality. However, there is no reason we actually have to grant Elsevier the right to print this in a bound volume, limit access, and soak the public.

As you know, the journal publishers are charging universities billions for access to publications written, edited, formatted, reviewed, and compiled by academics (whom they do not pay, and even have the gall to charge submission fees to). They also impose large administrative costs, including complicated submission forms, and strict and often outdated typesetting requirements.

The ‘human fund’ question

Got this email:

Subject: Donations to charity in someone’s name as a gift

Who is the giver in this case?

– Sent from my iPad

My thoughts: Yeah, I’ve wondered that myself. I suppose the receiver of the gift has the right to be considered the ‘giver of the charitable donation.’ At least if it was in lieu of a birthday/wedding gift etc. Because they have ‘sacrificed’ their normal present for the charity.

The person who gives this ‘present’ should not feel morally virtuous, and should certainly not reduce their other giving in response. (But perhaps the receiver could do so).

On the other hand if it’s in honor of someone deceased or someone who isn’t ‘expecting’ a gift, then the giver can feel virtuous. Agree?

On a related note, I often thought that one should be able to give gift certificates to purchase something at a charity store (Oxfam, etc). This is then a ‘real gift’ but also encourages the recipient to support the cause,

 

Inheritance (tax) and charitable bequests: an intergenerational pact?

…Key points from my response to the Charity Tax Commission call for evidence

Inheritance Tax

Leaving a part or an entire estate to a charity can reduce or eliminate an Inheritance Tax liability as it will not count towards the total taxable value of an estate. An Inheritance Tax liability can also be reduced from 40% to 36%, if 10% of a ‘net estate’ is left to a charity in a will. Inheritance Tax relief totalled approximately £840m for individuals in 2016-17.

The promotion of inheritance bequests seems to me to be a particularly valuable and desirable avenue for giving. I suspect there is a lot of room here to convince people to donate more when they pass away. This is a form of intangible income, there is an uncertainty in its amount, and this amounts to future commitment. Evidence from (D Reinstein, Riener, and Kellner 2018), (D Reinstein and Riener 2012), (Breman 2011) and others point in the direction of this being particularly promising.

Whether this tax relief is the most appropriate response, and whether levels are set correctly, is an empirical question which I think we have little data on. The ‘gold standard’ price elasticity is still the relevant measure. We may also want to consider moving whether it would be effective to move to a ‘gift aid’ approach in this context, offering a match rather than a refund. However, I can see an argument (loosely driven by ideas of loss aversion) that people may be particularly find the rebate particularly valuable in this context. People may be particular averse to the idea of paying taxes on their inheritance, and the ability to avoid those taxes may be especially salient. My work and discussions with people considering ways to increase such giving, in particular, an initiative/startup called ‘Giving Docs’, suggests to me that most people have not considered leaving a charitable donation in their will, but would be amenable to doing so

In the domain of inheritances and bequests, the expectations of the testator (usually a parent) and prospective legatee (usually a child), and the ‘second order beliefs’ (beliefs about what the others believe) are likely to guide what is done and what is seen as right and morally acceptable. Here, I have specific proposals for mechanisms and incentives that will may enable larger charitable bequests and more charitable bequesting by mutual consent of both parties.

A Discussion of the UK’s “Gift Aid”

…Key points from my response to the Charity Tax Commission call for evidence

Gift Aid

Gift Aid allows charities to claim tax relief – 25p in the pound – on gifts and donations made by UK taxpayers. If the donor is a 40 per cent taxpayer, further tax relief of 20 per cent (the difference between the current higher rate of income tax of 40 per cent and the current basic rate of tax of 20 per cent) can be claimed by the donor themselves (not by the charity). Gift Aid was worth approximately £1.28bn to charities in 2016-17. Higher Rate Relief was worth approximately £520m to individuals.

…An alternative to the Gift-Aid ‘match’ would be a rebate based program, as is more common in other countries. I believe that the evidence and some straightforward considerations argue against such a change.

Principally, to the extent that we have evidence, matches have been shown to be more effective at inducing donations then have rebates (Eckel and Grossman, 2003;  2006;  2008); (Scharf and Smith 2015). (There are various hypotheses for why this is, see Hungerman and Ottoni-Wilhelm, 2016); but there is little consensus.)

Furthermore, a tax rebate system would be harder more difficult to apply, and potentially not relevant for those who are not net taxpayers. (The available evidence suggests that lower and middle-income earners contribute a substantial share of charitable revenue; there is mixed evidence as to the whether giving increases less or more than proportionally with income.)

It would make calculation of this benefit more difficult for people who are unsure as to what sort of marginal tax rate they will be paying. General evidence suggests that people are more responsive to definite tangible benefits than ambiguous or uncertain ones.

A substantial proportion of funding in the UK is also raised through the donation and sales of secondhand goods through charity shops. These are eligible for Gift Aid, and the value of these can be determined in a straightforward way based on their ultimate sales prices. In countries such as the USA, ‘itemizing’ taxpayers may report the value of donated goods for tax relief; however, this is hard to verify, and conventional wisdom is that people inflate the value of these for self-serving reasons.

Gift Aid Small Donations Scheme

The Gift Aid Small Donations Scheme (GASDS) allows charities to claim a gift aid-style top-up on small donations, in situations where it wouldn’t be feasible to collect Gift Aid declarations, for example where a collection tin or bucket is used. Charities can claim up to £2,000 a year under the scheme (on cash donations of up to £8,000). GASDS was worth approximately £29m to charities in 2016-17.

I expect this to be a valuable program and a ‘plug’ in the hole that limits the effectiveness of donation incentives. There is a great deal of evidence that charitable giving (at least by smaller donors) occurs principally in response to requests for donations. Social influences on donations are also extremely important, and people seem to donate more where their reputation is at stake (see, e.g., Harbaugh, 1998; Soetevent 2005)). Donations are often connected to what psychologists call system-1 emotional responses, and analytical considerations may drive a switch to a system-2 analytical mode which may discourage donations (suggested by Karlan and Wood (2017); Paper et al. (2017); and mediating the ‘identifiable victim effect’, see Small et al (2007). I believe that in the context of these impulsive, emotionally driven, and socially pressured responses, the consideration that ‘gift aid might not be available for this’ might have discourage donations substantially. First of all it provides an ‘excuse’ to not donate or to defer consideration of this, and there is evidence that people may be drawn to these excuses and exercise motivated reasoning to avoid donating in particular contexts (Exley 2016a; 2016b; Exley and Petrie 2018; Fong and Oberholzer-Gee 2010); also see the literature on ‘legitimation of paltry donations’). Secondly, having to think about this concern (lack of Gift Aid) may lead to an analytical process that will block the emotional response and the donation. Finally, this may lead people to postpone decisions on whether to donate, and with this delay, the emotional and social impetus to donate may disappear.

What about the rate of gift aid, the standard 25%
The baseline that ‘donations will be considered as coming from pre-tax income’, embodied in Gift Aid and the higher-rate relief, would be unlikely to be the optimal rate of subsidising giving. If it were, it would seem to be a coincidence. A higher or lower rate may be favoured to achieve the maximum out-of-pocket contributions. Furthermore, rather than imposing a strict cap on the amount that can be eligible for higher-rate relief, it may be worth considering a gradual reduction in this level.

What forms of tax relief should the charities themselves get?

Key points from my response to the Charity Tax Commission call for evidence

Value Added Tax (VAT)

…Most of the charities that charge for their services are unable to recover input VAT because their services are exempt (estimated to cost £1.5bn a year). VAT relief was worth approximately £400m to charities in 2016-17.

I will asses this from the perspective of a policymaker considering we are considering how to aid charities/charitable causes, rather than how much to aid them. Holding constant the level of total aid, a standard Economics approach focuses on whether this gives charities incentives to purchase too many, too few, or the wrong mix of inputs, for their ‘production process.’  To the extent that charities are not able to recover input-VAT (in contrast to large private producers), the charities will underinvest in such inputs and over rely on goods that do not incur VAT.    Economists consider production as an output that can arise as a functions of capital, labour, and other inputs, and this function is often flexible; various combinations can produce the same level of output, but only one is the minimum-cost combination. Equivalently, there may be only one mix of these inputs that will yield the greatest value produced  for a given cost. Taxing inputs to the production process can yield what we call ‘productive inefficiency’. When there is a trade-off between purchasing a VAT’d product (e.g., a new dishwashing machine) and enlisting a worker or volunteer to do the same (e.g., wash dishes by hand), the charities may tend to favour the latter in a way that is inefficient.

Essentially,  I think businesses and charities of all sizes should be treated similarly when it comes to taxation and recovery of VAT.  To do otherwise creates inefficiency; less output and fewer services are being produced than could be produced. The same VAT revenue could be generated by changing the overall rates,  without introducing this distortion.

One caveat to this (which holds for my other related responses below) is that there may be political reasons why supporting charities through a wide variety of benefits and tax relief programs is more achievable. If this is necessary, for political concerns, to give charities the desired level of support, we may be willing to accept certain consequent inefficiencies.

Business rates relief

Business rates are a tax on occupancy, which any charity that owns or rents a property is liable to pay. Charities receive a mandatory relief of 80% of their business rates bill. …

Considering the format of the aid to charities/causes, and not the total amount of such aid… I do not see a justification for this particular form of tax relief. Again, thinking about the production model, this would seem to push charities in the direction of owning or renting property, in a departure from efficiency.

I make similar comments regarding Capital Gains Tax, Insurance Premium Tax, Climate Change Levy (a Pigouvian tax), Social Investment Tax Relief, Stamp Duty Land Tax, etc.

 

Should the government be subsidising charitable giving?

Key points from my response to the Charity Tax Commission call for evidence

Justifications for the government to fund good causes  through the mechanism of ‘donation-driven subsidies’ rather than the standard democratic policy process; counter-arguments

There is a broader public policy and philosophical question about whether the government should be subsidising charitable giving. Even if the elasticity does not meet the ‘gold standard’, and it would be less costly for the government to directly fund the charities, one might still argue that it is better that these resources and this process is occurring through voluntary action.  (On the other hand, even if the elasticity is above one, there are reasons why we might not support such a subsidy; e.g., we might think that the things people donate to are not the most vital societal priorities).

Classical economics argues that income taxes have some distorting effect on the labor market decisions, leading to departures from efficient choices, although it is unclear in which direction this impacts the labor supply. We could consider whether tax privileging charitable giving, which to some extent gives people more sense of choice and direct control as to where there money goes, has less of a ‘distorting’ effect on labour supply choices. As a simply described example, I might be more willing to work additional hours if I could choose which charity to allocate half this money to rather than knowing the government would make this choice for me. One underexplored question is whether voluntary a ‘big society’ that relies on voluntarism, perhaps under some social pressure, will lead to more efficient labour market choices. (I raise this issue in a conference paper considering historical modes of giving and provision of public goods; see Reinstein, 2014).

There are other justifications for this. It may be argued that getting people involved in philanthropy (even if this is partly driven by reduced prices of giving through tax incentives) is itself a positive good, or may lead to positive spillovers (e.g., as people educate themselves more about social problems and responses).

There is also a case to be made that charitable giving funds projects and initiatives that would be controversial to fund through taxation, but which are nonetheless extremely and valuable. (Holden Karnofsky of GiveWell and the Open Philanthropy Project) has permanently made this argument, for ‘neglected’ causes, either because they are controversial in some way (e.g., birth control in the previous century), or because they involve a low probability but high impact risks, such as the threat of out-of-control artificial intelligence.

 

Should there be tax relief/gift aid for charitable donations? Does it even promote more giving? This is not known.

Key points from my response to the Charity Tax Commission call for evidence

Presumably the main argument for offering tax relief and Gift Aid is that this promotes more giving, i.e., convinces people to donate more from their own pockets, to take advantage of these benefits.

Much economic research in fact considers how the amount people choose to give responds to the so-called ‘tax-price’  of giving (the amount of after-tax income an individual must give up in order for the charity to gain £1). If this elasticity is below the ‘gold standard’  this implies that by offering incentives (such as Gift Aid and higher rate relief), the government is actually reducing the amount that people choose to donate out of their own pockets. In such a case it would be more efficient to eliminate Gift Aid etc., and have the government  donate this money directly to good causes.

As an aside,  this would raise the question, ‘which causes should be chosen for support?’ The government might decide to support the charities that people donate to, perhaps  proportionally to the amounts donated. In theory (ignoring the issue of higher rate taxpayers) this latter policy would actually give people the same incentives as above, so it would effectively not change anything.

Evidence on this elasticity 

While a great deal of work has been done, ultimately the evidence is mixed as to whether the elasticity in fact exceeds this gold standard. It is difficult to identify the response to the “tax price” of giving for a variety of reasons.  In particular, there have been few if any experiments in altering the rebate/match at a national level that would permit such clean evidence.

There is some evidence from particular fundraising appeals; from non-representative circumstances. This offers limited evidence that the presence of a match increases individualsout-of-pocket’ donations. </span><a href="http://f1000.com/work/citation?ids=2943034&amp;pre=&amp;suf=&amp;sa=0"><span style="font-weight:400;">Karlan and List (2007)</span></a><span style="font-weight:400;">, find evidence that it only increases this for one subset of respondents, and they dont seem to consider the actual marginal impact of the match rate; the evidence suggests that any effect is being driven by the psychological impact of the presence of an outside supporter. Other such work finds it may even be counterproductive (Huck and Rasul 2011); and it would work better better to be simply a ‘lead gift’. Meier (2007) finds that the positive (participation) effect may be crowded-out in the longer run when the match is removed.

Other evidence (e.g., Feldstein and Clotfelter 1976; Auten, Sieg, and Clotfelter 2002; Backus and Grant 2018; Hungerman and Ottoni-Wilhelm 2016 survey this) comes from naturally occurring observational data on people’s tax rates and level of giving, and usually relies on particular parts of tax data where giving is ‘declared’ (in the US, those who ‘itemise their deductions’). The latter tends to rely on natural variations across US states and over time, in response to changes in legislation, etc. However, my impression is that this has rarely been done an extremely convincing way. A major ‘econometric identification’ issue is that it is difficult to disentangle a nonlinear income elasticity of giving from a response to a change in the tax price.

 

The taxman asked us to weigh in

So, I’m weighing in. The Charity Tax Commission is having a ‘call for evidence.’ I’m planning to submit the answers HERE. This is a combination of my off-the-cuff insights, and elements drawn from research as discussed at innovationsinfundraising.org.

Please add comments — tell me why I’m wrong.