Charitable giving: The IRS and Richard Thaler

The USA often gets a bad rep for not doing enough to help alleviate poverty in the developing world. While it’s true the government spending for foreign aid is much lower than European, and particularly Scandinavian, countries, as I’ve argued before, private citizens in the US are more generous than most others.

I just wanted to write a very short piece analysing the private incentives for donating to charity. It’s something that randomly occurred to me on the train last week.
In the US, the IRS says:

"You may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions." (IRS Publication 78)

For cash or property donations, as long as you keep itemised written evidence, you can deduct cash contributions in full up to 50% of your adjusted gross income and property to 20%. In other words, donating $1 in cash saves a taxpayer 50 cents in income taxes.

President Obama is proposing caps on the value of the tax break for itemised deductions, including donations to charity, to 28 percent for families making more than $250,000. The argument against this is that it will haemorrhage donations from wealthy families. But this is outside the scope of this blog post.

Individuals paying tax in the UK and US often find that the US tax rules invalidate UK tax breaks on charitable giving. Again, although I’m comparing the US and UK approaches to economic incentives for charitable giving, this is outside the scope.

In the UK, Gift Aid enables the donor to immediately benefit from a tax break. If I give £1 to a charity, including Gift Aid, it will receive £1.28.

Contrast the US and UK approaches:

US: Refund given ex-post often months later; transaction cost involved with claiming this money back; when you do receive the money, it’s like a nice present from the IRS
UK: Far simpler system; ex-ante realisation of the additional benefit provided to charity; flat rate of Gift Aid which is easy to understand; no additional personal monetary benefit of giving

These two contrasting systems have remarkably different economic incentives structures, at least in theory. Using Richard Thaler’s prospect theory terminology, both US and UK donors feel the pain of donation simultaneously with the pleasure of having donated. Americans additionally experiences the small pain of having to record documentary proof, but then experience the big pleasure of a rebate a few months later after they have gotten used to operating with a tighter budget constraint. In the UK case, donating is a more passive affair because of the lack of these latter two effects.

The implication of prospect theory is that utility might be reference-based i.e. you consider not only the value you receive from a transaction but the value others receive. The utility function this creates is asymmetric and implies shows that people feel losses more acutely than gains. More relevantly for this example, it also shows that people prefer disaggregating gains (having two gains is better than having one gain of equal value).

Without having done empirical research into this, the theory suggests the US approach might be better at encouraging people to donate.

Nick Griffin on Question Time: The fillip the BNP wanted

“That was not a genuine Question Time; that was a lynch mob,” said Nick Griffin after his grilling on Question Time this week. "The British public are aghast at the display of bias from the BBC, the venom from the political class, and the sheer unfairness.”

Although I’m not “ethnically British”, as Griffin would have all of us to be, I believe he was stitched up. And this was a bad thing for community cohesion.

Politicians from all the leading parties were wrong to condemn the impartiality of the BBC in inviting Nick Griffin to appear on Question Time – this gave his appearance the publicity and credibility it did not deserve.

The BBC was wrong to completely stonewall any criticism of its stance, and then change the format of Question Time so that it focussed completely on the BNP’s racist agenda.
The violent crowds protesting outside were wrong for helping give the BNP cause ammunition and legitimacy in marginal supporters’ eyes. While inside the BBC Griffin protested the Ku Klux Klan member he once shared the stage with was “almost totally non-violent”, the crowd outside showed they were a public menace, showed disregard for the police and bayed for Griffin’s blood.
The fact is, Griffin is an idiot. His arguments did not stack up on the programme. He lacked any depth and was ultimately found out by the audience and David Dimbelby to be the uneducated lout he was always supposed to be. When Justice Secretary Jack Straw categorically told Griffin that he need not fear UK or European law in the studio when explaining his views on race – he would “sort out the courts [for Griffin]” – the BNP leader still could not explain his actions, stuttering through his mumbled sentences.

There should never have been a storm about his attendance. The BNP has two elected representatives in the European Parliament, neither of whom have convictions for inciting racial hatred. They are entitled to express their views as much as anyone else. What the debacle ended up doing was increasing donations to Griffin’s party (only a few months ago it faced bankruptcy). A party spokesman claimed that 3,000 people had registered to sign up as members as a result of Question Time.

Nick Griffin should have been invited as an equal, a wide range of topics should have been debated, and the public should have been given the opportunity to see how incredible and pathetic the BNP’s policies are on pretty much every issue that matters to the British people. That’s the power of a good democracy.

Why a Tobin tax deserves further consideration

Or, How the French revived an old American economic idea from the 1970s

So much has changed, yet so little is different.

At the height of the economic boom, the fortunes of Wall Street and Main Street were inexorably linked. Today, nothing seems further from reality. The White House continues to count the cost of record public deficits for future generations, as Goldman Sachs reports a four-fold increase in quarterly profits. Bankers’ bonuses are back, but the misery in the real economy is likely to continue for many years.

In recent months, an old idea to dampen speculative gain has gathered some momentum.
In the early 1990s, it was French President François Mitterrand who backed a Tobin tax on all international currency trades to reduce currency speculation, and to raise money which could be used for development in less economically developed countries. In 2001, Lionel Jospin echoed his views.

A few weeks ago, Frency President Nicolas Sarkozy and Bernard Kouchner, his foreign minister, suggested a tax of 0.005% on financial transactions could bring in $30bn-$60bn (£18bn-£35bn) a year for meeting Millennium Development Goals.

Lord Adair Turner, chairman of the Financial Services Authority (FSA), supported this view in Prospect magazine, making a robust defence of the controversial idea to curb the “swollen” and not “socially useful” financial sector.

Senior City figures were stunned at such comments from a senior and highly regarded figure such as Lord Turner. London Mayor Boris Johnson called the idea “crackers”.

The debate around a Tobin tax is missing the point.

Such as tax wouldn’t be unilateral in the UK – that would put the UK financial services industry at a competitive disadvantage. There are sensible questions of on efficiency, feasibility and global coordination that would need to be addressed. However, imposing such a small transaction cost is unlikely to noticeably encroach on long-term and non-speculative trading decisions. Damaging short-term speculative dealing would be affected. But then, how would one distinguish between normal liquidity trading and inflated, “socially useless” financial transactions? Market liquidity must also not be comprised by the tax. If applied to a highly fragmented global market, such a tax would be difficult to impose.

Where markets tend towards centralisation, it would be easy to introduce the tax while limiting evasion. Trades at each of the global financial centres go through very few clearing houses such as Crest. The largest part of worldwide wholesale foreign exchange dealings is channelled through CLS bank. The tax would be applied at such a gateway stage through a small software routine, making it impossible to avoid. A Tobin tax could also be levied at settlement with a central bank, making it transparent and easy to administer.

The more sensible objection to the introduction of such a tax is that although there is a link between high volumes traded and high volatility, the causality between the two is unclear. Volatility and trading volumes can both be triggered by the influx of information to the market, for example, rather than sheer speculation.

The levy would also have to cover other traded financial instruments and even some real commodity markets as these could be used to avoid the tax. The consequent rise in costs could undermine potential benefits.

Tobin believed that some of the practical objections to his tax were overblown. Either way, I think it’s a credible solution to raise significant funds if some of the issues above area addressed. It’s not a substitute for higher reserve requirements or curbs in excessive risk-taking through reward structures, but I don’t think it’s an idea that should be dismissed as plainly as it has been in the City.

Doubt, intensity and wayward desires: Motivation in the workplace Part 2

In a new book, “The Pleasures and Sorrows of Work”, occasional philosopher Alain de Botton dissects the world of work, examining ten professions in ten chapters. It’s a wonderfully pleasurable book – in which he picks ten seemingly arbitrary professions as diverse as cargo-ship spotter, airplane vendor and painter – which allows you to lose yourself in a rich tapestry of philosophy, meaning and marvel that weaves together the activity we spend most of our lives doing. He entwines the understanding that much work is worthwhile and to be celebrated, with the assertion that many other professions are merely full of grief.

The philosopher
De Botton has never worked in a corporate environment, and his dislike for finance folk is clear. He laments the corporate striver, who barnacles himself on decisions about “shampoo or condoms, oven-gloves or lingerie”, instead of focussing on emotional well-being and healthy relationships. Yet he sees Adam Smith theory of specialisation as "an immense concatenation of individual efforts" to be marveled at.

“…start of work means an end to freedom, but also to doubt, intensity and
wayward desires... How satisfying it is to be held in check by the assumptions
of colleagues, instead of being forced to contemplate, in the loneliness of the
early hours, all that one might have been, and now never will be.”

The book is not simply a tirade against office creatures and company drones. It is a witty insight into the banality and oddities, marvels and ingenuities of the workplace. It gives food for thought and a chance for gentle, tranquil introspection into what work you do, and what it actually achieves.

The economist
I wrote about motivation in the workplace a few months ago, discussing Herzberg’s Motivator-Hygiene theory. His theory said the main factors that lead to job satisfaction (“intrinsic motivators”) are: achievement, recognition, work itself, responsibility, advancement and growth. The key aspects of dissatisfaction (“hygiene factors”) are: company policy and administration, supervision, relationship with supervisor, work conditions, salary, relationship with peers and subordinates, personal life, status and security.

Herzberg, Mausner, Peterson & Capwell (1957) suggested “in general, morale is high among young workers.” After young age, morale follows a U-shape, with lower morale until the early thirties, before a steady increase to retirement. Several subsequent papers have confirmed this U-shaped theory of employee motivation. It seems younger workers, fresh-faced from college, have higher expectations and feel positively about their novel transition to adulthood. As time goes by, and promises and dreams of opportunity fail to materialise, the gap between ‘ideal work’ and ‘actual work’ widens. Expectations now fall and aspiration levels become more realistic. I think to some extent, motivator factors such as additional responsibility and advancement are easier to achieve as you get older, but for a new graduate with sky-high expectations, the hygiene factors such as work conditions are more likely to play a role in tempering your expectations.

The conclusion
But to know the theory and understand the literature could mean just one thing: as a one-time extremely self-motivated worker in his mid-twenties, I should embrace lower job motivation for at least another five years, after which I transform into a wavy-haired romantic clambering up the ladder of job satisfaction through to retirement. This could be where the corporate drone in me finally focuses more on emotional well-being, healthy relationships and wider community commitments.

Here is the irony. De Botton describes corporate tainting and conformity as symptoms of our “incarceration”. By reaching a compromise with myself that I will resign myself to a predetermined fate – not predetermined by me, to be clear – in the short term, to realise my real goals and ambitions in the longer term, am I not subverting these goals and ambitions to fit in with what the incarceration allows?

But then, does not this introspection automatically mean I still retain adequate free will and choice – that I have in fact escaped the bleak confines of my corporate cell? Maybe it just means I need to get a life. Straight after I check whether it fits in with my latest project schedule.