Tuesday, December 19, 2017

Charitable Giving in 2017

I don't know if I've mentioned it on this blog but a while ago I took the Giving What We Can pledge to donate 10% of my pre-tax income every year to efficient charities.

In general I'd recommend following Givewell's recommendations fairly closely.  In past years I've strayed beyond them a bit, in particular giving a bit extra to charities that provide micronutrients in poor countries on the theory that allowing kids to grow up healthier is investing in the future and maybe I ought to prioritize that over saving as many lives as I can right now.

On the other hand, Givewell's top charity is the Against Malaria Foundation and we, that is humanity in general, have been making huge strides against Malaria recently.   It isn't an impossible project to eliminate it in the wild.  I'm too young to have helped with the elimination of Smallpox but this would be another ancient enemy laid to rest.  The Against Malaria Foundation is a finite entity and might not be able to absorb all the money that everybody donating through Givewell can muster.  But if they can't Givewell will trickle the money down to other, nearly as important, charities that can use is so I gave the money to them to use as they see fit.

If I were emperor of the world with all resources at my command I would be careful to distribute my money through a variety of causes and means in case one was mistaken and independent analysis could show that.  But as just one person among many I feel comfortable contributing to the one organization I trust the most.

In previous years I've tended to double up my giving by year.  Donating in January of, say, 08 then again in December of 08 then January of 10 then December of 10.  I give as much as I intend, roughly, per year but I get to double up my charitable deduction while in off years I take the standard deduction on my income tax.  This year with the new tax bill passing I'm not confident on this working out for me so I figure I'll do the simple thing and just donate for the year I've saved in, before my bracket and standard deduction change.

Also, while I may think that giving to the most efficient charity I can find is the best use of my money overall I still feel bad when someone asks me for money on the streets of Cambridge and I don't give them any.  In theory I wouldn't mind them having a few dollars from my pocket but I also feel bad if I give money to the people who are willing to stand out in public all day asking for it while not giving any money to the the people who don't.  To assuage all my feelings of guilt I donate $5 to the Greater Boston Food bank whenever anybody asks for money from me on the street, which comes to $210 this year.

Sunday, December 10, 2017

Tax Rates and Growth

People trying to justify the recent Republican tax plan often talk about the importance of long run economic growth.  And you can see how, if that were true, it could be a really important argument.  The difference between 2% and 3% annual growth over a hundred years would be a factor of two and a half.  If that sort of change were really possible it would justify quite a bit.  Even if all that extra growth went to rich people then even at the new, lower, tax rates that would be much more tax money available for social programs.

Sadly there's no way cutting taxes could have such a large effect in the US.

The theory behind the cuts is that people become more productive when they've got more or better machines.  Machines cost money, so leaving businesses more money to buy machines will make them more productive.  More machines leads to more money leads to more machines in a virtuous cycle.  Except that in a developed economy it's often very hard to figure out how to usefully add more machines.

At work I mostly use a computer.  Giving me a second computer might increase how much I get done by a bit, but it wouldn't increase it very much.  Diminishing returns is a fact of life and finding ways to usefully spend money increasing productivity is hard.  Some people are working at companies where they have to make due with 20 year old computers and it's quite possible that they would work faster if they could upgrade.  But that's not typical in the US.  It does exist and there are cases where extra money can result in research that yields better computers for everyone.  This is why we try to slant the tax code to favor investment over consumption.  But again expecting lower taxes to increase growth by a large sustained amount is wrong.

There are cases, not in the modern US, where it can play out like that.  If you happen to live in a country that's pretty poor and where most businesses don't have the latest technology then you could quite plausibly have huge growth rates based on money to machine to money virtuous cycles.  That's what's happening in China right now.  It also happened in Japan 50 years ago.  If there's some other country that's figured out how build awesome machines you don't have yet then you might very well find yourself limited by how many of them you can buy - though you might also have other problems that are more pressing.

In this case what you really want to do, as a government interested in growth, is to increase the rate savings rate, how much people invest relative to how much they consume. 

One strategy for this, pursued by prewar Japan, is to just tax poor people and give out the money as business loans.  Even today richer people save more of their income and that was more true when you have a population of peasants without access to banks. 

The early 19th century US didn't have quite the bureaucratic sophistication of late 19th century Japan but managed to do something similar.  By introducing tariffs that raised the price of imported cloth and other goods they indirectly increased the profits of factory owners, allowing them to invest more by buying pirated copies of machines already in use in Britain.  It's much easier to apply taxes at single ports of entry on obvious things like ship arrivals than it is to do something like an income tax.

The early 20th century Soviet Union took this approach to new extremes.  Most new machinery in the early days was paid for by selling grain abroad.  The need to more efficiently expropriate grain was part of the reason for the drive to collectivize agriculture.  Big centralized farms are again much easier for the state to manage than lots of little spread out farms.  Sometimes there was mass starvation but the country industrialized rapidly.

You might have noticed that China's economy has been growing rapidly recently but there hasn't been a lot of mass starvation.  As far as I can tell the main difference was that they jump-started things with foreign investment  These days the trillions in domestic savings drown out the $100 billion or so in foreign capital but when the current boom was starting money from Taiwan, Japan, etc was crucial.  This seems like a far more human way of jump-starting growth than the other methods above.


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