Saving, not charity, is the real answer to long-term poverty

It is heartening to know that the huge outcry concerning George Osborne’s proposal to reduce tax-relief on charitable giving has been followed by a few brave (and valid) counter-arguments.

A good example is that of Merryn Somerset Webb, writing recently in MoneyWeek, who argues that tax relief on charitable giving should be abolished. She points out that the true costs of charitable giving consist not only of the resulting Gift Aid payment by government but also its payment by way of tax relief to the donor. The total cost is paid by all taxpayers and accordingly reduces government spending on other requirements such as NHS and state education (three cheers for that, I say, but the underlying argument is sound).

As if anticipating several months ahead, an article on the IEA blog last November recalled the works of Samuel Smiles in 1875, who wrote ‘Why should we save? Such is the idea which charity, so called, inculcates. The Charitable Institution becomes a genteel poor-house.’

However in those days most UK charities were well aware of this risk. The underlying ethic with regard to the poor and needy was reform, thus ensuring that the charity’s ‘clients’ got off their books and into the workforce as soon as possible. Today’s Welfare State arguably does the opposite, with officials having an interest in keeping their charges on the books. Furthermore many, perhaps most, of today’s large charities are in effect deliverers on behalf of the government’s welfare state, and receive as much as half their funds from government.

This chasm between a century and half ago and today is enormous. The philanthropists supporting the old charities didn’t have to think about tax; the overall rate of tax (all taxes combined) was less than 10%, compared to an average of around 40% today and far more for the so-called rich. Then, the average household paid some 10% of their income to charity, and most paid the thick-end of their children’s school fees (where both attendance and literacy were superior to today).

As they did in the past, charities without tax-breaks will still work to fulfil vital immediate needs, but they should not call upon government for a leg-up, any more than should other vested interests. But to me the major issue comes back to saving: the real answer to long term poverty (as was well appreciated in the nineteenth century). What primarily makes people richer is the provision of capital equipment to increase output. The major difference between the production of the developed world and that of the undeveloped world is not knowledge; it is capital equipment. Tractors (say) are far more important than know-how. (I recall visiting a coffee plantation in Australia which had calculated that a single giant threshing machine would multiply output by some one-hundred-fold.) Britain’s place as a developed economy is largely due to those ‘dark satanic mills’ and emphatically not to its ‘green and pleasant land’.

For an interesting comparison between the benefits of saving and charitable giving, readers may be interested in a US article by F. A. Harper, ‘The Greatest Economic Charity’ in which he calculates that the saver is receiving less than one-sixth of the return which he or she has made possible. The remaining five-sixths goes to the users of the tools created (i.e. the employees), which enhances their pay by a multiple of seventeen. QED?

IEA Pensions and Financial Regulation Fellow

Terry Arthur is a fellow of Pensions and Financial Regulation at the Institute of Economic Affairs and has written on this subject for a number of publications, working closely with Philip Booth, Editorial and Programme Director at the IEA.

1 thought on “Saving, not charity, is the real answer to long-term poverty”

  1. Posted 22/05/2012 at 13:18 | Permalink

    I broadly agree. However, in the shorter-term it is important to stress the point made here that much ‘charitable’ funding comes, in fact, from the state itself. Far better, surely, to reduce this and allow charities to preserve their privileged tax-status rather than retain high levels of state subsidy for charities and worsen their tax position (especially given the deadweight costs of tax and subsidies). This would also allow gift-givers themselves to chose where their money goes. In the longer term, I agree that much charity work doesn’t necessarily aid its recipients – but it must be observed that much of it goes into trying to counter-act the deleterious impact of the welfare state and other government interventions upon society. The first aim should be to remove these.

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