Philanthropic acts do not necessarily reduce inequality
Rich individuals are encouraged to make large contributions to the provision of public goods in return for tax exemptions, a policy that appears to endorse the claim that philanthropy can be considered a substitute for the direct income redistribution brought about through taxation. The authors of CEPR DP6362 address the question of how voluntary provision affects welfare inequality and find that (1) philanthropy can in fact increase inequality among the non-rich, but (2) income redistribution can be more effective in reducing inequality when accompanied by philanthropy. Automatic exemption from expropriation for rich philanthropists is therefore not the right policy.
The increase in inequality comes about because for all that the non-rich benefit from donations to the public good, the rich benefit more than the poor from spending by other rich individuals on the public good. However, policies aimed at reducing inequality through income redistribution may become more effective in combination with philanthropy because the poor are able to benefit more from their income in the presence of the public good supplied by the rich.
The authors conclude by advising that instead of assuming a public benefit from all acts of philanthropy and offering tax incentives accordingly, the equality-enhancing potential should be assessed for each act. Contributions in areas that have a direct effect on the private asset base of the poor (such as basic health, education, housing, technologies that raise demand for low-skilled labour, etc.) can be seen as substitutes for income redistribution, whereas contributions to public goods that have little income-augmenting effects for the poor (such as churches, museums, sports facilities, parks, private schools and hospitals, etc.) should be seen as complementary to income redistribution. The case for exempting rich philanthropists from expropriation should not be accepted as a matter of course.
Topics: Poverty and income inequality