Currently there is a scandal over the IRS targeting of Tea Party groups for investigation of whether they qualify for their tax exempt status or whether they are primarily political.  The main issue at stake is whether the groups can get tax deductible contributions or not.  That is the main advantage of tax exempt status.  Making charitable contributions is a popular tax deduction on both the left (e.g. Yglesias) and the right (e.g. Heritage Institute).  But only about 30% of Americans itemize their deductions at all, so this is a benefit that mainly affects the elites of society rather than the median.

The position of medianism.org is that if a policy benefits people above the median and has no clear benefit to the median, then it should be scrapped.  This is a tax deduction that mostly benefits households earning above the median.  The idea of the deduction is that it will encourage more charity, but even proponents like Heritage acknowledge that it has little effect.  According to the Indiana University School of Philanthropy, charitable tax deduction has very little impact on charitable giving (pdf) among the 30% of Americans who are eligible to get it.  They say that Obama’s proposal to lower the deduction on charitable giving would only reduce charitable giving by 1.3% among the 30% of Americans who itemize and it would have no effect on giving by the other 70% of Americans.  In contrast, they point out that the 2008 recession reduced charitable giving by 13% despite the much greater need due to increased poverty during this time.  I would go further than Obama’s proposal and scrap the deduction, but even Obama’s proposal was politically untenable.

CATO’s Daniel J. Mitchel also proposed scrapping the charitable deduction because,

there’s just no evidence that the tax break leads people to increase their giving… Over the decades, there have been major changes in tax rates and thus major changes in the tax treatment of charitable contributions. At some points, there has been a big tax advantage to giving, at others much less. Yet charitable giving tends to hover around 2% of U.S. gross domestic product, no matter what the incentive.

Another reason to drop the deduction is that it’s exclusive—and it gives a break to people who really don’t need one. Upper-income households are the biggest beneficiaries of the deduction, with those making more than $100,000 per year taking 81% of the deduction even though they account for just 13.5% of all U.S. tax returns. The data are even more skewed for households with more than $200,000 of income. They account for fewer than 3% of all tax returns, yet they take 55% of all charitable deductions.

The charitable deduction should also be scrapped to avoid the problems with distinguishing between Tea Party (or Occupy) organizations whose “primary activity” is social welfare and organizations whose primary activity is political.  Political work is not tax deductible whereas social welfare work is.  The current IRS scandal is a real issue, but it will always be a difficult problem as long as the government allows deductions for social welfare and not political activity.  The issue could be eliminated forever by simply eliminating this tax benefit for the elite.

The Alliance for Charitable Reform claims that the tax deduction encourages, “a selfless act” that benefits “those in need.”  But very little of the money actually goes for “basic needs”.  According to the 2010 Study of High Net Worth Philanthropy (pdf – Table 4), in 2009, basic needs was the lowest priority expenditure for the people who get the most benefit from the tax deduction.

It turns out that high-income people care a lot more about the arts and elite educational institutions like the Ivy League, than they care about giving to people in need.  In comparison, Figure 20 of the same study indicates that basic needs is probably the second highest priority for the median American donor after religious contributions.

A lot of charitable ‘donations’ are a way to indulge in a hobby like art or sports.  AEI’s Mark J. Perry notes that charitable donors get a lot of benefits from their ¡¿‘selfless’ donation:

1. Here’s a list of benefits for donors making gifts to the Metropolitan Opera, which include backstage tours, ticket priority, invitations to dress rehearsals, free publications, guest passes, etc. (HT: M. Smith in the comments.)

2. According to Bloomberg, thousands of college football and basketball fans get a tax break on donations they make as a condition for buying season tickets. Many universities demand hundreds or thousands of dollars in donations as a condition for buying tickets at face value.

I do like charity and I would like to increase it, but if we are going to keep the deduction, it must be reformed along medianist lines and here are a couple medianist ways to reform the charitable tax deduction:

1. Extend the deduction to the entire population.  If it is good for high income earners, then it is good for low income earners too.  One problem with this is that it raises the transactions costs of keeping track of a lot of small donations, but we live in the information age where every sale of bubble gum pays sales tax, so it is feasible if it were a priority.  The deduction does not impact most Americans and it should at least benefit the half down to at least the median if it is to be considered medianist.  But why not just extend it to all American charitable donations?  The organizations that are fighting to preserve the deduction for elites (like the Alliance for Charitable Reform) do not seem to care about extending it to everyone else.

2. Define charitable organization along medianist lines.  They are supposed to engage in activities that increase the “social welfare.”  Harvard University is defined as a tax-deductible charitable organization and received total gifts of  $650 million in 2012.  Do these donations enhance the social welfare?  They benefit the elites, but they benefit only very few Americans at or below the median.  In order to qualify as increasing the “social welfare,” the majority of the funding should benefit people who are at or below the median American.  That medianist requirement would revolutionize charity in America and help avoid the sort of scandal that the IRS is currently involved in.  It would give the IRS some guidance for judging whether an organization is serving the “social welfare” or not.  Currently, the “social welfare” is so vaguely defined that it is easy to get in political trouble investigating a political organization.  At least this way political organizations would have to try to claim that they are working for the average American before they can get the deduction.  Even if they only pay lip service to the social welfare, it would still be a good exercise for organizations to think more about what their mission really is.

Economics is sometimes called the Dismal Science because of the dismal ethical implications of the discipline.  Yesterday I was reminded of that when one of my smart students told me that I teach that altruism is impossible.  I do not teach that and I have never taught that, but I understand where he got the idea from.  It is implied by many parts of economics that I teach, and it is easy to see where a student might get that idea from studying economics even though I am trying to teach that it is only a mental crutch to make thought experiments easier by simplifying the world.  Medianism.org is an attempt to make people think more critically about the mental crutches that economics has become dependent upon. These mental crutches have created a very peculiar ethical system that economists and unconsciously practice and it has bled into other academic disciplines and deeply influenced policy and culture.  Economists like to say that we separate ethics (normative economics) from science (positive economics), but it is impossible to do any positive economics without ethical implications and we need to own up to the ethical prescriptions that are embedded in mainstream economics.

The most important strand of ethical theory in economics is a mutant form of utilitarianism.  It is important to distinguish the ethics of economics from utilitarianism because self-proclaimed utilitarians reject what economists do and economists reject utilitarianism.  The antipathy is mutual, so we cannot call both groups utilitarians.  I call the tacit ethical theory of mainstream economics mutilitarianism to honor its roots in utilitarianism, but to distinguish it from what self-proclaimed utilitarians believe.  The main difference between the two schools of ethics is a difference in the methodology of measuring utility.  Utilitarians believe that utility is difficult to accurately measure in order to sum it up, but that it the ultimate goal.  Mutilitarians believe that utility is easy to accurately measure by simply adding up money-metric utility (or mutility), as measured using willingness to pay in dollars.  Economists do it all the time for cost benefit analysis and GDP-as-welfare.  Utilitarians typically believe that there is diminishing marginal utility of wealth and this is one of the difficulties in measuring utility.  Each person gets a a different amount of utility from the same amount of goods.  That is the theory that Bill Gates gets less utility from finding a $20 bill on the sidewalk than a homeless guy.  Mutilitarians reject diminishing marginal utility and just add up dollars to find the greatest sum of mutility.  A homeless guy’s dollars have the same mutility value as Bill Gates’ dollars which means that Bill Gates is literally worth a billion times more than a homeless guy when deciding what is good for the economy.

In mutilitarianism, the value of any government regulation is determined by theoretically measuring the willingness to pay of all people and subtracting off the dollar costs.  This is called cost-benefit analysis.  The wellbeing of any group of people is measured by adding up all the dollars that they spend for final goods and services and dividing by the number of people in the group.  This is called GDP which is the holiest measurement of mutilitarianism.

Medianism seeks to make a tiny improvement to economic thought by replacing mutilitarianist measures with measures based on median income or expenditure.  For example, the medianist replacement for cost benefit analysis is median cost-benefit, and the medianist replacement for GDP is median expenditure.

There is nothing inherently ‘median’ about all of the positions that medianism.org advocates, but medianism is really about reforming mutilitarianism.  Instead of calling this reform movement ‘anti-mutilitarianism,’ I am naming the movement after a particularly salient, simple, and powerful method for reforming ethical economics, the median.  Economic policy should focus more on measuring the median individual rather than the mean dollars.  Medianism seeks to reform other tenets of mutilitarianism including:

• Egoism in its various forms: Mutilitarians are philosophical egoists.
  • Ethical egoism: moral agents ought to do what is in their own self-interest without altruism.
  • Rational egoism:  maximizing one’s self-interest is rational.  This is also a normative stance because rationality is normative.  And it is closely related ti ethical egoism.  After all, it is hardly ethical for people to systematically behave irrationally!  Most ethical egoists, like Ayn Rand, believe that ethical egoism IS rational egoism for this reason.
  • Psychological egoism: people are always motivated by self-interest.  Although this is described as a descriptive rather than a normative form of egoism, it is only natural for people to accept things that they perceive to be natural as being benign.  The natural tendency to accept the natural and seek to change things that are artificial or mutable is sometimes called the naturalistic fallacy, but it is hard to avoid making appeals to nature and students who learn that selfishness is natural really do become more selfish as if they decide that it is a good thing. Even apparently altruistic behavior is really motivated by the desire for personal benefit according to egoism.
  • Medianist alternative:  Embrace a median between egoism and altruism.  Real people are both selfish and altruistic.  Even the worst monsters of history sometimes probably did something altruistic for somebody (or perhaps an animal) at some time in their lives.  Hitler could never have become a powerful leader with devoted followers if he were completely nihilistic towards everyone.  Society would immediately collapse if people were never altruistic.  Furthermore, it is important to embrace and encourage altruistic behavior to strengthen society.  Many philosophers have noted that altruism could get excessive in theory, but it is hard to find actual examples of altruism run amok and it is easy to find examples of excessive selfishness.  Even if you agree with the psychological egoists that altruistic behavior is motivated by personal benefit, altruism is not always hedonistic.  The soldier who sacrifices his life to save his comrades is not doing it for the hedonistic stream of experienced pleasures he expects to get out of it.  Altruistic motivation is more complicated than hedonism.
• Positivistic fallacy:  Mutilitarians believe in the fallacy that economists can avoid ethics and do a completely neutral science.  This is nihilism.  Avoiding ethics is impossible in a social science like economics whose ideas have, in Robert Heilbroner‘s words, “shattered empires and exploded continents;  they buttressed and undermined political regimes; they set class against class and even nation against nation.”  ¡¿Yep, nothing ethical about that.  Move along now!
  • Medianist alternative: We need to recognize the ethical underpinnings of economics so that society can utilize a more ethical economics.  If we persist in the fiction that economics can be nonethical (positive), then we will end up with an accidental ethics like mutilitarianism.
• The efficiency-equity tradeoff:  Mutilitarians worship at the altar of efficiency.  This would not be so bad except that they emphasize that there is generally a tradeoff between efficiency and equity.  As a result, an unstated goal of mutilitarianism is to increase inequality!
  • Medianist alternative: There are many policies that increase both efficiency AND equity.  These are also medianist policies because they will benefit the median person.

In sum, mutilitarianism is money-metric utilitarianism.  It is a mutation of questionable morality and it should be replaced by medianism.  This is a clear improvement, and it is cheap and simple to do.  Although it is only a modest improvement, when multiplied across multiple policies that affect billions of people over decades or centuries, it is well worth the tiny investment it would require.