Mandatory Donations or How to convince the rich to pay more taxes

Amiram Yehudai

September 2023

Many economists and public figures agree that it is necessary to raise taxes, especially in the aftermath of the COVID-19 crisis. Most of them believe that the extra tax should come from the richest households or large corporations. However, in recent years it has been difficult to raise taxes, due to the political power of rich corporations and individuals, who oppose any such initiative. Instead, there were tax cuts that went mostly to the rich.  Furthermore, experience shows that it is difficult to collect taxes, even at the current rates, from these corporations and individuals, due to their ability to hire experts who help them minimize their tax liability. I propose an approach that would allow for an increase in taxation on wealthy individuals and corporations, in a way that may reduce the resistance of these circles to an increase in the tax burden.

The Western world has a long tradition of donations. Wealthy people and corporations donate very large sums to various causes, especially in the fields of education, health, and the arts. There is no doubt that they obtain satisfaction from their support of these causes, and they also get recognition for their contribution when institutions and buildings are named after the donors. Universities, hospitals, museums, theaters, and concert halls in the Western world could not have existed without these donations, and governments in most Western countries were able to reduce their support for these institutions based on these donations. However, not all wealthy people contribute the same amount relative to the volume of their assets or income. I propose to create a framework of "mandatory donation".

My suggestion is that the excess tax, whether it is an additional tax bracket on income above a certain threshold, or an extra level of property tax above a certain property value threshold, (or especially inheritance tax), be imposed in a way that allows taxpayers some influence over the use of tax money and provides public recognition for their contribution to society and state. For such a proposal to be effective, the structure of the national budget must be examined, and parts of it that may be characterized as separate financial units must be identified. Such a unit could be an infrastructure project such as a public transportation system (possibly multi-year), or a more routine budgetary item such as “Science Education in High Schools (perhaps in a certain region)". The size of these budgetary units may vary. At the same time, the potential for excess taxation should be examined in terms of the number of households and corporations whose income or wealth is within the scope of the proposed excess tax, and the extent of the expected tax revenue. If an initial examination indicates the possibility of creating a match between the expected amounts of excess taxation and potential financial units in the budget, it will be possible to establish such a taxation plan. Any taxpayer who is supposed to pay an amount of excess tax will be able to choose from the financial units that match his or her excess tax liability, with the understanding that this "contribution" would be prominently noted, much like the recognition that a donor receives from an institution to which he or she contributes. Since it is to be expected that there will be attractive issues that many will be interested in being identified with, a bidding mechanism would be needed, in which each excess taxpayer will rank several alternatives he or she is interested in, and the system will determine the match between taxpayer and financial unit according to priorities, using an appropriate algorithm. In any case, only a relatively small portion of the national budget needs to be included in this arrangement.

In conclusion, the proposal to allow a match between additional taxation of wealthy individuals, and funding units within the budget, can give people and corporations recognition for their success and contribution to the state. But for the proposal to materialize, research is needed that will examine in depth the components of the budget, and the expected excess tax volumes from corporations and individuals, to ensure that a match can indeed be found between them.

It should be noted that this proposal does not replace existing donation mechanisms, which are designed to fund activities that are not budgeted by the government. It should also be clarified that the proposal should not be viewed as contradicting the sovereignty of the state to set tax rates to the best of the legislators' understanding. Instead, the proposal stems from the recognition that in the current political situation in the US and many other countries, the political influence of big corporations and wealthy individuals makes it much harder for legislatures to increase the tax liabilities of this class of people and corporations. Perhaps this proposal, which provides the rich some influence over the use of their tax money, and entitles them to some public recognition, may facilitate tax increases and help to reverse the growth of wealth inequality. I believe the proposed scheme is especially suitable for inheritance or estate tax. It may be especially relevant in an era that requires investment in infrastructure, especially to address climate change, where specific projects may be assigned to tax revenues from increased corporate tax.