Voluntary Taxes?!

“There is no such animal!”, says a popular Bulgarian saying and in this case we agree.

On August 9, “24 chasa” newspaper published a brief article, which describes an idea to enable municipalities to impose special voluntary taxes, set in the government’s decentralization plan until 2013.

First, let’s clarify the terminology. The definition of a tax is: “non-refundable and gratuitous (without a direct benefit) payment, unilaterally imposed by the State, an element of the budget’s revenue, which together with other revenue is allocated to meet public needs. “

A more careful look into the proposal shows that this is in fact not a tax because the payment is voluntary (not imposed), and the money collected is spent on specific programs and projects of public interest (i.e. the municipality is unable to allocate these funds as it sees fit). In this sense, those payments are a transfer from citizens in favor of a town, for example, which is close to charity. Furthermore, this is just a possible tool for municipalities to raise additional revenue, but they can as well refrain from using it. The very definition of these payments as a tax, however, inevitably leads to immediate negative reactions.

The idea itself is interesting and deserves to be examined more closely with its strengths and weaknesses. A brief overview of the concept and its practical application was published late last month in The Boston Globe.

It turns out that “voluntary taxes” are not a myth. Since 1843 the U.S. Treasury maintains an account named “Gifts to the United States”, which is a general fund to which citizens can contribute. As of 1961, it’s been possible to donate money specifically to reduce the national debt, the 2009 donations exceeding 3 million dollars. In the late 1970’s, states began to include boxes on their income tax forms that you could check to make voluntary contributions to various causes, recipients being both public institutions and private non-profit organizations. In 2008, for example, the Massachusetts Natural Heritage and Endangered Species Fund has received over 200 thousand dollars of donations from taxpayers in order to protect threatened species, such as the bald eagle. The examples do not end there (a total of 41 states provide such an option when filling out a tax form) and are not limited to the U.S. alone.

What is the potential of such exotic methods for collecting funds by the state and local authorities has been the focus of several surveys conducted by economists from the University of Texas. The results show that, at least in laboratory conditions, people are surprisingly willing to donate money to the state and such donations are not significantly smaller than those provided to private charities. The authors conclude that resistance to paying taxes may not be due solely to the reluctance associated with losing our money, or the general distrust in government (and the municipal administration). Major role plays perhaps the lack of control over the spending.

Economists point out that in experiments where the taxpayer has been given more opportunity to direct the use of the money he parted with, donations have doubled. Thus, if the citizens have initially available $ 20, they are willing to donate an average 1.68 dollars to general funds, donated money for research to fight cancer were on average 5.52 dollars, and for disaster aid – $ 4.04.

According to the authors, applying such an approach to fundraising by the state and municipal institutions could transform our understanding of the state and the role of its citizens. We would view paying taxes not as an unconditional surrender, but rather as an assertion of our values, investment in society and a means to achieve positive change, albeit limited.

“Voluntary taxes” are not immune to problems however. First, they cannot bring sufficient funds to maintain a country or a community. The realistic scenario is that the widespread adoption of the approach would be moderate, with limited scope. Second, it is conceivable that this scheme can become a tool of wealthy individuals to exert influence.

The main critical point when considering the concept is the relationship between citizens and state. Ultimately, governments are elected to make informed decisions regarding the allocation of resources in society. Providing too much power to people to control  the spending of tax revenue would prevent many of the activities of government because its ability to pursue the national priorities it has set would be restricted.

Also, we must not ignore the low level of trust in governments and municipalities, especially in Bulgaria. Opportunities for abuse and inefficient utilization of any donations will be a serious obstacle to establishing a truly effective and publicly acceptable scheme for the collection of “voluntary taxes”.

Another likely obstacle to the imposition of a “voluntary tax” in Bulgaria for certain municipal projects would result from the relatively low income of the majority of the population in those municipalities which are experiencing the most extreme shortage of funds. I.e., on the one hand, we have a poor community, which would be most in need to impose a “voluntary tax” and, on the other hand,  there is a poor population with a high proportion of the elderly and unemployed, which is unable to part with any more of its incomes, no matter how noble a specific cause may be – building a children’s playground, nursery / garden, a new road or sidewalk.

In sum, although the idea of “voluntary taxes” at the municipal level sounds attractive, its application in Bulgaria seems highly unlikely at present. Experience in other countries where such a form of “taxes” has been applied, shows that their use is limited exclusively to causes for which people generally tend to donate – sick children, research on certain diseases, overcoming disasters, etc. I.e. it would be much easier for municipalities to enhance their capacity, to prepare quality projects under different EU programs (e.g., “Regional Development”, for rural development, etc.) than to invest in a system of ” voluntary taxes “, which ideally will generate extremely limited resources.

* Intern in IME.