Welfare implications

Church taxes and assignment taxes are helpful instruments to raise revenues for religious organizations and also to raise contributions to charitable causes in general above their equilibrium level. This can be done by setting the tax rate sufficiently high and by distributing the tax revenues to causes that would otherwise be neglected by donors.

47 Some of the model results concerning church membership coincide with Borgloh’s (2012), while others do not. In both models, individuals who have a disutility from being a church member decide against membership.

Borgloh’s model predicts that individuals who are in a regular solution (i.e. who make additional charitable contributions) do not disaffiliate when the church tax increases. In my own model, this is only true when , because only then an increase in church taxes can be compensated perfectly by a decrease in charitable giving. A difference between Borgloh’s and my own reasoning exists concerning income: while Borgloh claims that individuals with higher income are more likely to be church members, I derive the opposite hypothesis. The reason for this difference is that Borgloh models church taxes are independent from income, while in my model taxes grow with income.

However, within the model framework church taxes and assignment taxes have a negative impact on welfare. Since taxes potentially disturb private decisions on the amount of contributions and the causes they should benefit, the utility of individuals is reduced compared to the benchmark voluntary giving system. Therefore, judging only from the point of view of the representative individual in my model, the welfare-maximizing system is the voluntary contributions system.

However, the model completely neglects that there are usually beneficiaries of the higher than individually optimal contributions in the tax system. The taxes collected can be used for creating private goods for some individuals that are not captured in the model, such as church or state employees who are paid through church and assignment taxes; or children, poor people and other groups of society who benefit from the charitable activities of the church or of secular organizations. Taxes can also be used for producing public goods, such as fighting poverty, nurturing of democratic attitudes or conservation of the cultural heritage. Neither individuals who receive private benefits from the distribution of taxes nor any public goods are part of the model. The reason is that the model is intended to focus on those who pay the taxes. Public goods are not included because they do not change individual decisions when the number of church members (taxpayers) in society is large.

In order to evaluate overall welfare in the church tax system, the utility losses of the church tax payers must be compared to the increase in utility of beneficiaries and the total benefits from public goods created. This is beyond the scope of this model.

In fact, churches in Germany justify the collection of church taxes at least partly with the argument that the money is used to support causes that would otherwise be neglected by donors, e.g. organizations helping children receive more funding than organizations helping homeless people or drug addicts. In the same vein, church members tend to support their local congregations and neglect denominational bodies. If it is true that private donors support a limited amount of “popular” causes, while other causes that have an equally high or even greater impact on society are not supported, and if the church behaves as a benevolent organization that corrects this inefficient distribution, then church taxes can also be justified.

Still, it is important to keep in mind that church taxes in Germany bias giving towards higher revenues for churches and lower revenues for secular organizations. Unless there is convincing evidence that the church has an efficiency, knowledge or scale advantage over secular institutions, this bias is difficult to justify. The same reasoning applies with respect to

democratic legitimization for the public goods it provides and the subsidies it concedes, while churches do not.

If one accepts the assumption that voluntary giving is inefficiently low without the tax system in place, then the tax assignment system appears to be the alternative that provides the higher welfare. First, since nobody can escape from the duty to pay taxes in the tax assignment system and free-ride on the contribution of others, the total amount of taxes collected is higher and the tax rate can easily be set at the welfare-maximizing level.⁴⁸ Second, since avoiding the tax by disaffiliating from the church is not an option, everybody who has a positive benefit from being a church member can be a member. In the church tax system, some individuals drop out of church even though their membership utility is positive. This can be rational when they weigh the individual costs of membership against the benefits, but might be the wrong decision when social benefits of paying church or assignment taxes are included in the equation. Third, in the church tax system the possible benefit of increasing the level of public goods comes at the cost of giving these goods a religious touch. This is because in the church tax system above-benchmark revenues pertain to the church, while secular charitable organizations even lose revenues. The tax assignment system offers two different choices for the individual (assigning taxes to the state or the church), therefore individuals can decide for the alternative that offers the best combination of subjective importance of the field of giving (captured by and ) and the fitting parameters (captured by and ). It is a priori unclear in the tax assignment system whether religious or secular institutions receive higher revenues than in the benchmark. It is even possible that both profit at the same time.

Finally, there are some more arguments in favor of a tax system compared to a voluntary contribution system that are outside the scope of the model. A tax system likely reduces transaction costs, because charitable organizations need not spend money on fundraising activities and the maintenance of donor relations. The tax system also mitigates the influence of high-income donors because they are not free to decide how their money is used. The disconnection of the amount given and the distribution of funds is particularly high in Italy where individuals cannot earmark the amount of taxes they personally pay for use by the government or the church. In fact, the total amount of revenues of the “otto per mille” is distributed according to the individual decisions, whereby the vote of each single taxpayer has the same weight.

48 It should be noted that the actual tax rate of the “otto per mille” in Italy is much lower than the church tax rate in Germany.

3.6.4 Changes to the church financing systems - common suggestions and recent