Funds of Social Want (FOSW) - A Better Way of Paying Tax?

13/07/2012 09:43 BST | Updated 10/09/2012 10:12 BST

A few years ago I developed the idea of tax reductions which were available if the deducted funds were used to pay for social benefits. Instead of paying tax to the government the amount that would have been paid would be sent to a charity of choice to enable social aid. The same sum of money that the individual would have paid in tax is still made but the funds are sent to the charity instead. Rather than the government making decisions on how and where the money is spent the fund distributes the income it receives. This decentralises the decisions and power that tax revenue creates for the government.

There are many benefits to this idea. The first is people get to choose where the money they have paid in tax is spent directly. The individual can choose which fund or charity will receive the money they were allowed to deduct from their pay cheque. This will allow people to have an impact on where the money they have earned it spent and have the ability to redirect the funds without government intervention if necessary. It will also make the expenditure of income more efficient due to the funds being smaller than the pooled government revenue.

The involvement of the individual who pays the income to the charity will also make these funds more efficient than government expenditure because the individual will have a vested interest in how the funds are spent. Most people will send money to the cause they believe in and wish to support. In addition to that they will be able to make an alternative decision on where the money is sent the next time they pay tax to redirect the funds if they are not happy with the way they have been spent. This is not an option with government revenue as there is no way to prevent the government from changing its channels of expenditure if they do not wish to.

There are however some drawbacks. The first and perhaps the most important problem is the funds may not be spent where they are needed because people may allocate the money on personal interests rather than necessities. This could however be overcome by limiting the options people have in where they can send the money they were allowed to deduct from their tax payment. Perhaps only certain charities could be offered the payments from these tax deductions allowing people to make decisions between each one or even select a number to distribute the funds to.

There may also be a loss of economies of scale which governments currently receive through the large funds generated in the pooled income they collect. This might be an issue in some sectors due to the smaller size of the charities, however they could unify their supply channels to maintain these benefits or even unify with international charities supply channels to gain even greater economies of scale. This is something that governments would find difficult to do, but international charities may be able to provide a larger system of networking and unity due to their shared objective. Governments on the other hand rarely have shared objectives, so bulk buying from the same supply channels would be difficult if not impossible in most cases.

I think the best way to overcome these problems and have the benefits of both systems is to use them in tangent. One way of doing this would be to allow a certain percentage of taxable income to be given to a Fund of Social Want (FOSW). The remaining income would be paid to the Inland Revenue maintaining a level of income to be received by the government. For example if an individual earned $20,000 a year and the taxable income was 50%, $10,000 would be taken in tax. To use the FOSW a certain percentage of the tax revenue could be allocated and deductable if sent to a charity. Let's say 50%, this would make the deduction and payment to the FOSW $5,000 and the remaining tax would be $5,000.

Another method that could be used to implement a FOSW system would be to give the money to selected government departments instead of a chosen charity. The individual who pays the tax would have the option to allocate a percentage of their tax bill to the department and service they want. This system is more democratic and would enable the taxpaying population to make decisions on how the public services they pay for are funded. The departments which provide the services they want will receive more funds and will become larger in size. This will enable individuals to have involvement in public sector expenditure instead of a governmental board making centralised decisions.

This system would enable competition. The ability to choose which departments receive taxpayers funds will not only allow individuals to be involved in public sector spending but it will create the opportunity to make the public sector become more efficient. Because the allocation of the resources would be in part funded by the taxpayer independently the ability to change where the funds are distributed would create competition between government departments. The departments that perform poorly will likely receive less funding due to their reputation. Conversely the departments that perform well will likely receive more funds due to their reputation. Funding will be based on merit and success.

This in itself will motivate departments to become more efficient or have their budgets cut. In addition to the competition factor the more successful departments, which would be run more efficiently, would increase in size and take on more responsibility rewarding a superior managerial team and increasing their spending power. Through this method of a FOSW system the size of the public sector remains the same but the free market advantages of efficiency and competition are attained. The current taxation and budgetary system negate these benefits.

The idea of a FOSW system allows a high level of wealth distribution to be achieved through a mandatory sacrifice of funds through either a free market or public sector interactive model. If you are interested in the implementation of the concept I wrote a taxation system a few years ago that utilised the facility. If you wish to see a video tutorial demonstrating the application of the tool you can here. The video lasts for twenty five minutes.