A Voluntary Buffett Rule

06/08/2012 03:25 pm ET | Updated Aug 08, 2012

We can now add actor Will Smith to the growing list of celebrities, business leaders, and politicians who have recently come forward to complain that they don't pay enough in taxes. Bill Gates has volunteered to pay more. So too has Warren Buffett. Most colorfully, the author Steven King recently penned a piece for the Daily Beast, "Tax Me, for F@%&'s Sake!"

We should take them up on their offer. But this does not necessarily mean raising everyone's taxes. If we can figure out a way to get the rich who want to contribute more to the government to pay voluntarily, then everyone will be better off.

Nothing prevents taxpayers from paying voluntary taxes. The federal government has accepted voluntary donations to the Treasury since the 1960s, and receives about $3 million per year against a deficit now exceeding $1.3 trillion. Many states also allow individuals to pay more taxes voluntarily. Few do. Case in point: Virginia's "Tax Me More Fund," which was implemented in 2002 to close a budget shortfall. Over the past decade, the fund has taken in a total of about $12,000.

These numbers are striking because of the size of voluntary contributions to charities each year. Individual taxpayers voluntarily gave $212 billion to charity in 2010, according to Giving USA Foundation.

So what explains the gap between the rhetoric of voluntary tax and the reality? One possibility is a view that real progress can be made on solving government problems if many people pay. While true, the same can be said of charitable giving. The Red Cross can't really do much good if only one person gives a little bit, but it can do enormous good if thousands do.

The problem can't be the size of the problem either. Many charities raise money against huge needs, like reducing poverty in Africa or educating children in failing urban school districts. A dollar given to the local soup kitchen is just a drop in the bucket, in the same way that giving a million dollars to the US Treasury would be.

The big difference between charity and government is choice and competition. Wealthy individuals with a preference for government action may not voluntarily give to government because they are worried about how the money will be spent. Politicians, who may serve their own interests or may spend in ways that donors do not like, spend government money. The government cannot credibly commit to spend money on deficit reduction or the poor; it just might spend it on bombing Iran or building a bridge to nowhere.

One way to solve this problem is to allow taxpayers to earmark their voluntary tax payments as they would if donating to a charity. Will Smith could voluntarily pay $10 million (half his pay for each film he makes) to fund the food stamp program (or perhaps even individual families) or FEMA, instead of giving money to a local soup kitchen or the Salvation Army. The government already does this to some extent, allowing every taxpayer to voluntarily contribute to the public financing of political campaigns by paying an extra $3 in tax. This program should be expanded to allow itemized contributions to various government functions.

In a world where extra tax can be assigned to particular government functions, one could imagine agencies competing for funds in valuable ways. As April 15th approaches each year, federal agencies could make their case for why the rich should give them money. This kind of competition could encourage efficiency in the delivery of government services.

One objection to this plan is a belief that every dollar raised in voluntary taxes could simply free up a dollar that would have been spent on that purpose to be spent somewhere else. But politicians might view the voluntary contributions as signals of political support, and, in any event, budgetary controls might be put in place to ameliorate this problem.

Work by Arthur Brooks, president of the AEI, suggests political ideology explains a great deal of charitable giving: people who are strongly opposed to government mandated income redistribution give nearly 12 times as much to charity as those who strongly favor it. The takeaway is that some people prefer to help others through charity, while others prefer the government to serve this role. Making government more like charity can offer the latter group a means of doing so, without coercing those who prefer private action.