Charitable giving in religion

The first piece of this puzzle came to me on a financial independence facebook group. A muslim member of the group was asking about how the concept of zakat fit in with reaching financial independence.

Zakat is a religious duty for all Muslims who meet the necessary criteria of wealth to help the needy. It is a mandatory charitable contribution, often considered to be a tax. Zakat on wealth is based on the value of all of one’s possessions. It is customarily 2.5% of a Muslim’s total savings and wealth above a minimum amount known as nisab.

The member of the group was trying to figure out how financial independence is possible while still following zakat. Their interpretation was that they would need 2.7 million in investments to cover their family’s living expenses of 40,000€/year as well as to pay the 2.5% to zakat if they were to use the 4% safe rate of withdrawal. For them, this means they will never reach FI in their lifetime.

A very interesting discussion followed.

Some compared this to tithing in Christianity which says to give 10% of your income to the church/charity.

One reader said that they personally try to look at the spirit of the law and the intention/culture at the time it was written. The spirit of the law was to look outside yourself and help those in need. When that law was written, the culture likely didn’t have taxes to the extent we have now. Today, part of our taxes go towards the poor through social assistance, welfare and disability programs as well as to education and recreation programs. If the government is collecting from you to give to the poor, could zakat be reduced to 1% for example. They also asked that if someone is volunteering and giving in time in lieu of money how does that play out?

There were many more ideas shared on how to interpret the spirit of this law if you want to read the full thread here but this concept sat with me and then I was presented with another piece of the puzzle.

Why don’t we donate more to charity

I know someone who is a nurse in the COVID ICU ward and I heard morale was very low just after Christmas when they were inundated with very sad cases. I wanted to do something to make them feel more hopeful so I ordered them a food hamper as a small token of appreciation. They were so touched and reciprocated by sending us some books for our son as I had mentioned we were sorely missing the library for having to re-read the same books at bedtime over and over and over. They also included a book for me. I never would have read or bought this book on my own but when offered it, it seemed interesting and ended up being really good.

It’s a book by an Irish professor called “Never mind the bollox, here’s the science – A scientist’s guide to the biggest challenges facing our species today”. It covers topics like free will, the anti-vax movement, the cost of medicine, dieting, depression, drug legalisation, gender differences, racism, climate change and so on. It includes a bit of history as well as a scientific viewpoint on each topic based on fact and scientific studies. Not one bit of fake news, so refreshing.

One chapter asked “why we don’t donate more to charity?”. It talked of various motivators for people to donate to charity. One study found that 85% of donations were made “because they were asked”. Another study found motivators to include:

• trust in the charity
• the need to help others
• to contribute to a cause important to them or someone they know
• to get a tax break
• to look good to other people

It also gave some very stark stats demonstrating how badly divided the world is (and perhaps always has been) when it comes to wealth:

• As it stands half of the world’s net worth belongs to 1% of the world’s population
• The collective net worth of the world’s poorest half (3.6 billion people) is equivalent to that of just eight of the world’s wealthiest men
• The top 10% of adults hold 85% of all the wealth, with the other 90% holding the remaining 15%

It covered how most of the super-wealthy actually do a lot of good with their excess cash through donations and philanthropy but that the decision on what cause to donate to is left up to individuals and what might be important to them personally. This spreads the wealth ineffectively.

More than half of billionaries are involved in philanthropic giving either through organisations that they themselves established or by other means. 35% of them have their own charitable foundations.

66% of billionaires give towards education (scholarships, educational support, outreach programs and teacher training) with

• 29% of all billionaire donations going to education
• 14% goes to healthcare
• 10% goes to arts, culture and sports
• 8% goes to environmental issues and
• 5% goes to religious organisations

Enter taxation

While it’s easy to complain about our governments wasting taxpayer money where money is seen not to have been spent effectively, it’s also important to look at the bigger picture and see what our taxes actually pay for.

First let’s see how much of our government’s revenue comes from which taxes.

In 2016 (I was too lazy to dig out a more recent report), 31% of the annual government revenue came from income taxes including USC, 21% came from VAT, 14% came from PRSI, 11% came from corporation tax and 9% came from excise duties. Only 1.4% combined came from dividends and CGT.

Looking at the 2020 Ireland Expenditure Report the country had 70 billion to spread across various departments. Below is the breakdown by department for all expenses of 2% or above.

• 32% went towards employment affairs and social protection
• 28% went to health (twice as much as the billionaire donation trend)
• 17% went to education and skills (12% less than the billionaire donation trend)
• 7% went to justice

Below is the detailed monetary breakdown per department including core and capital expenses.

Core expenses is money spent by the government on a regular or ongoing basis. The majority of government core expenditure involves the day-to-day provision of essential public services. Operating costs and wages for public sector workers account for a large portion of government core expenditure.

Capital expenses are ‘once-off’ projects or on infrastructure that will have long-term benefits for the country. Infrastructure refers to basic facilities, structures and services needed for the country to function including water, power lines, transport, communications systems, schools and hospitals.

This might start to sound familiar for anyone that’s ever played anything like Sim City or Tropico.

If you’re interested in the detailed split for each department you can check out the related sections in the full report. To give an idea of what each department pays towards:

Employment and Social Protection

• old-age pensions
• working-age income support
• working-age employment support
• illness, disability and carers
• child benefits
• jobseekers’ benefits
• supplementary payments

Health

Core expenses include:

• public healthcare hospitals and services (day to day running costs of hospitals and healthcare facilities eg: staff wages, buying medicines, light and heat
• primary and community services
• mental health services
• disability services
• services for older people
• palliative care
• health and wellbeing initiatives
• ehealth
  • electronic health records
  • infrastructure upgrades for national systems such as national medical lab information system, medical oncology clinical management system, national integrated medical imagining system

Capital expenses include:

• building new hospitals
• buying new equipment and ambulances

Education and skills

Core expenses include:

• expenditure to enable schools and colleges to operate eg: teachers salaries, light, heat and maintenance of school buildings
• national training fund
• higher education
• skills development

Capital expenses include:

• building or extending schools
• buying furniture and ICT equipment for schools

Justice

Expenditure to ensure our legal and judicial systems operate, e.g. judges’ wages, garda wages and operating costs of prisons.

Agriculture

Expenditure to help farmers and ensure the sector is maintained, e.g. income supports to farmers and funding for a wide variety of rural development schemes.

Defence

Expenditure to maintain defence of our country, eg: wages to members of the defence forces and civilians working for the sector, maintenance of facilities, training costs, etc

Transport and tourism

Money spent on maintaining our existing transport systems as well as providing funding for tourism promotion agencies such as Fáilte Ireland.

How to feel better about taxes

The book ended the chapter talking of the role of taxation.

Instead of the approach taken by most of the super-rich, which is to avoid taxes as much as possible to grow their wealth well beyond what they could ever spend in a lifetime, then to turn around and give most of it disproportionately to charities of their choosing, why not pay taxes to a government who democratically decide how best to distribute that money in the best interests of the country that you are living in?

Imagine how much better off we’d all be if corporations did not have ways of avoiding taxes? If the government had more money from taxes, could we live in a community with universal basic living income for all? Which has a whole range of benefits from better work conditions, fewer working hours, more time with family and friends, less money stress allowing people to be more creative and innovative to solve big world problems like climate change, gender inequality and racism for example.

While I’ve always had it in the back of my head, that taxes pay for our infrastructure and services, it never really made me feel better about handing my money over to the taxman but when I think about the bigger picture and of the path to financial independence I feel like I’ve had an aha moment.

What is the path to financial independence?

1. Keep your expenses (and taxes) as low as possible without compromising happiness
2. Invest 50%-80% of your income for 10-15 years
3. Have 25 times your annual expenses invested to cover an annual withdrawal of 4%
4. Reach financial independence and spend your time as you wish which could include earning even more income if you chose to continue working on projects that interest you
5. If you continue earning once you’ve reached FI like I intend to do, it means I will have more than enough money to remain financially secure and continue to build wealth beyond what I need to sustain my family until death.

What will I do with that extra money that I will possibly never fully spend? Will I donate to a charity of my choosing? Will I leave it all to my kid?

Personally, I’m not looking to build a legacy. I want just enough to be financially free to spend my time as I wish without worry of money and eventually to be able to make a contribution to the world and my community by advocating for financial literacy and security for all. I hope to impart financial literacy to my son so that he can build towards his own financial freedom. I do not want to hand it all to him as I think it’s important to instil a good work ethic and self-sufficiency.

So if my end goal in financial independence is to have more time to contribute more value to society (remember maslow’s hierarchy of needs?), why not contribute to society along the way in the way of taxes?

Instead of trying to avoid or optimise paying taxes as much as possible on the way to financial independence, pay as I go knowing that a good portion of those taxes is going to those less fortunate than me. Paying more taxes along the way may take me a bit longer to get to full financial independence but I’m not going to feel angry or annoyed when paying my investment-related taxes going forward and instead look at it as a way to give back to the community I’m living in. It’s actually been a really liberating change in viewpoint.

What do you think?

When I first came across FIRE, there was a lot of content focused on US and Canadian tax systems which on the surface seem much better in terms of investments and I scoured the internet to find similar ways to invest in Ireland as favourably to no avail. It seems that the Irish government has de-incentivized savings as they’d prefer people to stimulate the economy and spend instead. Every investment option is so punitively taxed that it almost seems worthless. I even considered moving my money back to Canada to invest it there but would have complicated matters from both a tax and foreign exchange perspective.

However… leave it to me to figure out a way to justify anything (just ask my husband), I think I found a way to put my complaints to rest based on 3 things:

1. Income tax rates are not as bad as they seem
2. Earning potential is higher in Ireland
3. Earning some interest is better than earning no interest

1. Income tax comparison

When I took a step back and compared my Canadian income to my Irish income I realised something interesting. The taxes aren’t that different.

Looking at my husband and I’s combined take home in Canada and dividing by the gross income as per our tax slips, the net effective tax rate was 29%. When I compared that to the following 12 months in Ireland, the net effective tax rate was 33%, so not much difference and we were earning more.

Income tax bands

One of the big differences that make the income taxes more comparable is that in Canada in 2019, an individual can only earn the equivalent of 8,238€ before you start paying taxes, but in Ireland you can earn 16,500€ before you start paying the 20% rate (this is the net effect of the 3,300€ and 1,650€ credits).

So while it seems that on the surface you are paying 52% income tax for anything over 35,300€ in actuality it looks something like this:

Looking at sample salaries starting with 20,000, which is just above minimum wage, here is what you actually pay in tax including PRSI and USC payments when you take into account your basic income credits and personal allowances, these figures do not include any other tax credits that may be applicable to you like medical or home carer credits which would further reduce the net tax rate:

Note that even at a salary of 100,000€ you are not at the 52% net tax rate that is so often quoted. In fact an individual would need to be earning over 2 million before their net taxes came to 52%.

2. Earning potential is higher

Now I know this won’t be the case for everyone but when my hubby and I were both working, we were taking home 60% more in Ireland than we were in Canada. This is due to higher paying contract roles and higher salaries in tech/pharmaceutical companies. Even when you take into account the additional 4% in income tax were we paying compared to Canada it still equates to a 56% increase in take home and I wouldn’t have considered our salaries to have been low when we were in Canada.

Just search the news for daily rate contract roles in Ireland and you will see how many more opportunities there are for those types of roles compared to Canada.

3. Earning some interest is better than earning no interest

In this case I’m going to look at the tax rates applied to Irish domiciled ETFs. There may be other options which have lower tax rates but based on my research, I’m happy to continue investing a large part of my portfolio in ETFs.

Even though taxes on dividends and gains for Irish domiciled ETFs is 41%, the fact remains that while the tax bill will be hard to swallow, it’s better than not investing at all.

For example: say you manage to save 100,000€ and that earns 8% over 10 years bringing in 115,000€ in growth. The tax man takes 41% (47,150€) which still leaves you with growth of 67,850€ and a portfolio worth 167,850€. Compare that to not investing and losing 1.9% to inflation each year, your 100,000€ would only be worth 82,545€.

So if you compare paying taxes on investments to not doing anything with your money, your opportunity cost would be 85,305€ or 8,530€/year.

I don’t know about you but I know which option I prefer.

Another silver lining to help swallow that tax pill, is that you are getting services and infrastructure for that money. It’s hard to stomach sometimes when you see it mismanaged but we need taxes to run a country and even if you are no longer earning traditional income, you will still be availing of the services provided by the state and so it’s only fair to contribute a portion of your passive income as well.

I’ll close by saying that, when you get your tax slip at the end of the year and you see how many thousands of euro have been taken in taxes, you don’t really think too much about it. It’s an unavoidable cost and part of working. The same outlook should apply to investing and although you should consult a professional to try and optimise your tax burden, hopefully looking at taxes in a different light will make it easier to start investing if you haven’t already.