When Helping the Poor Became a Tax Strategy
Social Enterprise and Poor Law in pre-Famine Ireland
In the decade before the Great Famine, Ireland quickly built one of the most extensive microfinance systems in the world. Across the countryside, hundreds of small loan funds sprung up, lending tiny sums to farmers and labourers. This was not a rich country experimenting with finance. Ireland was poor. And yet, by the 1840s, it had more formal microfinance institutions per capita than anywhere else in Europe or North America.
Why?
I co-wrote a paper on this boom with Rowena Pecchenino. The answer turns out to be less about charity and more about incentives.
A Country Under Pressure
In the early nineteenth century, much of rural Ireland was de-industrialising. Cottage industries were being wiped out by cheaper British imports. Whatever protection had existed faded away when Ireland joined the Union and rural households were exposed to full-blown industrial competition.
The result was striking inequality. Wealth accumulated in the hands of merchants and large landowners, while much of the rural population lived in extreme poverty, often in mud cabins (a replica is shown in Figure 1).
At the same time, the British state was preparing to introduce something Ireland had never had before: a poor law, funded by a new tax on property. While ‘an old tax is a good tax’, a new one is never popular.
Social Enterprise – Irish style
Before the 1830s, Ireland did not have a formal welfare system. Responsibility for poverty was diffuse and was handled by through charity and ad hoc schemes.
Some of these were surprisingly innovative. Jonathan Swift, the Dean of St. Patrick’s and author of Gulliver’s Travels, was a pioneer in the use of microcredit to help alleviate poverty. This was followed up by the Dublin Musical Society, it famously used proceeds from performances (including the first ever public performance of Handel’s Messiah) to finance a small loan fund to make loans to the ‘industrious poor’.
These were early forms of what we’d now call social enterprise.
But in the 1830s, something changed. The threat of a new poor law meant landowners would soon face a direct tax burden tied to poverty in their area. Loan funds suddenly became more appealing, they were no longer seen as charitable they were useful to property owners. Local property owners came together and utilised the loan fund system to try and avoid the new property taxes. Cheap credit could help the industrious poor, avoid the workhouse and reduce pressure on the poor rates (so contemporary pamphleteers argued).
Why there and why then?
A lot of recent work tries to explain this using modern econometric techniques. One approach uses the geography of modern musical societies as an instrument (pun unintended!) for eighteenth-century institutions (i.e. the future influenced the past). This raises two problems. First, it assumes a continuity that isn’t established, there’s little reason to think modern societies map cleanly onto their eighteenth-century predecessors. Second, at least in some cases, these societies were still active into the nineteenth century. They weren’t historic relics and so the instrument is not excluded from the outcome and it may be capturing a direct effect rather than a historical one.
Once you see that, the identification starts to unravel.
A simpler explanation
Instead of forcing a modern causal design onto the problem, we took a more direct approach and simply looked at the timing.
Loan funds appeared exactly when the poor law is introduced and where the incentives are strongest. The key variable was simple, how many people were exempt from the tax versus how many had to pay for it. We used the fact that the loan funds appeared at the same time as various efforts to introduce the poor law to explain why loan funds were established when they were and where they were located.
A central feature of the poor law was an exemption for poor rates for holders of land valued under £4, so places with more people exempt from the poor law meant a greater incidence of taxation fell on landowners instead (this is shown in Figure 2).
What we found then was that inequality influenced the uptake of loan funds as a way to try and mitigate the impact of the poor law.
Lessons for today?
The usual story is that social enterprise emerges where the state is absent. Ireland suggests something more complicated. Here social enterprise expanded because the state attempted to establish a welfare system funded by a local tax. Faced with this new burden, the local elites didn’t just resist, they adapted. They built institutions that both addressed the social burden and reduced their own exposure.
And it raises a broader question. When new forms of taxation and welfare emerge, whether driven by technological change or something else, how will people respond?