Every time I hear the word צדקה translated as "charity," I want to shake my head, mainly because we have run into yet another instance where translation is inadequate. In English, the word "charity" comes from the Latin word caritas, which means "from the bottom of the heart." The etymology of the word "charity" is undoubtedly influenced by Christian thought. For Christianity, you give because your love for Jesus is so overwhelming that your default is to give. From a Christian perspective, the love you feel towards Jesus and the fellow human being to whom you give is the ultimate arbitrator in terms of how well you gave, whether you give a dollar or your entire savings. However, Christianity views such things as large amounts of altruistic giving and vows of poverty in a positive light because money is an earthly attachment, which for Christians, is inherently a vice.
In Judaism, it is slightly different. The primary purpose of giving money to the poor is not out of love, which is made clear by the word צדקה .צדקה comes from the root צדק, which means "justice." We don't give because are hearts are inclined to do so. We give because it's the right thing to do. According to Deuteronomy 15:7-11, the ultimate purpose of giving is to help alleviate poverty. That is why it is no accident that the highest level of giving, according to Maimonides' Eight Levels of Tzedakah, is to give a loan substantial enough where the recipient because self-reliant enough where he no longer has to depend on צדקה.
Based on this, it would seem that צדקה functions as a means of poverty relief. If that were solely the case, we would need to be able to explain why even someone dependent on צדקה has to give (Mishneh Torah, Mattenot Ani'im 7:5). Having poor people give other poor people צדקה seems to be an inefficient way of dealing with the plight of poverty. That is why צדקה functions in other ways. As Rabbi Jonathan Sacks states, giving is an essential to human dignity. If happiness is correlated with not what we take, but with what we give, the privelege of whatever wealth we have gives us the opportunity to do for others.
This brings me to my second point. In the Midrash (Shemot Rabbah 31:5), there is a dialogue based on Psalm 61:8. David is talking to G-d and essentially demanding that He equalize the world [in terms of economic disparities]. G-d replied, "If I make all men economically equal, who will practice kindness and charity?" Without poverty, people would be self-reliant. There would be no need to practice compassion. There would not even be a need to have intrapersonal relations if everyone's needs were provided for. That is why many of the levels on Maimonides' hierarchy of giving have to do with the dignity of the recipient. We are to develop giving souls, considerate souls, and bond with our fellow human being that needs our help. צדקה is an act that simultaneously gives the giver and the recipient the dignity of being human.
To conclude with a quote commonly attributed to Rabbi Israel Salanter, the founder of the modern-day Mussar movement, "Spiritual life is superior to physical life, but do realize that the physical needs of another is an obligation of your spiritual life."