From the Dean

The Appeal of Charity

Summer 2009

How many of us actually enjoy paying taxes as much as we enjoy giving to charity?
One of the great virtues of private philanthropy, as opposed to government programs, is that the funding is voluntary. People who give to charity actually enjoy making the gift.

Charities offer the further advantage of flexibility with a minimum of red tape. Let’s say we want to provide food to the homeless. To persuade the government to do this, we would have to lobby key legislators to appropriate the funds, and then lobby key administrators to implement the program. If we rely on charity instead, we can simply buy the food and hand it out. Charities find it easier than governments to experiment with new approaches, and to compete with each other.

Nonprofits also have access to an important source of expertise: They can rely on sophisticated donors to give advice and monitor performance. The typical nonprofit manager has deep expertise about the nonprofit’s mission, but is less comfortable crafting budgets, structuring departments, and refining communications strategies; yet these challenges are second nature to the successful entrepreneurs and for-profit managers who are significant donors to charities. Donors also have ample opportunity to evaluate the performance of the nonprofit’s programs—so they will continue to fund only programs that are working well, while cutting off programs that are not. It is hard to identify an analogous group in
government with the requisite expertise, access, and incentives to play this role as effectively.

Since donors are advising and evaluating competing nonprofits in this way, the government is spared from replicating this effort. If donors have enough confidence in a program to contribute their own money, that is a strong indication that the government should do so as well, as long as the charity falls within parameters defined by the government. Our tax system enables the government to piggyback on private judgments in this way. When donors deduct their charitable contributions, they route tax dollars to programs they support.
In granting this tax benefit, the government allocates money to a range of programs at low administrative cost.

Another, more familiar reason to subsidize charity is to induce more of it. Recent studies suggest that donors do indeed increase their contributions in response to tax incentives, but only modestly. To be more effective, our tax law needs to take account of a reality of charitable giving: The first dollar we give is easier than the last. As a result, the tax
benefit should become more generous as we give away a larger percentage of our income. Indeed, the average American household earning more than $100,000 gives 3 percent of their income to charity. Arguably, there is no need to give any tax benefit when someone gives only 1 or 2 percent of their income, since they would probably give this amount anyway. Instead, we should save this money, and use it to offer an especially generous government match when people give, say, 5 percent or more to charity. Unfortunately, instead of having the subsidy increase in this way, our system currently does the opposite: The deduction is disallowed when people give away more than 30 percent (or, in some cases, 50 percent) of their income to charity. It would be much better, instead, to offer a credit that increases with the percentage of income given to charity.

Let’s hope the government makes this change by the time we file our taxes in 2010. Meanwhile, it is worth remembering—and, indeed, celebrating—private philanthropy’s vital position in our communal life.

—David M. Schizer