David Pozen has published an interesting article on tax and foreign policy, Tax Expenditures as Foreign Aid, 116 Yale L.J. 869 (2007), available on SSRN at http://ssrn.com/abstract=951236. As he notes, the OECD generally ranks the US well below most other developed countries in the amount of foreign development assistance provided to other countries and our record is viewed as problematic by those hoping to see more progress on global poverty. (Pozen references Jeffrey Sachs, whose "The End of Poverty" suggests that global poverty could be ended with appropriate commitment from major economies such as the US.)
Pozen says we haven't been counting US foreign aid appropriately, because we don't include the subsidization of private aid efforts accomplished through tax expenditures. Since Stanley Surrey first put forward a tax expenditure budget to help us understand better the way the deductions, exclusions, credits and preferential rates provide subsidies for everything from homeowners (or maybe home builders and banks) (the mortgage interest deduction and the property tax deduction) to professionals who discuss business over meals (or restaurants) (the business meal deduction). Pozen suggests that overseas spending of charitable organizations represents, in part, privatized US foreign aid, because of the tax expenditures in support of charities. Charities are often exempt from taxes at all levels of government--property taxes, sales and franchise taxes, income taxes, and gifts to charities may be deductible for federal and state and gift and estate tax purposes. Accordingly, "the government acts as an indirect fiscal sponsor of the beneficiary organizations, in all that they do...[and] it is hard to see why, analytically, the tax expenditure portion of these funds--the portion effectively paid for by the government--should not count as official aid." Id. at 871.
Pozen reports that international charity has grown significantly over the last few decades. While they make up only about 2% of the nonprofit sector, many international and foreign affairs charities were founded since 1970 (62% of them since 1985). And many domestic charities have expanded their international focus. Id. at 872. Determining how much the US spends on foreign aid through these tax expenditures is not easy, however, because of the range of tax expenditures supporting their work, the lack of a direct correlation between tax expenditures and charitable contributions, and the fact that some cross-border work clearly doesn't constitute foreign aid (support for missionaries whose goal is to convert Muslims to Christianity would not count, for example). Making a stab at rough figures, Pozen concludes that "the cocktail-napkin math suggests that annual tax expenditures on foreign aid, as delivered through private nonprofits, are currently running somewhere in the range of $1 to $2.5 billion, of which as much as $1.5 billion might reasonably be deemed ODA [official development assistance]." Id. at 875.
Is this a good thing? Pozen suggests that at least the US should get credit for this indirect ODA--by classifying tax expenditures on foreign aid as foreign aid and maintaining appropriate data on these expenditures. Id. at 876. He admits that starts us down a slippery slope (the tendency of government to claim it has done more than it actually has will push those classifying the data to see ODA and not religious zealotry or whatever else in a particular charities' work), and that once these expenditures are official, it will be easy to claim we are spending too much on foreign aid (the privatized foreign aid will make the real foreign aid seem just that much less necessary). But he still wants the US to get "full credit" for its foreign development expenditures.Id. at 876-77.
Beyond those issues, tax expenditures have been criticized as problematic because of administrative concerns, "visibility concerns" (costs of particular programs hidden away in the complexity of the tax code); equity concerns, predictability concerns, and efficiency concerns. Foreign aid decisions made by charities are, he acknowledges, even more likely to reflect "very different objectives" than those espoused by the government, raising issues of democratic legitimacy.
Pozen nonetheless finds virtues in the very decentralized patchwork that tax expenditures for foreign aid represent.
"These expenditures help develop both the U.S. nonprofit sector and global civil society. They diversify aid spending and increase the total amount of aid. ...They serve an educative function by connecting more americans, via the beneficiary nonprofits, to issues and events around the world. They empower certain minority views in foreign policymaking and invigorate the 'market' in development strategies. They cordon off one segment of the aid budget from the vicissitudes of constituent politics and thereby help correct for possible governmental failures.... [G]iven America's comparatively paltry levels of ODA and the well-known limitations ... on individuals' capacity to show moral regard for distant strangers, I submit that tax expenditures serve a valuable function in institutionalizing and expanding our commitment to foreign charity."
I've always worried about the charitable contribution deduction and tax exemption for charitable organizations from the perspective of oligarchic capture. Those who have the most to give (and especially those who can benefit from in-kind contributions that generate fair market value rather than basis deductions) are, as always, the very rich. And there is generally a quid pro quo connected to the gift--names in brass letters over the lecture hall or theatre, ability to rub elbows with the sophisticated group of similar donors to the museum, and similar percs. it may be that this is somewhat less of a worry in the context of foreign charities, but I suspect that it is ultimately not. Pozen's piece, though, gives us a new perspective about foreign aid and something worth pondering.
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