TaxProf notes David Schizer's 2008 article on charitable contributions: Subsidizing Charitable Contributions: Incentives, Information and the Private Pursuit of Public Goals (on SSRN), now published in 62 Tax L. Rev. 221 (2009).
I'd originally read Schizer's article with skepticism. As readers know, I have criticized the charitable contribution deduction as permitting wealthy donors to gain outsize tax deductions for supporting endeavors that at the least tend to reflect their class interests (ballet, orchestra) and frequently tend to be vanity projects that blazon the wealthy donor's name over buildings, orchestra hall seats, and anywhere else that a name can stand out.
The wealthy get outsize deductions for three reasons. First, a deduction against income that is taxed at a high rate is worth much more than a deduction against income taxed at low rates. Second, the wealthy often get huge deductions for phantom costs--contributions of stock, a financial asset owned in large part by the wealthy, gives a deduction at fair market value rather than for the actual after-tax investment amount that a wealthy person has in the stock, thus giving a tax benefit for something for which the wealthy person has never borne the economic burden. Third, wealthy donors might well have contributed to support their particular causes without the deduction, so that the tax expenditure is a needless one. The wealthy have, by definition, disposable income not available to ordinary Americans and they tend to enjoy the limelight at high-society events (look at the NY Times section on socialites at various gala events, for example), so that the charitable deduction should be only one factor in the various incentives to give for the wealthy.
The wealthy enjoy numerous vanity quid pro quos. Donors receive name recognition in annual reports, on buildings, in gala announcements as honorary chairs, and in many other ways. Donors get more recognition the more money they give--every fundraiser knows the importance of finding appropriate quid pro quos. And they get perks--special trips, special seminars, special gala functions, exclusive "sneak peeks" on exhibits at museums or theaters, etc. The perks increase with the amount of the gifts as well. Further, they are made to feel influential in policy matters. They are invited to board meetings, to meet the senior executives of the charity, to meet influential government figures that the charity works with, etc.
I'm afraid my skepticism has only grown. Schizer claims that there are three reasons to subsidize charitable contributions (not all, admittedly, harmonious with each other): (1) to encourage generosity, (2) to measure public preferences about public goals and (3) to improve monitoring of non-profits through oversight by wealthy donors. It seems to me that Shizer overlooks the weakness of the first and third of his objectives, which I think are interconnected in the way that they purport, but often fail, to make use of good intentions of the wealthy to do good for the many.
First, encouraging "generosity" as a goal in itself, separate from the activities/individuals that are the recipients of the generosity, is a debatable goal that may not be worthy of subsidization. "Generosity" that merely elicits a quid pro quo naming-of-a-building-ego-satisfaction may do actual harm because of reallocating resources towards less worthy projects--i.e., recipients may forego projects that should be undertaken because of the focus on accomplishing the project that gratifies the donor.
Schizer does at least consider the need to develop programs that would encourage larger gifts than the average for higher income levels, which is a start. The average US household with a $100,000 income gives 3% to charity--not much. Schizer suggests not subsidizing anything unless it is more than 1.5% of household income or even a progressive scale (credits that vary depending on percent of income from 1 to 3, to 10, or above. It seems to me that if encouraging generosity is the goal, there should be no subsidy except for those gifts that are well above the average gift -e.g., gifts in excess of 10% of income.
Second, the "monitoring" by wealthy private donors may be harmful rather than helpful. A particularly "important" wealthy donor has inordinate influence over a charity (or university) to which the donor contributes (which Schizer acknowledges at the beginning of his discussion of this issue, but treats as a positive), and the "monitoring" often ends up as pressure to use money in the specific ways the donor wants it used, rather than in satisfying any broadly useful oversight function. To "cultivate" the donor for more money later, the charity may bend over backwards to do what the donor wants--perhaps even influencing projects not connected with the donor's existing donations in hopes of getting money from the donor for a new project, allowing the wealthy donor to reach in and dictate policy on issues on which the donor has no expertise.
Schizer notes that "donor expertise has limits" but his view is that if a donor has expertize in an area, the donor's close involvement with the charity is beneficial and it is only those cases where "donors seek to intervene beyond their expertise" that problems are created. He acknowledge that such donors will "want access to the nonprofit's leaders" and a continuing relationship, that a named building or activity will become "theirs" "in a very personal sense." "Venture philanthropists", Schizer notes, don't just want to hear about need, they want "a seat at the table so they can be closely involved in the governance of the nonprofit." And regretably, their big money often buys them just that.
In fact, I'd argue, donors with expertise in an area shouldn't intervene, either--because they will be adamantly insistent that their solutions are the right ones, even when the charity has considered and rejected that solution for valid reasons. Schizer ultimately admits that "the challenge here is to empower donors whose input is constructive, while constraining the influence of those who are not." And he suggests a "cohort of top donors" to avoid too singular an influence while treating the "concern that donors will overstep their advisory role" as just "challenges for the nonprofit manager to finesse." But this heavily freighted potential for harmful intervention is hard to see as a positive 'monitoring' result of the charitable contribution system.
Both of these purported goals may reflect the dark side of the tax exemption and charitable contribution deduction--tax-subsidized organizations that serve the vanity of wealthy donors more than the public good.
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