A Charity Premium and Premature Taxation, pt 1.

All things being equal, is it better to have tax revenue or untaxed charitable donations? From a taxation point of view, I think the fact that we don’t tax donations to non-profits indicates that we believe whatever percentage that would have gone to the Treasury is better spent by a non-profit, whether American Red Cross, Doctors Without Borders, or even individual private schools and universities.

The reputation of government spending does little to suggest otherwise. Politicians’ pet projects can be notoriously wasteful. Though perhaps Josh can better comment on this, Boston’s Big Dig cost $14.6 billion to push a 3.5 mi. highway underground. Cost effective? The infamous bridge to nowhere, the Gravina Island Bridge, was projected to cost nearly $400 million, all to connect a city less populous than this author’s New Jersey suburb to an island of 50 residents and an airport.

Government benefits and pension plans are so generous they have been bankrupting states during this recession. The fattest pension check in New York State weighs in at a whopping $261,037 annually, all while the holder simultaneously earns $280,000 in salary as SUNY Albany president. And of course, 20 cents of every dollar taxed these days goes into the Defense or Homeland Security Budget and deceptively, a borrowed nickel goes to the separate, unbudgeted, and outrageously expensive Iraq and Afghanistan wars. Always frustrating is government spending financing the government debt, which of course is expected to increase due to recession borrowing. And if we value current worldwide suffering more than potential suffering of indebted Americans, it’s better to spend money helping people now than later.

For many, government spending priorities just don’t reflect those of rational and progressive citizens. I’m not even talking about libertarians, though as Josh pointed out, the existence of a charity premium is a strong case for a smaller government. Spending $663 billion on Defense while Energy gets $26 billion, National Science Foundation gets $7 billion, and NIH gets $32 billion. For people interested in… say, science research and a cure for cancer… this is not an ideal allocation of resources. Donating to Columbia University, on the other hand, or Howard Hughes Medical Institute, or the Susan G. Komen Foundation, can seem like a smarter way of promoting more important societal goods.

It’s hard to imagine that particularly efficient charities like the Gates Foundation, or Partners in Health, or any of the others we’ve named so far, couldn’t spend their money better, and create more utility for people, than the U.S. government. This suggests that there’s a “charity premium” (if I may boldly coin a term) when your dollar is invested by a good non-profit instead of by the government. Put another way, if you could choose to either donate your money to the government, or donate it to charity, donate it to charity.

A few criticisms. Are charities more efficient than government agencies? Not all, but some, certainly. Charities are independently rated. On Charity Navigator, for example, any charity that spends less than 30% of its budget on program expenses automatically gets zero stars. Charities that spend too much of its budget on fundraising similarly are downgraded. Of course, it can be possible to fudge the numbers in order to game the ratings. For example, opening an office in New York is an administrative expense. Opening an office in Sri Lanka, on the other hand, can be written off as a program expense. However, there are runaway hits. Freakonomics authors reported that “Smile Train has performed more than 280,000 cleft surgeries in 74 of the world’s poorest countries, raising some $84 million [in 2007] while employing a worldwide staff of just 30 people.” There could also be increased regulation and oversight of non-profit reporting, and non-profits that do not meet certain goals could be downgraded by the government itself, and donations to these non-profits may be taxed. In terms of salaries and pensions, I suspect that anyone who has looked at Idealist.org or worked for a non-profit would agree that overall, non-profit spending on salaries is pretty reasonable. “I work for a non-profit” is universally accepted as a euphemism for sacrificing earning power to contribute toward a higher good.

While libertarians would love the existence of a charity premium, I don’t think the charity premium necessarily endorses all of the libertarian agenda. There are some services that non-profits or profit-driven organizations cannot tackle. Defense spending may be bloated, but simply for legal and liability reasons private entities wouldn’t be able to field even a defensive army, much less continuously invest in weapons that likely aren’t going to be used. Expensive long-term projects might not be able to bear the risk of a non-profit hitting a bad fund-raising year, so government deficit spending flexibility can be a good thing. Private administration of  justice would be profoundly unjust. And un-flashy places to invest, like building a road in poor rural part of American, would simply go undone without government.

Still, as long as there are clearly bloated areas of government spending, common stories of corruption, extensive government waste, and over-generous retirement packages, I conclude that the government should be making do with less. In that case, more utility comes from donating your money to a charity than to the government. More improvement of human life is obtained when a non-profit invests the 35% of your charitable donation that would otherwise be going to the Treasury.

So in this blog post we’ve discussed whether there is a charity premium on money spent. Return for Part 2, where I hope to propose a change to tax policy (above the deductibility of charitable donations) to take advantage of the charity premium.

Reading assignment for next post: Gates & Buffett campaign to raise $600 billion from America’s super-rich.