Charities and other nonprofit institutions perform a vast array of altruistic works yielding benefits for both the direct beneficiaries and for society writ large. Current proposals to change the favorable tax treatment of private giving, and larger proposals to reform the federal tax system, would have important effects on such giving and thus on the benefits that private charitable institutions yield.
The analytic case for public financial support for private giving is longstanding, comprising four basic observations:
» Underprovision of collective goods by the private sector.
» Underprovision of collective goods by the public sector.
» Distortions in the public provision of collective goods.
» The strengthening of the institutions of civil society as a buffer between the citizenry and the state.
A change in the tax treatment of charitable giving is likely to have significant effects on the level of such giving. Prominent proposals to change the way that the current tax system treats charitable donations would be likely to reduce such giving by $5-10 billion per year, an effect equal to significant percentages of the operating budgets of major charitable organizations in the U.S.
Moreover, the central proposals to reform the U.S. tax system either cannot be reconciled with public support for private charity, or would require changes likely to reduce such giving.
These central proposals have varying effects. Perhaps a tax reform that results in substantially greater economic growth in the aggregate would compensate for these impacts. Or, perhaps, tax reform may be sufficiently important to justify them.
But the public discussion of changes in the tax treatment of charitable giving should consider not only the narrow effects on contributions, but also the more subtle but larger implications for the substantial benefits that the institutions of civil society yield in terms of the protection of our freedoms. - Benjamin Zycher, Pacific Research Institute