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Fellows with Friedman

The Government's Effect On Charitable Giving

David Henderson

Both Prime Minister Justin Trudeau and Alberta Premier Rachel Notley have announced that they will match Red Cross donations for Fort McMurray dollar-for-dollar. As such, people who consider giving money to the Red Cross for Fort McMurray know that their dollar will leverage two more dollars. On the surface, cleverly leveraging private charity may appear as a charitable action but looking below the surface, David Henderson argues that governments using taxpayer money to help victims is not a real charity. Instead, they are government subsidies and those who pay the subsidy do not have a choice. For politicians to be charitable, they must use their own money.

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Russ Roberts

Russ Roberts sat down with Dan Pallotta, Chief Humanity Officer of Advertising for Humanity, to discuss charities. According to Pallotta, our current charitable attitude towards charities have made charities less effective. He argues that society's non-profit ethic acts create an economic disadvantage that denies the non-profit sector critical tools and permissions that the for-profit sector is allowed to use without restraint. These double standards place the non-profit sector at an extreme disadvantage on every level. While the for-profit sector is permitted to use all the tools of capitalism to advance the sale of consumer goods, the non-profit sector is prohibited from using any of them to fight hunger or disease. For that reason, Pallotta advocates a new culture for non-profits that takes the best aspects of the for-profit sector to enhance the mission and effectiveness of charities.

Click here to listen to the interview. 

Richard Epstein

Richard Epstein argues that charitable deduction should stay because “itimplements the Hayekian imperative of decentralized control over social resources. It was for just this purpose that Congress enacted the charitable deduction in 1917, four years after the adoption of the initial income tax of the Sixteenth Amendment. If we let the government collect money through high taxes, then remote bureaucrats determine who gets what benefits.

It is common for the champions of redistribution to ignore the political forces that operate nonstop in Washington DC that incentivize the transfer of wealth from the opponents of the powerful to their friends. That set of political forces is certainly at play in dealing with public largesse of all forms, as the dominant party can dictate which individuals and groups are allowed to participate in which programs. The expected consequence is greater dissipation of wealth in factional intrigue, and public expenditures in areas where they are not likely to do much good.

Decentralized control of spending changes that political dynamic entirely. The charitable deduction gives each person who makes a contribution to the public welfare a matching gift from the government, no questions asked. The kind of activities that should be eligible for these matching grants should be limited to charitable purposes that have proven their worth over time. Today, organizations whose operations are dedicated to charitable activities, broadly defined, count. That includes traditional charities dedicated to the alleviation of poverty, and also organizations devoted to religious, scientific, literary, and educational purposes.

Within these broad parameters, the charitable deduction ensures that no political elite gets to dictate the ways in which charitable dollars are spent. Indeed, one strength of the system is that it allows individuals and groups with wholly different agendas to get the same public benefit without having to convince their rivals to approve their expenditures. As such, the deduction does not alter the amount and direction of charitable activities that would take place in a non-tax world.

As such, the device has three important advantages. First, this non-discretionary subsidy increases the total amount of charitable activity, without increasing the role of the government in the collection or distribution of funds. Second, it still requires charitable institutions to persuade some potential donors that their mission is worthy of private support, which can only be done if organizations have some form of private monitoring by charitable boards and other external watchdogs. Third, the rise of charitable organizations attracts the civil participation of a large number of people who receive no direct cash payment for their charitable efforts. Charities, in sum, reduce the control of government over the lives of ordinary individuals. People in need now have other places to look for assistance.”

However, it is equally important to get the right tax structure. To learn more, click here.