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Subsidizing Charitable Contributions: Incentives, Information and the Private Pursuit of Public Goals


David Schizer


Columbia University - Law School


Columbia Law and Economics Working Paper No. 327

Abstract:     
The charitable deduction has enjoyed relatively little support in the legal academy. Many commentators have asked what it adds to the tax system and, as critics have observed, the deduction obviously does not itself collect tax revenue. Defenders respond that the deduction helps measure income and keeps taxpayers from inefficiently substituting leisure for work, but these points are, of course, contested. Instead of revisiting debates about what the deduction adds to the tax system, this Article focuses on the broader question of what it adds to the pursuit of public goals. The deduction - and any other government subsidy that matches charitable contributions through the tax system (here called "subsidized charity") - enlists private individuals to pursue public goals in a somewhat unique manner. While in other settings the government delegates implementation but still specifies the goal to be pursued, charitable donors are allowed to select the goal as well. Is it desirable to pursue public goals in this way?

This Article analyzes three reasons to subsidize charitable contributions, each responding to a different information or incentive problem that is inherent in the pursuit of public goals. First, the subsidy can counter free-riding by encouraging donors to be more generous. A second objective is to measure and respond to popular preferences about public goals. Subsidized charity can encourage experimentation and competition and can empower minority perspectives that are underrepresented in the political process. Yet subsidized charity also disproportionately represents the views of wealthy donors. The third goal, which is new to the academic literature, is to recruit private donors to monitor the quality of nonprofits, so that the government can piggyback on these quality-control efforts.

Since there are three competing rationales for the subsidy, its institutional design can vary depending upon which has priority - an insight that is new to the literature. To encourage generosity, the subsidy should focus on wealthy donors, giving them broad discretion about which causes to support and targeting marginal contributions. Recruiting these wealthy donors as monitors is largely compatible with this program. Yet by focusing on wealthy donors, the subsidy may fail to reflect broad popular preferences. In response, one option is to compensate with other policy instruments, such as government programs, to address the preferences of low-income nondonors. While I find this approach appealing, others could reasonably want subsidized charity itself to be more representative. Toward that end, we can go to extra lengths to persuade low income taxpayers to contribute more (e.g., through extra-generous matches) or, for that matter, to induce wealthy donors to contribute less (e.g., through caps on giving) or to support causes that reflect broad popular consensus (e.g., through limits on which causes are subsidized). Yet the cost of making the subsidy more representative in this way is that it will be less effective at advancing our other goals of encouraging generosity and recruiting monitors.

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Date posted: February 26, 2008  

Suggested Citation

Schizer, David, Subsidizing Charitable Contributions: Incentives, Information and the Private Pursuit of Public Goals. Columbia Law and Economics Working Paper No. 327. Available at SSRN: http://ssrn.com/abstract=1097644 or http://dx.doi.org/10.2139/ssrn.1097644

Contact Information

David M. Schizer (Contact Author)
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States
212 854 2675 (Phone)
212 854 9740 (Fax)
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