Hidden Foreign Aid
45 Pages Posted: 5 Dec 2007 Last revised: 25 Jan 2008
Whether the U.S. government should be allowed to claim credit for the private philanthropy of its citizens is a hot topic in today's foreign aid debate. Overlooked in this debate, however, is a form of aid that straddles the traditional public/private divide: charitable tax expenditures. Through the many tax privileges that the United States grants to its nonprofit organizations, the government implicitly foots some portion of the bill anytime these organizations send money into foreign countries for development purposes. Other tax privileges subsidize the income-earning activities of American individuals and corporations living or operating abroad. Unlike official development assistance (ODA), these tax expenditure funds are privately organized and distributed, yet unlike voluntary transfers they are paid for by the public fisc. This is not private aid; it is privatized aid. At the same time that explicit expenditures on aid were falling in recent decades, these hidden tax expenditures were rising.
The basic goal of this Article is descriptive: to show how domestic tax policies have covertly shaped the content of American aid. The broader goal is to connect this insight with the literatures on tax expenditures and international development. If one accepts the Article's theoretical premise, then U.S. government spending on aid is somewhat larger, and substantially different in character, than most commentators have assumed. Although tax expenditures on foreign aid raise a number of concerns, they also, I contend, possess unique virtues that can make them a valuable complement to ODA.
Keywords: tax expenditures, foreign aid, official development assistance (ODA), OECD, philanthropy, charity, nonprofit (not-for-profit) organizations, nonprofit tax exemptions, charitable contributions deduction
JEL Classification: D64, H00, H20, H50, K00, K34, L30, O20
Suggested Citation: Suggested Citation