Money for Nothing: Charitable Deductions for Microfinance Lenders

34 Pages Posted: 31 Jul 2008  

Date Written: July 30, 2008

Abstract

The last five years have seen a huge increase in the general public's interest in microfinance, which provides financial services such as loans, insurance, and savings instruments to people living in poverty. At the same time, the popularity of social networking through the internet has exploded. These two worlds intersect in the form of websites that permit a U.S. individual to use PayPal or a credit card to loan small amounts of money to poor people around the world. By far the most successful of these microcredit websites was also the first such website: Kiva Microfunds, or Kiva.

Although loans through Kiva are truly loans (that is, the lenders expect repayment), Kiva loans pay the individual lender no interest. The right to use money for a period of time has, of course, a real financial value, as the tax code recognizes in many places. But under current law, even though Kiva is a tax-exempt organization, lenders through Kiva receive no tax benefit for the interest they forego when they loan money interest-free through Kiva. This Article argues that the law should be changed to allow taxpayers who lend money through a microfinance organization that qualifies as tax-exempt and who receive no interest or below-market interest on those loans the option of taking a charitable deduction for that foregone interest. The Article also proposes a novel and simple method for implementing this tax benefit.

The practical benefits of the deduction could be significant. Permitting a deduction for interest foregone on loans to Kiva and similar microcredit organizations will help these organizations thrive and thus, as the Nobel Committee stated about another microcredit institution, play a role as an "important liberating force" and a "major part" of eliminating poverty as we know it.

Keywords: tax, tax-exempt, charity, charitable deduction, microfinance, microcredit, Kiva

JEL Classification: K34, L31

Suggested Citation

Lawsky, Sarah B., Money for Nothing: Charitable Deductions for Microfinance Lenders (July 30, 2008). Southern Methodist University Law Review, Vol. 61, 2008; GWU Law School Public Law Research Paper No. 423; GWU Legal Studies Research Paper No. 423. Available at SSRN: https://ssrn.com/abstract=1189122

Sarah B. Lawsky (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

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