Charities in Politics: A Reappraisal

Abstract

Federal law significantly limits the political activities of charities, but no one really knows why. In the wake of Citizens United, the absence of any strong normative grounding for the limits may leave the rules vulnerable to constitutional challenge. This Article steps into that breach, offering a set of policy reasons to separate politics from charity. I also sketch ways in which my more-precise exposition of the rationale for the limits helps guide interpretation of the complex legal rules implementing them.

Any defense of the political limits begins with significant challenges because of a long tradition of scholarly criticism of them. Critics of the limits suggest that the “market failures” that justify tax subsidies for charity also afflict group efforts to monitor politicians and organize politically, so that the subsidy should extend to cover those activities. These claims, though, overlook a series of additional issues suggested by transaction cost economics and other aspects of economic theory.

Most significantly, even if lobbying and electioneering should be subsidized, it does not follow that these functions should be carried out by charities. I argue that combining politics with charity produces a set of diseconomies of scope, including higher agency costs, diminished “warm glow” from giving, and greater inframarginality of deduction recipients. In addition, I argue that the economically ideal tools for reaching the socially optimal levels of charity and lobbying are incompatible with one another. While there are also off-setting gains from the combination, many of these gains further exacerbate the diseconomies.

Keywords: nonprofit organizations, 501(c)(3), lobbying, electioneering, Citizens United, conditional grants, transaction cost economics