Solving Charity Failures

38 Pages Posted: 9 Oct 2014

See all articles by Brian L. Frye

Brian L. Frye

University of Kentucky - College of Law

Date Written: 2014

Abstract

“Crowdfunding” is a way of using the Internet to raise money by asking the public to contribute to a project. This Article argues that crowdfunding has succeeded, at least in part, because it makes charitable giving more efficient by solving certain “charity failures,” or inefficiencies created by the inability of the charitable contribution deduction to subsidize the charitable giving from low-income donors. The economic subsidy theory of the charitable contribution deduction explains that the deduction is justified because it solves market failures and government failures in charitable goods. According to this theory, free riding causes market failures in charitable goods, and majoritarianism causes government failures in charitable goods. The charitable contribution deduction solves these market and government failures by indirectly subsidizing charitable contributions, thereby compensating for free riding and avoiding majoritarianism. Crowdfunding is successful because it provides a technological solution to some of those charity failures. While the charitable contribution deduction causes charity failures because the deduction cannot subsidize contributions from low-income donors, crowdfunding can subsidize those contributions by offering rewards instead. As a result, crowdfunding should solve at least some of the charity failures caused by the deduction through providing an incentive for low-income donors to contribute. The remarkable success of crowdfunding suggests that the inefficiency associated with charity failures is quite large.

Keywords: Crowdfunding, nonprofit, nonprofits, charity, charities, economic subsidy theory, economics, charitable contribution deduction, deduction, economic subsidy theory, public goods, market failures, charitable goods, free riding, vertical equity, distributive justice, tax policy, donation, reward

JEL Classification: L30, L31, K34

Suggested Citation

Frye, Brian L., Solving Charity Failures (2014). Oregon Law Review, Vol. 93, No. 1, 2014, Available at SSRN: https://ssrn.com/abstract=2506951

Brian L. Frye (Contact Author)

University of Kentucky - College of Law ( email )

620 S. Limestone Street
Lexington, KY 40506-0048
United States

HOME PAGE: http://law.uky.edu/directory/brian-l-frye

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