Asking the Right Question

In prep for this blog launch, I wrote a post called “Do We Really Need a Charitable Deduction?” (short answer: no), and was planning on posting it when there was some down-time with content. But I recently realized that question was the wrong one to ask, and decided to hide it away in the archives of the site.

I’ve been reading a lot about the charitable deduction (for some reason, the intersection of social change and tax policy is quite fascinating to me), and I’ve been quite disappointed in what passes for real dialogue on the subject now-a-days. People are essentially going back and forth about the question I asked in my first post on this topic: Do we need a deduction? And if so, how much should we allow people to deduct to optimize either government revenue, donations, or both?

Kelly Kleiman pretty definitively answered this question on the Stanford Social Innovation Review blog, saying:

[W]e should realize that everyone who’s hyperventilating about the impact of these changes on their poor, struggling private school, museum, or hospital should just take a deep breath. Given that the [tax] reforms will support many of the social programs, environmental protections, educational institutions, and health care options the nonprofits themselves seek to provide, it’s about time for the community to stop whining and agree to pony up.

Or, as I would have said, shut-up people! (Which is why I don’t write for SSIR.) The back and forth about this deduction is disturbing to me, because I see people who represent my industry, an industry I joined because I want to help people, going to Congress and speaking to the press in ways that seem uncomfortably self-serving. Instead of thinking about how these reforms will help the people who need, the supporters of the deduction seem to be more concerned about how a slight modification of the tax code will affect their own revenues.

To be fair, those that argue for the charitable deduction say that the decreased nonprofit revenue will negatively affect the country’s most vulnerable. (No one would go to Washington with the explicit purpose of defending their paychecks, right?) But this being a viable defense of the deduction shows that we are not asking the right question in the first place–which should be: What reforms would have the most overall benefit for the most needy?

Assuming that increasing (decreasing) money to nonprofits will increase (decrease) social impact is a logical fallacy at best and negligence at worst. Government social interventions are not traditionally seen as being nimble or responsive enough to solve community-based problems, and that can be a fair argument in some cases. But to completely write-off government revenue as capital for social change does a disservice to those who will benefit from that change.

Several recent programs out of the federal government show that government revenue has a place in social change. The Investing in Innovation Fund, the Social Innovation Fund, the Promise Neighborhoods Initiative, and the Green and Healthy Homes Initiative are just a few examples of how tax-payer dollars can be used for innovative social solutions. (Not to mention the more basic government grants out there that support a plethora of social service organizations.)

I’m not saying that the plans on the table to reform the charitable deduction will maximize social impact (I honestly can’t understand most of the plans on the table), but I think using impact as a standard is better than asking, “What will maximize revenue?” Government and nonprofits can both deliver social impact, sometimes most effectively together, sometimes most effectively separately, and the policies in place should play to the sectors’ strengths.

It shouldn’t be about who gets how much money and from what. It should be about what is done with that money and how to best use it. When we start to answer–or just start to ask–this question, we might get somewhere.

Patrickm

I couldn’t agree more that the real issue is what happens with any resources – the impact – no matter how they are collected. Your conclusions, therefore, resonate with me. However, I am concerned with some of your assumptions. 1) The first assumption is that a deficit cutting deal which includes a change to the charitable deduction, or even elimination, as some reports have suggested, would be offset by government funding being maintained for the very programs run by nonprofits that would be impacted by the deduction change. I believe that is a false assumption. There is no “trade” in these deficit talks. The deficit plan likely to come out of Congress (if you believe they can come up with one at all) will include cuts, and deep ones, to discretionary funding. That means big cuts to programs that work through contracts to nonprofits. So, we would take government funding cuts AND reduced capacity to raise individual donations to make up at least some of that loss in government funding. 2) The second assumption you make is that the groups opposed to the change in the charitable giving incentive are focusing only on the impact on vulnerable populations. Being part of the National Council of Nonprofits campaign, I can tell you that we have not put that language at the center of our argument. Our focus has been on how nonprofits, in all of their many shades, are doing important work in the community, and the current tax code recognizes that work as tax exempt, so the community should benefit from that tax exemption. And as 501c3s, their donors are incented to support that important work by receiving a tax benefit. We recognize that significant portions of those donations go to large, well-funded nonprofits. But for the small, community-based nonprofits, those donations are no less important. And as long as the tax code, section 501c of IRC, puts those organizations into the same category, we should not unduly punish the small ones because we think the large ones don’t deserve it. There may be a public policy conversation coming soon that asks whether all of the types of 501c3 organizations currently allowed in the tax code should be included. That’s fair. But that is not the issue Congress has time to deliberate about this fall. 3) The final assumption made here is that “traditional” nonprofits are not very effective in serving their communities. (At least that’s an assumption that I read between the lines.) While nobody can argue that nonprofits have solved all of the social problems ailing our communities, families and citizens, I think a strong case can be made that without the services and support of most of our nonprofits, our communities and country would suffer a much lower quality of life. Nonprofits are the organizations in our communities who continue to stand up for and serve community needs, whether there is profit to be made or not. While most have suffered during this recession, they have not relented in their commitment to serve the community. That is what our annual survey in Arizona tells us. If I am a home builder and the economy falls apart, I stop building homes. But if I provide services to people suffering from lack of affordable housing and foreclosure, I find a way to keep providing my service. I do not see how we can ignore the contributions of those organizations. Let me finish by saying that, in the long run, the issues you raise and the questions we need to tackle as a nation are something I hope we engage productively in our public policy arena. But the manic deficit-cutting process this fall does not do that all. Let us find a way to take on the questions you ask in a more deliberate and informed way with a long view, and we can make a difference in the lives of our children and grandchildren.

http://www.unsectored.net Jeff Raderstrong

Thanks for your comment, Patrick. I think you do raise some interesting points, and while I agree these are issues that should be tackled in the long run, we need to begin to deal with them now.

Also, I think the assumptions you call out are well placed, except for the last one. I don’t think traditional nonprofits are ineffective any more or less than I think newer “social enterprise” nonprofit are ineffective. I hold no overarching assumptions about nonprofits or any sector. I think that instead of lumping all organizations together into one group with preferential tax status regardless of their impact, we should look at what is being done by these organization and how they are impacting the communities they work in. I’m not implying that they aren’t doing necessary work, I’m just implying that they should be to get exemption/donations.
However, I agree with your first point very much. I think that if the government is going to make these cut/changes to nonprofits, they need to look for ways to fill in the gaps in social services that will be created. It is my hope that by looking at this budget crisis from a truly “unsectored” point of view, we can figure out what makes the most sense and what is the most efficient course for creating change.

http://www.fullcontactphilanthropy.com David Henderson

Nice writeup Jeff. I’d add that purported impact on services to the poor of capping the charitable deduction especially miss the mark, since most human services donors are poor and middle class themselves, and will not hit the donor cap.

http://www.unsectored.net Jeff Raderstrong

Thanks for your thoughts David. I agree with you–reforming the deduction needs to consider both how it will impact services for low-income people, as well as the deductions they give.

http://blog.givesmart.ca/ Nadine Riopel

Questioning the assumption that decreasing revenue to charity automatically means hurting the most vulnerable? Suggesting there are other factors at play than volume of money? Asking that we base decisions on what will generate the most good vs. what will generate the most money?

I like the cut of your jib, my friend. Well done.

Nadine

http://www.unsectored.net Jeff Raderstrong

Why thank you…and welcome to the site!

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