Not a Lexis+ subscriber? Try it out for free.

Tax Law

Charity vs. Taxes and the Destruction of the State

From the FT this week, a story on John Paulson's $100 million donation to the Central Park Conservancy.  The article focuses on the idea that charitable organizations can step in for government to provide public goods, and why that idea is pernicious:

[America]'s philanthropy is unique. Its two key institutions are the tax deduction for charitable gifts and the tax-exempt foundation. Noting the role of the Ford Foundation in Lyndon Johnson's "war on poverty" in the 1960s, Daniel Patrick Moynihan, the late senator, called foundations a "new level of American government". 
Americans pat themselves on the back for their generosity, not always with good reason. Olivier Zunz, a historian of philanthropy at the University of Virginia, calls American charity a "capitalist venture in social betterment, not an act of kindness as understood in Christianity". 
Giving to a foundation can be self-interested - a way for a rich person to launder economic power that he does not need into political power that he does. Foundations inevitably get politicised, not because donors are corrupt or insincere but because they are rational. Lobbying for a piece of a government budget is a more efficient way of serving most causes than simply spending donations.

Note that this story comes on the heels of the recent news about how presidential candidate Mitt Romney has used donations to the Mormon church to secure huge tax breaks for himself, even while he campaigns to dismantle agencies like FEMA.  True to form, the Heritage Foundation has suggested that the right answer to Sandy and other natural disasters is for the private sector to support charities like the Red Cross.  It is ironic that Heritage begins its discussion by lauding the fact that "Americans are already coming together to help family, friends, and neighbors."  Isn't that, after all, the whole point of our democratic society: people come together and decide how to govern themselves, including how and when to help each other when disaster strikes someone you don't know personally but who is part of your larger community?

We need only look a little closer at the Red Cross to see the utter silliness of the Heritage foundation's response.  From the
Red Cross website:

We have the legal status of "a federal instrumentality," due to our charter requirements to carry out responsibilities delegated to us by the federal government. Among these responsibilities are:
  • to fulfill the provisions of the Geneva Conventions, to which the United States is a signatory, assigned to national societies for the protection of victims of conflict,
  • to provide family communications and other forms of support to the U.S. military, and
  • to maintain a system of domestic and international disaster relief, including mandated responsibilities under the National Response Framework coordinated by the Federal Emergency Management Agency (FEMA).

Yes, the federal government and the several states contract (pay) the Red Cross to fulfill government functions, even on occasion appropriating funds for the direct support of this organization.  It is not an independent charity that sinks or swims on the altruism or lack thereof of the giving class.  It is a public/private hybrid that relies on donors and the government, and--more importantly--that follows direction from the government in responding to matters involving the common good.  It is not, in other words, subject solely to the whims of its donors in deciding what public goods to provide.

The dismissal of FEMA that characterizes organizations like Heritage and sympathetic politicians like Romney and Ryan even while they laud charitable organizations like the Red Cross betrays the utter emptiness of their fundamental mistrust of "government" as well as that of their trust in the private sector to furnish necessary public goods.

The central problem with relying on purely private charities to provide public goods like disaster relief is not that the donors are self-serving (they are) but that in promoting a mythical idea of a private sector that solves public goods problems without any coordination from government, you have to believe that such a sector exists and further that is can and will accurately assess public needs and mete out coherent responses.  That involves a lot of faith in individuals and organizations that are subject to any number of cognitive biases and mistakes even while they are not subject to the same level of scrutiny to which we can subject government.  The FT says, "most charity does some good for someone, at the price of a certain corruption."  True enough, but what are we to do about public goods problems that rich donors don't find compelling or interesting enough to support?  Moreover, where is the accountability if no private charity steps up to meet a given demand or that in responding to a real and serious demand,
bungles the job?

That is why the Red Cross' mandate from the federal government to respond to FEMA reveals the bankrupt idea of anti-government sentiment when it comes to disaster management in particular and government vs charity more broadly.  We should be very skeptical of any attempt to wrest the mandate to provide public goods out of the hands of government and into the hands of the private sector alone.

The FT concludes:

[Mr. Paulson's gift raises] no worries that well-heeled experts are bypassing or steering democratic processes. It simply puts a large fortune at the disposal of a beloved and perennially underfunded institution. There is no better use for a billionaire's money, short of taxing it.

That's the right answer.  Taxes are what we pay for a civilized society: one in which public goods problems are identified, assessed, and responded to in a way that can be in turn assessed, evaluated, and yes criticised when necessary (cf: Katrina).  That accountability loop exists in government, even if imperfectly.  It is not the same for individual donors or purely private charities.  Churchill's famous quote about democracy holds true for taxing and spending.  It's the worst way to fix public goods problems except for everything else.


Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store