Acton Commentary

Does American Charity Cheat the Tax Man?


The generosity of Americans is a constant source of amazement. With charitable giving running at $245 billion a year, even the recent string of disasters - the Asian tsunami, Pakistan earthquakes, and Gulf Coast hurricanes - doesn't seem to have “fatigued' donors. The Center on Philanthropy at the University of Indiana estimates that some $5 billion was donated to Katrina and tsunami relief last year, and that philanthropic giving overall was actually spurred by these events.

So it was not a little surprising to read the lead article in the Winter 2005 issue of Stanford Social Innovation Review and learn that U.S. philanthropy, whether aimed at educational programs or projects designed to help the needy, is “shortchanging” the poor. There's more. Charitable giving is actually a “federal subsidy” that benefits wealthier people more than the poor, argues author Rob Reich. “The effect of these unequal subsidies is to increase inequalities between the rich and the poor, not only in education, but also in other domains of charitable giving,” he writes.

After a long exposition of the uncertain 'redistributive' effects of charity, Reich concludes that, “Given the evidence already presented, philanthropy does such a poor job of channeling money to the needy that it would not be difficult for the government to do better.”

Reich is a Stanford political science professor and is affiliated with the school's Center for Social Innovation. Thus, he has ample credentials for qualifying as an expert on these matters. But he seems to have ignored or misunderstood some obvious truths about philanthropy: First of all, a gift of money or goods and the resulting tax deduction is only a government subsidy if you believe the money or goods belonged to the government in the first place. What's more, wealthy people get a bigger write-off than poor people because poor people can't give to charities - they're poor. And, finally, private charity works faster, better and closer to the problem. The evidence that government does a sorry job of helping the needy is everywhere before us.

Not many Louisiana residents may read the Social Innovation Review , but they nevertheless have some highly developed conclusions about government help for the needy. Their conclusions were actually formed by personal experience with government helpers.

In a survey by Louisiana State University researchers, state residents were asked to rate the effectiveness of hurricane-recovery organizations on a scale of 1 to 10, with 10 being very effective. Church relief groups got the highest mark of 8.1. Next were nonprofits, the Salvation Army, and local community organizations, at 7.5. The Red Cross scored 7.4. Governments ranked lowest with Louisiana residents, with the Federal Emergency Management Agency at 5.3, the federal government at 5.1, and state and local governments at 4.6.

The real problem with government “charity” is that government takes a “one size fits all” approach to the problem of poverty. That, really, is all a bureaucracy can do. Government agencies are not designed to understand unique circumstances or to care about personal problems. And government certainly is not equipped to provide total coverage for major disasters like the Gulf Coast hurricanes. Government also pretends to distribute its help in an equitable and even-handed manner, an error of policy that results in waste, fraud and corruption.

Just wait till government auditors dig into the FEMA program that put hurricane evacuees into thousands of hotel rooms across the country, many of the rooms paid for but empty. To be sure, nonprofits don't get a free pass on waste and fraud. Charities and relief organizations that failed to use donations smartly should be held to account. How many of those loaded debit cards given away so promiscuously to evacuees were used for real household needs?

From the declaration of the War on Poverty to the decade of the 1990s, some $5.4 trillion government (i.e., taxpayer) dollars were targeted to poverty programs. The poverty rates in 1990 were almost exactly the same as 1960. If government solutions were really about wealth redistribution, surely there would have been some positive movement in those thirty years. But the real movement of people out of poverty didn't begin until policies were recast in a personal responsibility paradigm.

Historical evidence is quite clear: Governments do a bad job of alleviating poverty. Making social justice the equivalent of wealth redistribution isn't a new idea, but it's still a very bad one. So let's drop all the talk about the government's generosity in “subsidizing” American philanthropy.