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November 16, 2005

Bill Thomas's idea of charity

Congressman Bill Thomas (R), Chairman of the House Ways and Means Committee may be trying to strip large numbers of charities of their tax-exempt status.

So what is charity today if it is not aimed primarily at the have-nots? Has its definition been stretched so broadly that it no longer has meaning? If so, are the tax breaks that propel our philanthropy justified? Representative Bill Thomas, Republican of California, the chairman of the powerful House Ways and Means Committee, has raised those questions in a series of hearings examining whether tax exemption is justified for certain types of nonprofits.

The question, in his words, is, "What is the taxpayer getting in return for the tens of billions of dollars per year in tax subsidy" offered to donors through tax write-offs or to nonprofits through their tax exemptions? According to the Treasury Department, the charitable deduction will amount this year to a $40 billion tax subsidy, mostly to upper-income households - overshadowing the roughly $20 billion the human services sector is likely to raise. No official estimates exist for the cost of the tax exemption covering money that nonprofits spend and for the property they own.

The hearings have received little public notice but have terrified nonprofit leaders, more than a Senate Finance Committee threat to tighten regulation of charities. [NYT]

Since when have Republicans been so concerned about the downward redistribution of wealth?

The the passage above is from a New York Times article on trends in charitable giving. Over the past few years, charities serving the poor have received a decreasing fraction of overall charitable giving, while health-related charities and universities have increased their share.

Bill Thomas seems to be arguing that direct social services to poor clients (food banks, soup kitchens, job training programs) are inherently more deserving of tax breaks than other non-profit projects aimed at the general good (cancer research, animal welfare, environmental protection, public interest research).

The argument for the tax breaks for non-profits and donations to non-profits is that these organizations are socially beneficial in ways that can't be addressed by the market.* Direct help to the needy is one example of beneficial non-profit activity, but you need some further argument to show that it's the only benefit that should count.

Even if you agree that only groups that help the worst-off deserve a tax break, you still have to establish that direct social services are the most effective way to accomplish that goal. Why should a soup kitchen get a tax break when a library doesn't? Libraries benefit everyone, but they are especially valuable for people who can't afford to access information any other way.

Implying that only means-tested social services deserve tax breaks is a nicer way of framing another agenda. Republicans just don't like a lot of the work that tax-exempt non-profits do.

Republicans are much more comfortable giving tax breaks to Paris Hilton for doing nothing.

*Update: Thanks to commenter dan for helping me refine the argument for subsidizing charitable giving and the work of non-profit organizations.

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This type of thinking leads eventually to the idea that Churches in and of themselves don't deserve tax-exempt status - but that certain kinds of work that they do (such as with the poor) does deserve tax-exempt status.

In other words - if you want to make sure that Universities and Health Issue organizations keep their tax-exempt status for charitable donations, you should make sure to spin this so that Churches lose most of their tax-exempt status too. The Churches will put the smack down on this so hard you won't see it coming, since its only the rare (usually liberal) churches that spend most of their tax-exempt monies on aiding the poor and needy. More often the Churches use that money to pay their staff, pay for exorbanent Cathedral/Mega-Church building and maintenance, and pay for advertising.

(And, personally, I think that this is all part of the Feds trying to sluff the responsibility for EVERYTHING onto the private sector. It's standard Republican Operating Procedure - they don't responsibility for anything, so let the market do it...)

The Internal Revenue Code has always had a non-judgmental rule about the public good that must be performed by charitable organizations; you've got to fall within one of several categories(general charitable, relief of the poor, hospital, etc), but as a practical matter qualification as a tax-exempt organization is fundamentally about organizational structure, i.e. you don't distribute profits to shareholders (if any), you take precautions to ensure that funds don't inure to the benefit of certain insiders of the organization, and you meet one of several tests to avoid categorization as a private foundation, the practical effect of most of which is that you've got to actually do some work. This produces a lot of pretty perverse incentives; it is not at all difficult to find sectors where (publicly subsidized) tax-exempt organizations are competing with for-profit institutions; hospitals are the most obvious examples, but there are a lot of others (I'm a tax lawyer with a fair amount of exempt organization experience; for instance, I just helped a for-profit organization switch to 501(c)(3) status; I don't know whether it has competitors in its field, but if it does, it now has a tremendous advantage over them). Worse, arguably, are private foundations, which get a slightly reduced tax benefit (generally, contributors get a 30% deduction instead of a 50% deduction) but have far fewer constraints on their operation; effectively, they've only got to distribute a minimal amount of their holdings every year, so a rich person can get a massive, immediate deduction by creating and funding a private foundation which in practice bestows a surprisingly modest public benefit each year for the forseeable future.

The argument--and it's been around forever, and isn't limited to Republicans by any stretch of the imagination--is that if the Code focused more on actual charitable works than on structure, there would be fewer perverse incentives and far more actual charitable work would get done. The problem with the argument, of course, is that it entails having the IRS determine whether particular organizations are actually doing good work, which is problematic for a lot of reasons, including the possible politicization, but also because it would require a lot more oversight personnel at the IRS and would introduce substantial uncertainty for potential donors. The most conceptually clean solution is to eliminate the charitable deduction entirely and commit to having government massively increase its commitment to works in the public benefit (i.e. switch from a concealed subsidy to a direct subsidy), but there are all sorts of problems with that idea, not the least of which is that any direct subsidy would be a very tempting line item in future budgets, which is, of course, the main reason Congress likes to bestow indirect subsidies.

Incidentally, the argument isn't that programs for the benefit of the poor are inherently more deserving than programs for the public benefit; it's that the charitable deduction is effectively a massive subsidy, and therefore should be reserved for organizations which produce a social benefit of a sort the free market is unable to deliver. But yes, there's a lot of line-drawing that would have to be done, and there's no good way to do it. Is a soup kitchen more deserving than a library? Maybe not. More deserving than a horticultural club, or an alumni association? Possibly. More deserving than a group dedicated to supporting a particular relatively wealthy high school's jazz band? A poor high school's band? I've got no idea how to answer those questions, and I'm wary of the idea that government should be in the business of answering those questions, but it's important to understand that the way we currently do it, the organizations that de facto are of most use to the rich get far and away more leverage out of the subsidy than do organizations that actually help the poor.

For my money, ultimately I think using an organizational test, like we have now, is probably the best solution, but it's a close call, and Thomas' proposal, putting aside his motivation, is really worth some careful consideration. That said, as a political matter, it looks to me like a fundamental shift in exempt organization law is dead in the water, although I do expect to see a lot of tinkering.

another cog in the grand scheme of the ownership society, or as the poor might see it: the pwnz0r5hip society

I think that there is a worthwhile distinction here between charities directed toward helping people in a non-adverserial, essentially non-contreversial manner and charities directed toward advocacy of a position. If I give to a soup kitchen or a library, that's clearly good. On the other hand, groups dedicated toward advocacy may do good or ill, but they do so in a rival manner which may not have net social benefits. If you give to the ACLU, and Fred Jones gives to the Family Research Council, then it's not clear than, as a whole, we've accomplished anything of social benefit. Naturally, people should be free to give to the ACLU or the FRC if that is what they want to do with their money, but it isn't clear that it should be tax-deductible. The distinction between a charitable library and a charitable soup kitchen may not be worth making, but I think the inclusion of all "non-profit projects aimed at the general good," a definition that would probably include the FRC and ACLU in addition to universities, libraries, food banks, etc, might cast too wide a net for charitable deductibility. We are running a big deficit, after all.

Julian, the 40 billion tax subsidy is a tiny portion of the USA's deficit, and at any rate if the government eliminates it, it will have to compensate by directly funding such charitable services. There are some good arguments in favor of eliminating it, but saving money isn't one of them, because it will reduce the US federal government's deficit by a few percent at most.

ACLU Contributions are not tax deductible.

Dan, thanks for the very thorough and informative reply.

If the argument for these tax breaks is that they do good works that the market can't provide, it seems that that direct aid to the poor is just one kind of good work among many. We can't rely on the market to prevent cruelty to animals, or research cures for very rare diseases, for example. In order to restrict tax breaks to traditional charities, you've got to make some kind of argument about why these activities deserve a special subsidy.

One argument for singling out traditional charities is that we have a special responsibility to look after the worst-off members of our society. You could make a deontological argument about our obligations to the worst-off, or you could make a utilitarian case that subsidized aid to the worst-off does more good than, say, subsidies for horticultural associations.

Julian, I would argue that contributing to a thriving public debate is a significant benefit that the market won't necessarily provide. There are already rules that limit the extent to which exempt groups can participate in politics and lobbying. The http://www.aclu.org/about/acluf.html>ACLU and (presumably) the FRC have foundations that can receive tax-deductible contributions.

I agree with Dan that it's unwise to let the IRS decide who is performing the right kinds of good works.

Since when did Republicans consider taxes that don't have to be paid a "subsidy"?? What happened to, "It's your money! You earned it"?

Next thing you know, Bill Thomas will be counting tax cuts as expenditures -- like Democrats do.

"Since when did Republicans consider taxes that don't have to be paid a "subsidy"??"

I was thinking the exact same thing. Isn't the point of the anti-taxandspend republican party that people direct their money to the causes they think best benefit their community? Of course, "anti-taxandspend" is all good when you're not the party with the power to spend. Now that the republicans have the power, they're spending worse than democrats did. Looks like they're about to start taxing like democrats, too.

Thomas' approach is basically "no, give your money to the government (in the form of taxes) and we representatives will spend it on the thinks WE think best."

I bet if someone called him a tax and spend democrat in republican clothing he'd rethink his position (because that's what he is. If it weren't for the "R" by his name, I would have bet money that this proposal came from a democrat.

Tax-exempt status and elligibility for tax-deductible donations are subsidies. If everyone has to pay tax X, but you decide to make a special exception for class Y, the government loses out on whatever Y would have paid in taxes. Excluding Y has the same net effect as if there were no exception and the government sent Y a check.

If you get to write off your charitable deduction on your income taxes, it's "cheaper" for you to donate $50 to your favorite charity. People that spend $50 on video games don't get a write-off. So, the people who buy video games (or whatever else) are subsidizing the people who give to charity.

Explain it better about that $40 billion subsidy thing. As I understand it, an individual can donate $500 to charity and get a tax break of about $20. That's $20 the govt doesn't get. Likewise, the charity can receive $50,000 in donations and not pay a penny in taxes. So when you add that all up, 100 individuals donate $500 to a charity ($50,000 total), thus depriving the govt of $2000 in personal income tax revenue, as well as the tax on the $50,000 taken in by the charity, or about $15,000 (30% tax rate on $50k). This means the govt is losing $17,000 in revenue while $50,000 is going into public service activities. So how did they come up with a whopping $40billion in "subsidies" to the nonprofit sector if the charities are only taking in about $20billion?

>Representative Thomas and others are particularly vexed by nonprofit hospitals, often noting that data from the American Hospital Association calculated that their average spending on uncompensated care was 4.4 percent of their costs in 2002, compared with 4.5 percent for their commercial cousins.

>Representative Charles Rangel of New York, the senior Democrat on the Ways and Means Committee, has asked whether a better target may be universities, which sit on tens of billions of dollars in assets while tuition increases are outpacing inflation.

>Of course, some portion of contributions made to health, education and religious institutions, which are the recipients of most philanthropy, do benefit the poor. Universities provide tuition assistance to students from low-income families, medical research can alleviate problems like asthma, which is a particular issue for the poor, and churches engage in a variety of activities to help the needy.


It looks like they are looking into changing the rules for non-profit hospitals and, maybe, universities. That wouldn't necessarily be horrible.

Sounds like it's the for-profit hospitals trying to expand their market. There's loads of money in hospitals, and it makes sense for hospitals to lobby their reps to try and get some more moolah. I don't really see that much value in lost taxes from most 501c3's. What, local property tax? If taxes were a big issue, it'd be a big issue for local gov't as well. That's doubtful, and if that were the case, you'd see more mayors, etc clamoring for this. When the nat'l reps talk about it, it's got to be b/c of nationally-scoped (lobbying) interests.

Welcome to America: rule of the special interest$.

If Congressman Thomas's inquiry stripped the 501 c (3) status from the likes of Pat Robertson, Jerry Falwell et al - then I believe there could be some good accomplished.

Breaking:

Democrat defeat the spending bill. Chaos ensues.

dkos diary
http://www.dailykos.com/story/2005/11/17/162056/16

Waposh
http://www.washingtonpost.com/wp-dyn/content/article/2005/11/17/AR2005111700931.html

Democrats, unanimous in opposing the legislation, said it included the first cut in education funding in a decade and slashed spending for several health care programs. "It betrays our nation's values and its future," said House Democratic Whip Steny Hoyer of Maryland. "It is neither compassionate, conservative nor wise."

Republicans said they may have lost votes because this year's bill, down $1.5 billion from last year, included no special projects or earmarks for lawmakers. "You take those out and you lose the incentive," said Rep. Tom Davis, R-Va., who voted for the bill.


Even the tnr chimes in. ha haa...

http://www.tnr.com/blog/theplank?pid=3650

MORE ON THE HOUSE CHAOS:

This from another Hill Democrat. Normally it might be bad form to let Democrats crow away at such length. But something really extraordinary seems to be happening in the House right now. So let's have at it. I've bolded some extra-interesting points:

The defeat was embarassing in more than one respect. First, they lost. Second, they looked hapless while losing. Rather than stopping the bleeding, they held the vote open for a long time, but had a twenty vote deficit. Very few of those votes were budging. To make the effort to hold the vote open and then to lose looks exceptionally weak.

The reasons for voting against it were pretty obvious. Massive cuts in popular education programs. Cuts in home heating assistance while prices are skyrocking. And the list goes on. Moderate republicans could get away with these votes when the President was doing well, but they can't now. Instead of making them take fewer of these votes, the wackos on the right are making them take more. They are p*ssed that the leadership isn't stepping in and saving them...

Somebody posted report from the ground. There was protest against this spending bill.

http://www.dailykos.com/comments/2005/11/17/162056/16/157#157

I organized a budget cut protest

outside of Representative Jim Gerlach's office. Rep Gerlach (R-PA) of district 6 in PA. It was part of MoveOn's campaign to oppose these budget cuts. I think there were over 100 (maybe 150?) protests organized all over the country, they happened yesterday.

Mine was small. It was raining extremely hard, so only about a dozen people showed up. But we got pictures, and the local press was there.

The reporter asked me if MoveOn was getting more membership since Bush is doing badly. I said I don't know, because I've only been with MoveOn for a month. But now I'm a team leader, organizing shit, and making life hell for my Representative, who is a piece of crap.

If anyone reading this wants to do something about the political situation, I suggest joining MoveOn's Operation Democracy, or Democracy For America, or something similar, and get out there and get organized and do shit.

whoa.

they are doing revote again tonite. talking about big battle.

I hope the dems holding on, cause this is going to be painfull

http://www.dailykos.com/story/2005/11/17/212345/32

Adam Putman (R-Hell) has apparently managed to bring a resolution on budget resolution back to the floor. I joined CSPAN late so I'm not sure what exactly they've pulled off but I think the budget that failed today will be back up for a vote tonight.

Rep. Slaughter is on the floor now making great points. She is condemning the budget reconciliation bill which will be voted out of the House tonight. It looked so good earlier today, now the Democrats seem resigned to Republican unity on this resolution.

Howdy Doody (aka Adam Putman) wants to hear your opinion of his plan to bankrupt your grandchildren, let him know! 202-225-1252

I'm late getting back to this, but I just thought I'd clarify:

Linsay writes, "Tax-exempt status and elligibility for tax-deductible donations are subsidies."

Sure. That's fine for you to view it that way. But not for Thomas, or any "It's your money!" Republican. Wealth always belongs to taxpayers until it is taken from them by the IRS. Money not paid in taxes, according to this view, was never the government's to give back.

It's odd that Thomas would argue against this.

hmmm... taking away the tax-exempt status for charities? I wonder if that would include churches?

Somehow, I doubt it.

Nobody should be making claims that this is something that Democrats would do. Not only do Republicans spend more than Democrats, they spend heavily on pork and special interests that have very little public benefit while cutting the spending that benefits the public most. Meanwhile, they give tax cuts that only benefit the wealthy while placing a heavier tax burden on current and future generations of American wage-earners.

So when one stops comparing this move to the party's professed selling points and matches it against reality, it fits in perfectly to what a regressive conservative agenda would do. The Republicans have been working hard at blurring the seperation of church and state, giving direct subsidies to "faith-based" organizations as if they weren't already tax-exempt. They want to slightly increase benefits for military studends while allowing education subsidies to stagnate or get cut (which military students also depend on - so no net increase for them) while finger pointing at universities for increasing tuition. This latest move is just the other piece of the puzzle. If you want to see the type of nation that the Republicans envision for America, look towards Iran.

Also I'd like to note that Iran got to it's current regressive conservative religious state through years of subversive manipulation such as Reagan's Iran-Contra affair. To Iran's credit, it took assasination to fully kill democracy there; it seems to only require character assasination here.

One of my main observations about the Republican agenda is that they've never been interested in legitimate economic growth. It's a fact that for decades after the Great Depression (caused by conservatives), GDP has continued to grow slower in Republican controlled years than in Democrat years.

Republicans are consistently more interested in consolidating their own power and that of their backers than they are in the overall economy. Even if one were to accept the cynical view that Republicans wage wars to secure oil resources for our economy, the question remains if the cost of this war to taxpayers and to the stagnating economy will ever be recovered through whatever savings on oil we will ever get from those countries as a result. It's easier to view the whole practice as a successful bid to destabilize the world oil supply and raise prices, something that gives measurable benefits to Republican interests but with no measurable benefit to the world or the national economies. I think the numbers speak for themselves on this.

So that's a bit of a tangent, but it's relevant to think of how an appearantly contradictory move by one Republican actually fits in to the overall goal of consolidating power in the hands of conservatives.

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