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Monday, March 31, 2008

What's a Charity?

A recent blog post on the Tax Foundation blog points to an analysis they did on the tax treatment of charities, which I found to be quite intriguing.

The study questions whether certain nonprofit organizations should be treated as charities under the tax code - i.e. that any donations be tax-exempt under federal law (exemptions from state sales tax and local property taxes also apply). Their argument is that truly charitable organizations provide "public goods", for which they use the typical economic definition of (1) people who don't pay (free-riders) can't be excluded and (2) one persons' use doesn't reduce the amount left for others (non-consumable).

For this reason, they argue that the largest charities (in terms of dollars) - hospitals and private schools/universities - along with museums, theaters, and symphonies should not be tax exempt. They also pinpoint tax-exempt "businesses" which include Ms. and Harper's magazines (which I am stunned to learn are considered charities).

They also question the tax exemption granted to the Tax Foundation itself (this would apply to other research and policy organizations, like the Commonwealth Foundation or the Keystone Research Center). I agree with this conclusion, but I think the consistency of their argument unravels with this claim. The products of the Tax Foundation, and the Commonwealth Foundation - our research, data, and ideas - are available to all, so their is a "free rider" problem. Likewise, our products are clearly non-consumable - when I read the Tax Foundation's data on Tax Freedom Day, it doesn't prevent anyone else from reading it.

My thought is their definition of "public goods" may not be the best way to think of charities. Rather, organizations should be considered charitable if their services provide essentially a substitute for government spending. For instance, private schools save taxpayers in property taxes, hospital's charitable care saves in welfare spending, etc. Charitable giving (and the tax-exemption) help support these alternative to higher taxes. By contrast, the work of the Tax Foundation, art museums, and other "charities" do not deserve a tax exemption.

Of course, my theory implies a reassessment of what government funds (which we should do) and an evaluation of charities' spending (recent examples include debates over how much
charitable care hospitals provide, and how universities use their endowments).

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