Charitable Deductions and Direct Democracy
Many charities have been able to demonstrate more creativity and client-focus than their equivalent government programs. There is a competitive dynamic in this sector stemming from the ease with which donors will withdraw their support from ineffective organizations, and this allows the sector as a whole to adapt, innovate and experiment far more effectively than governments. That is important to note, but beside the point in a government vs. charitable sector debate.
Governments are not experimental, and then they shouldn’t be. What makes them rigid, inflexible and bland also keeps them accountable. Where the interplay between the public and charitable is fruitful it is because the charities can perform the experiments which provide the evidence governments need when adopting new programs and reforming old ones. In that sense, the charitable sector is where the public sector innovates.
That reason alone is enough to justify government support of the sector, including indirectly through charitable tax deductions. Many of those deductions are, in effect, social research and development expenditures. Even if the federal government does later fund promising programs itself, provincial and local governments will often support them.
However, as a tool for “direct democracy”, charitable tax deductions fall short. These deductions deprive governments of revenue. For net public spending, this is the equivalent of spending that money directly. So the $250 rebate you get from your charitable donation is, in effect, a $250 public expenditure on your charity of choice.
The difficulty with this it is that it is a dollar-driven way of making social choices. Democratic decision-making is based on a pretty simple notion: “one person, one vote”. Yet a donor-centred model is based on a “one-dollar = one-vote”. The subsidization of the charitable sector through tax deductions is, in effect, taking resources from the “one person = one vote” structure we all pay into and giving it to the “one dollar = one-vote” structure that only some pay into.
More worryingly, because of the progressive nature of our income tax structure, the amount of a rebate someone earning $100,000 per year receives is greater than the amount of a rebate someone earning $20,000 per year receives despite making the same size donation. Thus while we are encouraging people to contribute to charity, we are encouraging the wealthy more than we are the poor. This is not simply “one dollar = one vote” this is “one dollar = one vote; two dollars = three votes”.
The simplest alternative here would be the elimination of charitable tax deductions – even charitable status altogether – and only provide social services through direct government spending or fee-for-service government contracts with nonprofits. Some people would still donate to nonprofits, but it would reduce the size of the sector.
The key flaw there is government failure. In a small, homogenous country like Sweden it is relatively easy to build a broad social consensus around public spending. However, the geographic and ethnic diversity of Canada greatly increases the consensus-building challenge. Here there is a greater need for successful experiments to demonstrate value to a population bringing a wide variety of perspectives to the table.
A better solution would keep the dynamism of the sector but set it in an egalitarian framework. One possibility would be replacing the charitable tax deduction with a charitable donation voucher. This voucher, maybe about $200 in value, could be given to any registered charity to be redeemed by that charity from the federal government. At the end of the year any unclaimed vouchers would simply go towards servicing the public debt.
That is just one idea, but there may be other policy approaches that could achieve this. Do you have any ideas? Is it even a problem?
Photo credit: http://www.flickr.com/photos/quinnanya/3829316945/in/photostream/
