Sunday, August 22, 2010

McCormack on Recognizing the Negative Externalities Created by Charities

Shannon Weeks McCormack (UC Davis) has posted Taking the Good with the Bad: Recognizing the Negative Externalities Created by Charities and Their Implications for the Charitable Deduction on SSRN.  Here is the abstract:

The tax code allows donors to deduct amounts donated to an extremely broad variety of organizations deemed to create societal benefits (i.e. positive externalities), leading to a rapid proliferation of such organizations. Subsidy theory is one of the most utilized theories offered by scholars to limit the availability of the charitable deduction. Under this theory, a deduction is warranted for efficiency-enhancing transfers to organizations providing underfunded public goods. This Article focuses on the efficiency prong of the analysis. Subsidy theorists use the Kaldor-Hicks model for determining whether a transfer from donor to donee is efficient. According to this analysis, a transfer is efficient (and a deduction for that transfer appropriate so long as the other prongs of the analysis are fulfilled) if the total net benefits created by the transfer outweigh total harms. Subsidy theorists assume that the harms caused by donee-organizations are limited to the revenue effects of the deduction and slight psychic harms. As shown, when harm is limited in this manner, it is easy for the transfer to be efficient. However, subsidy theorists fail to recognize that many organizations that may receive tax-deductible contributions cause more serious negative externalities. This Article seeks to fill this gap. Once negative externalities are considered, it becomes clear that the results yielded by the Kaldor-Hicks model are not useful in analyzing the charitable deduction. The model produces results that may be incompatible with pluralistic notions lying at the heart of the deduction’s justification and would allow taxpayers to take deductions for donations to organizations that impinge upon important rights of certain segments of society. The Article suggests that, in order to reach appropriate results, one must ensure that certain Rawlsian notions are not violated. Specifically, individuals should be able to live full and meaningful lives, as fair and equal members of society and the government should not subsidize transfers that hinder this ability. Second, the government should not support one reasonable conception of the good over any other, and therefore deductions (i.e. subsidies) should not be granted for organizations advancing any particular conception of the good. Using these principles to assess current law, the controversial disallowance of deductions made to lobbying organizations is clearly correct. Current law, however, inappropriately allows donors to take deductions for amounts contributed to other organizations violating these principles, such as churches that engage in lobbying, sibling-organizations of lobbying groups that seek to change public opinion by proselytizing, and groups like the Boy Scouts of America that discriminate based on sexual orientation.


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