Thursday, June 23, 2011

Brian Galle: Do Charitable Subsidies Decrease Social Welfare?

Brian Galle has posted, "The Distortionary Effects of Subsidies for Charity in a Federal System,"  in which he questions the conventional wisdom that charitable subsidies invariably increases social welfare.  He suggests that the undisciplined application of subsidies might actually decrease social welfare.  Here is the conclusion:

We have shown here that the leading normative justification for subsidized charity inadequately explains that subsidy. The claim in the literature is that subsidies are welfare-increasing. We show that, once interactions with local government are taken into account, in many cases it is ambiguous whether a subsidy would increase social welfare. At best, then, the traditional justification is fully persuasive only in those instances, sketched here, in which the welfare-reducing aspects of the subsidy are mitigated. For example, our analysis implies that the traditional rationale cannot explain subsidies for universities, hospitals, or social-service organizations, all of which can create localized negative externalities and are not fully subject to crowd-out. Accordingly, our analysis can be read to suggest that the subsidy should be available for a dramatically narrower class of organizations than are currently eligible to claim it. Given that the subsidy bears an estimated tax cost of $50 billion annually in the United States, and that eligible recipients account for on the order of one-seventh of U.S. GDP, we think this is a significant result. We note, though, that once nonprofits and local government are considered together as substitutes, new justifications for the subsidy emerge. For example, the threat of nonprofit production of public goods might be desirable when Tiebout sorting is implausible, such as in conditions of high exit costs. In that case, nonprofit production serves the competition function that is usually attributed to federalism. We analyze these possibilities at greater length elsewhere. (Galle 2011).



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