The public interest revisited

Got a very kind and thoughtful e-mail from Rob Reich at the Stanford University Center on Philanthropy and Civil Society, whose 2005 article A Failure of Philanthropy in the Stanford Social Innovation Review poses important questions about the tax subsidy to giving.  For example, if rich families give to the schools their children attend, then they receive a direct benefit through the tax subsidy to their giving.  Hence the tax system is regressive in that it helps the affluent to help themselves.

Rob (who gave his permission to respond to him on this blog) picked us up on a comment in an earlier post about the public interest test for subsidising giving through the tax system that: “Cases of individual wrongdoing are shocking of course, but it’s less clear whether there is a widespread problem.”  Rob suggests that we have ignored a more fundamental issue, which is that a lot of giving goes to causes that don’t generate a public benefit.  For example, 50 cents in every dollar given in the US goes to the pursuit of religion (this does not include faith-based social service institutions) – how much public benefit is there in my choice to participate in organised religion?  Or what about niche organisations like the Klingon Language Institute?

One could argue that religion (and speaking klingon?) should be subsidised because it yields benefits through making us better people.  But that’s hard to prove.  There’s probably a stronger case to be made that subsidising this type of ‘club’ activity helps to strengthen civil society, which yields positive externalities for society as a whole, although again hard to measure.  The tax subsidy also creates an incentive for organisations to operate within a legal framework where they have to meet certain standards of governance and transparency, which may prevent a public disbenefit from having poorly run institutions that could do harm to society.

Even taking these points into account, we have some sympathy with Rob’s argument – the public benefit from subsidising the largely private consumption benefits of religion is hard to prove.  But even if you take a hawkish stand on the public benefit of club activities, the problem remains of what to do about it.  As we argued earlier, it remains to be seen whether the revision of the law on public benefit, particularly around gifts to education, in England will have substantial effects. 

Rob then poses a second question: that subsidising the giving of rich donors to support civil society creates a ‘plutocratic bias in the incentive system’.  This an important issue that we discuss in the book.  George Soros has used his giving to support the democratic movements across the former Soviet Union, Jeff Skoll used his wealth to finance Al Gore’s Inconvenient Truth film, Pete Peterson endowed a foundation last year to persuade the American people that the federal debt needs to be addressed, New York Mayor Michael Bloomberg used his private money to finance his political career, and so on.  Is it a problem that the rich can use their money to influence politics?  On balance, in mature political systems like the US that have checks and transparency in the democratic process, we argue that rich philanthropists can be a force for good in our politics.

That is not to say that philanthropy is better than grassroots social movements.  They are complementary forces that can work together to achieve great things, like the One campaign/Make Poverty History campaign that levered massive commitments to increase aid by the G8 in 2005.

An historical footnote:

The 1601 English Charitable Uses Act established a regulatory mechanism to investigate abuses of money put into charitable foundations.  This is not a part of the history of philanthropy that we were able to go into much detail about in the book but we’d refer interested readers to two sources.  First, David Owen’s English Philanthropy 1660-1960 (published in 1965 this is the most recent general history of philanthropy in England), which describes how the 1601 regulatory mechanism of ‘special commissions’ to investigate abuses was finally replaced in the mid 19th cenury by the Charity Commission after investigation and lobbying by the politician Henry Brougham.  Second, Anthony Trollope’s novel The Warden that captures the flavour of the debate about charity in Victorian Britain through the story of an idealistic young man called John Bold and his efforts to reform an ancient charitable trust, Hiram’s Hospital, that provides little public benefit.  Senator Grassley is heir to a long tradition.

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