March 15, 2009
American Charitable Deductions Abroad
American Charitable Deductions Abroad-Becker
Pressures for both increased government and private assistance to poorer nations may well result from this recession because some nations that can least afford a setback may suffer the most due to reduced demand for their exports of commodities and other goods. In considering the topic of private charitable giving to other countries, Posner stresses one of the economic rationales for tax exemptions of charitable giving; namely, that tax deductions are a recognition of the interdependence among individuals in the benefits from charitable activities, such as those by hospitals or schools. If many individuals and organizations benefit when recipients of their charity has more resources, each donor will tend to under give because they do not take account of the benefit to other donors from their donations. That is, giving by any individual or organization produces a positive or beneficial "externality" because it adds to the welfare of other givers.
Another important rationale for tax exemption of charitable contributions is to decentralize giving away from the government and toward the private sector. Just as government grants to hospitals and other beneficiaries crowd out giving to these beneficiaries by private foundations and religious organizations, so too does private giving reduce the need for government giving. For example, when private universities obtain support from wealthy individuals and foundations, this allows them to compete more strongly against public universities, and thus reduces the need for as much public funding of higher education. This "crowding" out of government giving may be valuable because private donations are generally better thought out and more efficient than public grants and aid.
Both arguments seem to apply rather fully to giving to foreign charities as well as to domestic ones. Private giving to help foreign hospitals, doctors, schools, or individuals reduces the need for foreign aid by the US government to the same type of organizations and individuals. This is preferable because government foreign aid invariably goes through other governments, and hence tends to be centrally controlled, and subject to government inefficiencies and corruption. Private giving is more effective at getting the assistance to those who need it.
Giving by an American individual or organization to foreign charities also creates an externality to other givers and to others who benefit as well from such giving. There is a positive externality even if one counts only the benefits produced to other Americans, as long as many American individuals and organizations benefit from the giving to particular foreign charities.
That both arguments for tax deductions are applicable to foreign giving makes a case for also allowing giving to foreign charities to be tax deductible. There is, however, one important argument against doing so: the difficulty of determining whether foreign recipient charities are legitimate and acceptable charities. If such giving were deductible, American individuals or businesses might try to funnel assets into fake foreign "charities" that they control in order to reduce their taxes. Such tax evasion may be relatively easy for American authorities to determine for American charities, but extremely hard for them to pinpoint in poorer countries with limited data and few investigations of fraud. It may also be difficult to determine if foreign recipient organizations are spending the contributions received from Americans on desirable purposes rather than in promoting terrorism and other activities detrimental to US interests.
Still, I tend to support allowing at least some tax deduction for giving to foreign charities. Otherwise, it may be just another form of protectionism, where American services and goods are favored over foreign services and goods. Since protectionist arguments take many disguises, it is likely that some of the opposition to allowing tax deductions for foreign charities is due to the desire to impose tax disadvantages on the "import" by American individuals and organizations of foreign "goods".
Tax Deductions for American Charitable Donations Abroad--Posner
Of some $300 billion in annual American charitable giving, about 5 percent is spent abroad; almost 40 percent of that 5 percent is donated by the Bill & Melinda Gates Foundation, mainly for trying to alleviate Third World health problems (such as malaria and AIDS) and provide assistance to Third World agriculture. Total American charitable giving abroad is more than half as great as total U.S. governmental foreign aid, of which almost a third goes to Israel and Egypt.
Americans do not receive an income tax deduction for giving to foreign charities, but they do for giving to domestic charities that donate abroad (provided they don't just donate to foreign charities). Should they? I am inclined to think they should not.
This is not, however, because I think that government foreign aid is a more efficient method of increasing Third World welfare. Little U.S. foreign aid goes to the Third World, and the efficacy of the aid that does go there is undermined by the requirement that the aid be used to purchase U.S. goods and services.
Nor do I question the economic rationale for providing a tax exemption for charitable donations. The argument is that charitable giving provides an external benefit; that is, if I want to increase the welfare of people in Bangladesh, I will benefit from a charitable donation for that purpose made by someone else and will therefore be inclined to give less. Knowing this, that donor will donate less because the value of his donation is diminished by my free riding on it. There is even an argument that placing any restriction on how a person uses his money reduces incentives to earn, but it is hard to believe that this would be a big effect of eliminating the tax exemption for charitable donations to foreign countries.
Although charitable donations to foreign recipients will thus diminish if the tax deduction is repealed, there is likely to be some substitution in favor of domestic recipients, which will increase welfare in the United States; and that seems to me a good thing, especially in a depression. (Of course, the depression may induce donors to reallocate grants to the United States because the wealth of Americans is less; but perhaps not, because the decline in wealth in the Third World is probably as great or greater.) Also, to the extent that total charitable donations fall, tax revenues will rise, which is also a good thing, given the enormous budget deficits that we face. I suspect, moreover, that charitable donations to Americans create more utility than charitable donations to people in poor countries, because the latter donations reduce pressures for desperately needed political, economic, and social reforms. I doubt that Mugabe would still be ruling Zimbabwe if the West did not provide extensive food to its starving population. I have not seen any attempt at a rigorous analysis of the net benefits of charitable contributions to Third World nations.
There is also some danger that charitable donations to foreign countries undermine U.S. foreign policy. But I do not put much weight on this factor, because the government can forbid donations to countries with which we are at odds, or to other countries where we think aid would undermine our foreign or security objectives. An offset, moreover, is that donations from the United States, even if made by private individuals and foundations rather than by the government, build good will toward Americans.