Most readers know that the U.S. has the most extensive nonprofit sector in the world. It also, not surprisingly, has among the most generous of subsidies for private contributions to charitable organizations. Congress periodically gets interested in fiddling with “tax expenditures” that support charity, although the most recent proposals were swatted aside with a “blah, blah, blah, blah” from the House Speaker. Still, for folks like me who study charitable organizations, the rationale for and design of those subsidies are a big deal.
One standard story for why government supports charity is that it’s a cost-effective way to produce public goods. If one dollar of government support can trigger more than a dollar of private spending, all else equal, we should invest that dollar. Studies do find that the tax deduction for contributions to charity is cost-effective in this way, returning somewhere in the range of $1.10 to $1.40 of contributions for each dollar of government revenue foregone.
A worry about these studies is that they are based on donors’ tax returns, not information from the recipient firms. What if changing tax subsidies also influences how charitable organizations behave? These behavioral responses could either improve or undermine the net efficacy of government supports. For example, how much does an average firm spend in fundraising to bring in a dollar of donations?
It turns out, as I report in a new draft, that the answer itself depends on the government’s policy.