Monday, December 20, 2010

Put Social Programs in the Hands of Private Institutions

Government is the great fiction through which everybody endeavors to live at the expense of everybody else. -- Frederic Bastiat, French Economist (1801-1850)

A recent New York Times column by Richard Thaler, professor of economics and behavioral science at the Booth School of Business at the University of Chicago, Mr., Thaler makes a case for reducing the tax benefits for charitable donations, or, more suitably, changing the way we give tax benefits to people who donate money to charitable institutions and causes. Link to article -

Mr. Thaler makes some good points. He lists three principles to help “guide the debate.” Without reprinting everything he stated (link to his column is available below) I will note in summation his arguments - that any person donating to charitable organizations should be allowed the same tax benefit by implementing a tax credit system instead of using deductions (high income people receive a better tax deduction because they are in a higher tax bracket), limiting the tax-benefitted amount to above a certain minimum, such as 2% of AGI in order to require good record keeping and reduce the small-time cheating and resultant IRS nightmare, and keeping the tax credit rate low to prevent large “distortions,” which I take to mean keeping people from donating overly large amounts. As noted above, Mr. Thaler is not only a professor of economics, he is a behavioral scientist as well, and he has obviously thought this out. His article is worth reading.

There is, however, one issue I take exception with; that we should lessen the overall tax benefit, encouraging smaller total donations for the purpose of tax savings. It is my view that any money we can put into private hands (charitable entities) and take out of the public coffers is an excellent tradeoff. I would recommend to some degree just the opposite of Thaler’s suggestion; that we increase the amount of charitable giving through increased tax benefits (government subsidies as Mr. Thaler refers to them) but then lessen the amount the government spends on social welfare programs.

This would accomplish a number of sound, efficient objectives. One would be greatly increased implementation of social programs by charitable institutions such as religious entities and public interest groups, which would use the money far more efficiently than government workers. Private groups are more frugal about their expenditures, not giving money to people they know are faking or over-estimating need, and would be better about demanding effort out of those who are capable. In many cases the money would be spent in efficient food programs, such as those run by Glide Memorial Church in San Francisco. It is harder to pull the proverbial wool over the eyes of your pastor or an administrator of a private group than a government worker (highly paid government worker at that) who usually doesn’t really care. Fraud in the distribution of social program benefits such as welfare and food stamps is rampant, and the government knows about this but is seemingly powerless to stop it.

While it is hard to calculate for certain how much money would be saved through the increased efficiency, I believe private entities could do a better job than the government with less than half the money. By stripping the federal budget by 80%-90% of it’s social program expenditures and reducing revenues by the amount of the increased tax breaks to individuals, there would be a gain in net revenue for the government and a gain in the quality and scope of services to needy individuals.

It is certainly reasonable to expect that fraud will (and does) find it’s way into privately-run programs as well. However, it would probably be easier for the government to detect fraud by auditing private entities than it is to prevent fraud in their own operations.

As Mr. Thaler suggests, a debate on this issue could be beneficial, and his suggestion on issuing tax credits is a good one. However, I think one of the most effective principles for a “guideline” in the debate would be find ways to increase the incentive as opposed to a decrease. As a behavioral scientist, I am sure he would see the merit of this approach.

Mercer Tyson

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