Credit is Due:
A New Approach to Welfare Funding
emergence of welfare reform as one of the leading issues of the
day symptomizes the failure of the welfare state that emerged out
of the Great Society programs of the sixties. In light of the growing
unpopularity of those programs, welfare reform is inevitable.
welfare reform of the kind being considered or implemented in Washington,
DC and in various states will not solve the problem. As long as
the existing welfare-delivery mechanism remains in place, reforms
such as limiting benefits or mandating school or work by welfare
recipients will do little to reverse the trend of the last 30 years
toward the creation of a large, costly dependent class.
reason lies in the method by which the government funds welfare
programs. Under the existing system, the taxpayer (who is a potential
donor to charitable, nonprofit organizations) sends his money to
Washington, DC, where part flows into the welfare bureaucracy, and
where a fraction of that part eventually flows into the pockets
of welfare recipients.
this process, the taxpayer/donor has no incentive to take an interest
in how his money is spent. First, he has no clear idea (indeed,
it turns out that no one has a clear idea) of how much of his tax
dollar finally makes it to the welfare recipient. Second, he has
no control over the disposition of that tax dollar or, therefore,
over the behavior of the welfare recipient.
the citizen casts a vote for president or congressman, he does not
have the slightest hope that, in doing so, he can directly allocate
some fraction of his tax dollar to those welfare recipients who
are deserving and worthy, and away from those who are not. Legislators
and faceless bureaucrats make those decisions for him.
long as welfare is thus taxpayer funded but bureaucrat controlled,
the seeds of poverty are left freely to sprout new generations of
poor. The only solution is to make welfare taxpayer funded and taxpayer
federal income tax provides a mechanism for effecting this solution.
In order for taxpayers to fund a system of social welfare, it is
not necessary for their tax payments to flow into government offices.
The same funds can flow, instead, into private charitable organizations,
which can help recipients lead productive, independent lives while
offering a cost saving to the taxpayer.
Tax Credit for Charitable Contributions
study proposes a federal tax credit for charitable contributions.
Under the proposal formulated here, taxpayers will be able to deduct
100% of their contributions to eligible charities to up to 25% of
their federal tax liability. The creation of a tax credit effectively
gives the taxpayer/donor a choice between sending his welfare dollar
to Washington, DC or to the charity of his choice. It also reduces
federal spending and brings spending decisions closer to the taxpayer/donor.
giving the taxpayer control over where his dollar is spent, the
tax credit creates an incentive for the taxpayer to take an interest
in how that dollar is spent, to monitor the work of the receiving
organization and, perhaps, to spend time volunteering. It correspondingly
creates an incentive for eligible charitable organizations to vie
for contributions from donors and to do so by offering superior
services to their clients.
proposed tax credit will serve as a catalyst for the creation of
thousands of new humanitarian nonprofit organizations, some of which
will be created by people leaving government who hope to use their
entrepreneurial skills to help make a difference. This group of
new organizations will respond to the increased opportunities presented
by the tax credit to apply private initiatives to the solution of
social problems. Since competition leads to economic efficiency,
we expect these organizations to be more innovative and successful
than government in providing social services.
tax-credit proposal offered here raises four types of research questions:
How, in light of history and evidence, are taxpayers/donors likely
to respond to the credit? Will they give and volunteer more, or
How, given the response by taxpayers/donors, should the tax credit
be structured? What limits should be placed on the credit to assure
(1) the appropriate flow of welfare services and (2) "revenue-spending
neutrality" (equality between the money lost by government minus
governmental overhead and the money directed to eligible charities)?
How will the tax credit work in practice? Will taxpayers/donors
change their giving as predicted? Will new donors come forward once
their tax incentive is increased? Will donors volunteer and take
an interest in how their money is spent? How will new charitable
organizations arise? What services will they provide? How will charitable
organizations and their clients adapt? What federal agency will
perform oversight of eligible charitable organizations?
How will charitable organizations measure success in shifting from
public to private provision of welfare? Will it be in terms of their
ability to provide services efficiently with low overhead or in
terms of measurable success in helping the poor: a reduced incidence
of teenage pregnancy, increased success in job placement, and so
Andy Shemeline, it was a chunk of iron that inspired him to
move to Idaho and raise cattle to feed hungry people. While
laboring as a construction worker in Chicago, he sustained
a head injury after a crane operator dropped some iron on
him. The ensuing epiphany moved Shemeline, in his own words,
to "do something for somebody else."
Shemeline started HAPPY (Help American People Prosper Yearly),
a small cattle farm to which he devotes most of his money
and energy. The 64-year-old rancher struggles to keep his
ranch solvent while donating its output of hamburger, roasts,
and steaks to area food banks. He provides the brunt of the
money needed to maintain his operation.
Shemeline works 14-hour days, escalating costs, rent, and
scarce water threaten his endeavor. While he wants to continue,
he acknowledges the factors that jeopardize the ranch and
the possibility of having to shut it down. An infusion of
donations, however, would enable him to continue helping feeding
the hungry in the Pacific Northwest.
study addresses questions 1 and 2. The only satisfactory way of
addressing questions 3 and 4 is through a model program that provides
an experimental field test of the tax credit idea. We suggest a
matching-gift experiment that would provide a test of this kind.
in Theory and Practice
theory recognizes an argument for classifying welfare as a "public
good." This argument implies that, because the provision of welfare
confers benefits on taxpayers as well as recipients, the welfare
system is an appropriate object of taxpayer support. But this argument
implies only that taxpayers should support welfare, not that they
should cede the provision of welfare to government bureaucrats.
Welfare can be taxpayer controlled as well as taxpayer funded.
history of U.S. welfare reflects a tension between two views regarding
the responsibility for providing welfare, one that puts this responsibility
on the individual and another that puts it on government. In early
times, the first view dominated. In current times, the second view
dominates and will continue to dominate under the welfare reform
now under consideration.
the poverty rate declined from 1959 to 1994, there are still over
38 million Americans living in poverty. Poverty affects women and
children more than other groups. The poverty rate was 14.5% for
the total population and 54% for single, female heads-of-household
in 1994. The poverty rate for children rose from 14.9% in 1970 to
21.8% in 1994. The percentage of households headed by single females
rose from 9.8% in 1968 to 21.7% in 1993. The percentage of families
headed by never-married individuals rose from .7% in 1968 to 8.1%
statistics stand out against a backdrop of a vastly expanded U.S.
welfare system. In 1990, 11.5 million people received benefits under
the AFDC program. Government spending on direct public aid for AFDC,
food stamps, housing, and so forth increased tenfold from $15 billion
to $142 billion from 1970 to 1990. Yet, only 41% of all poverty-level
families receive any government benefit at all. Only 23% of all
poverty families live in public housing or receive housing benefits,
and almost half of those receiving benefits are not poor. In other
words, government spending is tremendously inefficient. More than
2/3 of all federal welfare spending ultimately ends up in the pockets
of people who are not poor.
Charity in Perspective
gave $102 billion to private charity and $17 billion to nonprofit
human-services and public-benefit organizations in 1992. Between
38 million and 98 million people volunteered (the number depends
upon how one defines volunteering). Individuals at opposite ends
of the income distribution gave higher proportions of their income
to charity. Religious organizations received close to two-thirds
of all contributions. Social services received 10.5%, while public
benefit organizations received 6%.
are 85,800 social and legal services nonprofit organizations that
provide individual and family services, job training and vocational
rehabilitation, residential care, day care, and legal aid to the
poor. Social and legal services nonprofit organizations receive
42% of their revenue from government, 35% from private giving, and
23% from fees for services. The evidence suggests that the 42% provided
by government can be more efficiently donated directly by private
givers to the nonprofit sector. This removes a layer of government
bureaucracy and increases the value of contributions.
What Does the Literature Say?
reviewed the literature to see what light it sheds on the questions
of (1) why people donate time and money for the betterment of others,
(2) how the amount of giving relates to the price of giving, as
determined by the tax deductibility of giving, (3) how tax policy
affects voluntarism and (4) whether government spending crowds out
private giving. The literature points toward a strong positive relationship
between tax incentives and the willingness of people to give and
to volunteer -- an important point if we are to shift the welfare
system from the public to the nonprofit sector.
literature also suggests that the standard economic model, in which
individuals act only out of self interest, can be generalized to
incorporate altruism. The generalized model accommodates both pure
altruism and a more paternalistic form of altruism.
27 studies that we reviewed, all 27 found that giving increased
when the net price of giving fell. Seventeen of these studies found
that the estimated coefficient on giving was greater than one, implying
that increased tax incentives yield more in additional giving than
they cost in lost revenue. Government can both increase the amount
of money going to the poor and reduce tax burdens by making the
tax incentives for giving more generous.
related issue is whether giving and volunteering are complementary
activities, that is, whether the individual who gives more to charity
is more likely to take a personal interest in the charity and to
help by volunteering. Some (but not all) of the evidence supports
this expectation. A recent Gallup poll found that 29% (some 70 million)
of all Americans volunteered their services to their communities.
We expect the creation of a tax credit to add many more people to
this pool of volunteers.
is the expectation, finally, that government spending "crowds out"
private giving. Thirteen studies found estimated crowd-out to range
from - .5% to - 35%, that is, a one-dollar increase in government
spending reduces private giving by between .5 and 35 cents. Of nearly
50 published papers, 40 found that private enterprise is unequivocally
more efficient than government at delivering services.
sum, the literature is instructive on the subject of the feasibility
of a tax credit for charitable contributions:
Both theory and evidence strongly support the idea that tax incentives
yield a net gain to society: The increased giving to charity exceeds
the revenue lost to government.
There is evidence, in addition, that, by encouraging giving, tax
incentives encourage volunteering.
The private sector can provide services more efficiently than the
Government spending crowds out private giving.
findings suggest that tax incentives aimed at transferring the provision
of welfare services to private charitable organizations represent
a cost-effective vehicle for welfare reform. Because, in offering
them, government produces more in giving than it loses in revenue,
tax incentives can yield a bonus in the form of increased welfare
services to the poor.
as the same tax incentives indirectly encourage taxpayers to volunteer,
they also offer a vehicle for lowering the costs of delivering welfare
services. Finally, the tax revenue lost by offering a tax incentive
is recovered in part by the reduced crowd-out that results.
Peggy Brown runs The Mandela Town Hall Health Spot and Youth
Program, in Lower Roxbury, Massachusetts, an economically
disadvantaged section of Boston. Young people congregate in
her facility for socializing and a snack at the "feasting
table." In winter, she distributes warm clothing.
Dr. Brown does not give handouts. "It's simple," she says.
"To be successful today, we must work hard, have self-discipline
and learn marketable skills. My young people will go to college,
if that's what they want, because they will make it happen
Brown coaches the Mandela Crew Team. This group of young people
races teams from throughout the area. "If these young people
can be motivated enough to be on the Charles River in Boston
at 6:00 a.m. in November, then they can be motivated enough
to accomplish anything. That's a metaphor for life."
of the Credit
in order to avoid "underpricing" our proposal, we did not count
any of the expected cost saving in structuring the tax credit. As
mentioned, we aimed, in designing the tax credit, to achieve revenue-spending
neutrality. In order to make the credit neutral in this sense, it
is necessary (1) to identify the kinds of government services that
will be shifted to private charitable organizations, (2) to identify
the amount that is spent on those programs under current law and
how much of that amount is caught - wasted - by the bureaucratic
"filter" and (3) to calculate the upper limit on the tax liability
that must, in the light of (1) and (2), be imposed in order to bring
about revenue-spending neutrality.
these guidelines, we determined that only qualified 501(c)(3) organizations
that provide services to the poor will be eligible to receive contributions.
Assistance to the poor means assistance for basic human needs. This
includes food, shelter, clothing, housing and job training. Organizations
providing medical care and intermediaries like the United Way will
not be eligible for the credit. No more than 30% of the organization's
annual expenditures can be for expenses other than exempt-purpose
expenses, such as administration and fundraising.
proposed credit will be limited to contributions of cash by individuals
only. Pass-through entities such as partnerships and S corporations
will be permitted to take tax credits because individuals are ultimately
responsible for tax and income originating from these sources. Nonitemizers
will be eligible for the credit. This removes an inequity in the
current law, spurring greater interest in volunteering and contributing
on the part of these taxpayers. Contributions eligible for the credit
will be allowed for contributions made during the year, and up until
the date the return is filed.
credit will have different effects on different states and regions
owing to the expected inclination of taxpayers to give locally.
The resulting disparities show that welfare recipients stand to
gain in some states and to lose in others. Migration and state-government
initiatives will mitigate the losses.
substantial amount of taxpayer money flowing into the welfare system
gets caught in an administrative filter. The amount caught in this
filter is estimated at $17 billion, or 15% of the total eligible
welfare expenditures. After adjusting for the savings from elimination
of the administrative filter, the disallowed tax deduction for credit
contributions, and nonprofit organization and governmental administrative
overhead, the total tax credit allowed will be $115 billion to be
revenue neutral. Based on a static model of giving, the maximum
percentage of a taxpayer's total tax that will be eligible for the
credit is 25%.
Buttenweiser family of Belmont, Massachusetts founded the
Family-to-Family Project, the purpose of which is to help
homeless families navigate the various obstacles that often
frustrate their acquisition of permanent housing. The philosophy
of the Project requires participating families to assume an
active role in this process. While Project members will usually
limit direct financial assistance to $4,000, Ann Marie Healey,
Executive Director of the Project, avers that "most families
don't even need that much."
to Healey, minimal assistance in the form of a refrigerator
or seed money for rent may suffice to provide homeless families
with housing. With its emphasis on family involvement and
staff assistance, the Project incurs very little in administrative
developed an econometric model of charitable giving and estimated
it using a 1991 data set comprised of information from individual
taxpayer returns. We investigated several possible scenarios, using
tax credits of different sizes.
found that charitable giving is related to the price of giving,
as measured by the after-tax cost of a dollar's worth of donations.
A 10% decrease in the price of giving increases charitable giving
by 11.1%. Charitable giving is related to income. We estimate that
an increase in income of 10% increases giving by 3.5%, implying
that giving is a "normal good."
who itemized in 1991 made $63 billion in charitable contributions.
Nonitemizers made approximately $39 billion for a total of $102
billion. The average amount of giving for taxpayers with adjusted
gross incomes over $200,000 was $14,040. This comprised 2.75% of
income. The average amount of giving for taxpayers with adjusted
gross income below $15,000 was $399. This comprised 5.99% of income.
for programs eligible for the tax credit totaled $17 billion in
1991. Of this amount, an estimated $11.2 billion was given by itemizers
and $5.8 billion by nonitemizers. We estimated the levels of giving
under several different tax credit scenarios and, on the basis of
our findings, recommend that taxpayers be allowed a credit of 100
percent for eligible charitable contributions up to 25 percent of
total personal tax liability. Under this scenario, taxpayers will
contribute more than enough money to transfer welfare responsibility
from the public sector to private nonprofit organizations.
with a deduction for contributions above the limit, the law will
achieve tax-and-spending neutrality where the amount of the lost
revenues is compensated for by reduced government spending on welfare
volunteers represent an important method by which charitable organizations
are able to deliver services at low cost, we investigated the effects
of the tax credit on donors' and other individuals' willingness
found that volunteer labor is most important to religious, health,
and education organizations. Volunteer labor was twice as large
as paid labor for religious and cultural organizations. Most volunteers
performed clerical, manual, leadership, or fundraising roles. People
who volunteer their labor gave more in charitable contributions.
estimate that approximately 3.76 million volunteers donate time
today to organizations that would be eligible for the tax credit.
We estimate that enactment of a 100% tax credit will produce an
additional 2.06 million volunteers. We base our estimates on research
that shows volunteering and giving to be "complementary goods."
too our estimate does not take into account the expected growth
in the nonprofit sector. It is quite possible that this growth will
induce another 6 million people to become volunteers.
in America means sharing. Families congregate, friends meet,
coworkers exchange good tidings, and community organizations
plan special events and meals to help the less fortunate.
Government, too, helps by distributing food to these community
organizations. In 1995, however, for seven days, including
some of the week before Thanksgiving, all nonessential federal
government services stopped because President Clinton and
Congress could not agree on a budget plan. One program deemed
nonessential was the distribution of turkeys by the Departments
of Agriculture and Education.
no budget agreement in sight, many less fortunate individuals
faced a turkey-less Thanksgiving. The County Food Bank in
Worcester, Massachusetts immediately sent out a plea for help
since they could no longer rely on the federal government.
The response was overwhelming. Small and large businesses
agreed to donate large numbers of turkeys. Unions donated
labor and worked phone banks while individuals chipped in
with their time and brought in single turkeys. A nine-year-old
girl donated $30 of her allowance. According to Janet Ward,
director of the food bank, "This is the greatest thing that
ever happened to the food bank. We've had countless people
saying I've got a turkey. Where and when can I deliver it?"
the President and Congress agreed to a stop-gap measure that
allowed the federal government to resume its operations, including
turkey distribution. Yet for a short time the people of Worcester
County had a chance to show their community spirit, to show
what they could accomplish if the need arose, to show what
could happen if the federal government returned some of its
functions back to the communities. The spirit of voluntarism
soared. Community action, powered by the feeling that comes
from helping, ensured that the needy would not be forgotten.
assessed the relative efficiency of nonprofit organizations, particularly
schools. There is strong evidence that private schools are able
to offer a superior education for less money.
public elementary schools in Texas spend $3,686 for each pupil,
Catholic private elementary schools spend a mere $2,137. At the
high-school level, Texas spends $4,282 for each public-school pupil
while Catholic high schools spend only $3,666. Boston and New York
spend over $7,000 for each public-school student, most of whom achieve
poor results on standardized tests. By comparison, the Marcus Garvey
School, a private school in South Central Los Angeles, teaches sixth-graders
calculus while spending $3,600 for each student.
also found that nonprofit organizations rely more on volunteers
than either government agencies or private sector businesses. Salaries
and wages dominate the expense reports of all sizes of nonprofit
organizations and comprise the largest class of expenditure. Yet
spending is lower for this category than comparable private and
public sector industries because of the use of volunteers. Compensation
of employees dominates the uses of resources as a percentage of
total resources used, no matter what the organizational form.
nonprofit organizations, measured by aggregate contributions received,
pay a higher proportion of their expenses as salaries and wages,
implying a more corporate, more formal atmosphere with less reliance
on volunteers. Larger nonprofit organizations give more money out
as grants and allocations. Smaller nonprofit organizations give
out more assistance to specific individuals. This suggests smaller,
more entrepreneurial organizations will spring up to meet the needs
of the displaced welfare state.
input-output tables, we found that compensation of employees and
real estate are the two biggest resource uses for most areas of
production or service. Social-services industries use more resources
for advertising, as evidenced by higher percentages of spending
(between 1% and 5% of total spending) on this item than comparable
groups. This implies that these industries are willing to perform
outreach to raise funds. Oversight by donors and the need to be
effective in providing welfare services will deter eligible organizations
from overspending on fundraising.
include two appendices that provide ancillary information. These
include: (1) an overview of the major means-tested welfare programs
in existence today and (2) a sample of existing nonprofit organizations,
some eligible and some ineligible.