and Updates on Current Issues
Compassion Tax Credit
reform is on the way, but most welfare-reform proposals merely shift
control of welfare spending from federal to state government. As long
as welfare is taxpayer funded but government controlled, the seeds of
poverty will be left freely to sprout new generations of poor.
Policy Study, Giving
Credit Where Credit is Due: A New Approach to Welfare Funding,
offers a proposal under which welfare will be taxpayer controlled and
taxpayer funded. Individual taxpayers, both itemizers and nonitemizers,
will receive a 100% federal tax credit for contributions to eligible
charities for up to 25% of their federal tax liability. The tax credit
will shift control of $115 billion of federal welfare spending from
government to individual taxpayers. Some commentators have called this
a compassion tax credit.
charities will be 501(c)(3) organizations that provide services now
provided by government under means-tested programs such as AFDC, food
stamps and housing assistance. These organizations will vie for taxpayer
support by offering superior services to persons who now depend on government
Need for Radical Change
Why so radical a proposal? The existing system treats welfare as an
"entitlement" rather than as temporary assistance offered
on the condition of self-help by the recipient. The result is the creation
of a cycle of welfare dependency.
facts show why the welfare system is broken. Although the poverty rate
declined from 1959 to 1994, there are still more than 38 million Americans,
or 14.5% of the total population, living in poverty. Poverty affects
women and children more than other groups. The poverty rate was 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% in 1993.
statistics stand out against a backdrop of a vastly expanded U.S. welfare
system. In 1990, 11.5 million people received AFDC benefits. Government
spending on direct public aid increased tenfold from $15 billion to
$142 billion from 1970 to 1990. Yet, only 41% of all poverty-level families
receive any government benefits 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
welfare spending is highly inefficient. More than 2/3 of all federal
welfare spending ultimately ends up in the pockets of people who are
recipients will receive at least the same level of support that
they receive now.
this light, the existing entitlement is a Faustian bargain for recipients.
Taxpayers and recipients alike would be better off under a system
that eliminates the government middleman and creates instead a system
under which taxpayers and recipients can arrange directly, with
minimum intervention by third parties, the conditions under which
taxpayer support will be provided. The compassion tax credit creates
this system. It gives taxpayers an incentive to take interest in
how their money is used and gives thousands of social-services workers
an incentive to create new organizations for the purpose of channeling
the increased flow of private donations directly to the poor.
for Welfare Myopia
Welfare is commonly viewed as something government provides. This view
is highly myopic. Individuals give directly to private charities that
perform services similar to those performed by the government welfare
bureaucracy. Individuals give about $17 billion to programs eligible
for the credit. This means that, for those programs, total spending
is about $132 billion, equal to the $115 billion spent by government
plus $17 billion spent by private charity.
to the myopic view, it can be shown that the total amount of welfare
provided rises with the provision of a tax credit. This is owed to the
expectation that tax incentives for charitable contributions lead to
(1) increased giving, (2) increased voluntarism, (3) increased efficiency,
and (4) reduced "crowd-out."
Increased Giving. The provision of a tax incentive for charitable
contributions amounts to a reduction in the price of private giving.
This price is equal to the cost, after taxes, of giving an additional
dollar. Under present law, the price of giving for a federal taxpayer
in the 28% bracket is 72¢. A 100% tax credit reduces this price to zero
(for donations up to the 25% limit). A 10% decrease in the price of
giving increases charitable donations by 11.1%. Provision of a tax credit
will cause private giving to expand by more than tax revenues contract
and thus cause the total amount of welfare provided to expand.
Increased Voluntarism. A recent Gallup poll finds that 29%,
or 70 million, of all Americans volunteer their services to their communities.
Social services receive 10% of volunteer time, while public benefit
organizations receive 6%. Volunteer labor is twice as large as paid
labor for religious and cultural organizations. People who volunteer
their labor give more in charitable contributions. The creation of a
tax credit will add at least 2 million people to the pool of volunteers
for eligible organizations.
Increased Efficiency. Of nearly 50 published papers, 40 find
that private enterprise is more efficient than government at delivering
services. There is strong evidence that private schools are able to
offer a superior education for less money. While schools are not affected
by this credit, they provide a good surrogate. Nonprofit organizations
rely more on volunteers than either government agencies or private sector
Reduced Crowd-Out. Government spending "crowds out"
private giving. A one-dollar increase in government spending decreases
private giving by about 10¢. By reducing government spending, the proposed
tax credit will increase giving.
offered here is structured in such a way that welfare recipients will
receive at least the same level of support that they receive now. Money
now collected as tax revenue will be shifted to eligible charities as
the tax credit reduces the price of giving. (Any moneys not shifted
to such charities will continue to flow into existing federal programs.)
Cost savings realized through reduced crowd-out and increased voluntarism
and efficiency will generate a dividend to taxpayers and recipients.
BHI FaxSheet is a synopsis of James P. Angelini, William F. O'Brien,
Jr. and David G. Tuerck, Giving Credit Where Credit is Due: A New Approach
to Welfare Funding (Boston: Beacon Hill Institute, December 1995). Call
617-573-8750 for a copy of the full report.
25-Jan-2007 11:50 AM