Transcript of Proceedings
Compassionate Welfare Reform: Empowering Charities and Private Citizens
a conference sponsored by
MR. TUERCK: Thank you very much, John.
I would like to join earlier speakers in thanking David Macdonald and Ray Shamie for their support, along with other Beacon Hill Institute supporters of this conference. And I would also like to thank the people on the Hill that have been so helpful to us, particularly, Megan Gilly, Linda Barnett and Jim Cantwell and, from my office, Ellen Foley, who planned and organized it; and Bill O'Brien who wrote most of the material that you see summarized in your folders.
Today I get to address this topic as an academic which means that I don't have to be accountable for anything that I say, which is always the privileged position that we in the academic community get to enjoy. And I am going to be completely academic about this and unaccountable, despite the fact that my institute, under Bill's leadership has done quite a bit of work on designing the implementation of a charitable tax credit.
It's more fun really just to approach it as an economist and say: "Let's see what we have here and what would an economist say about it?"
What we have to begin with is what Robert Rector has correctly documented as a $5.4 trillion failure of a welfare program that, according to the Green Book, published by Congress, cost about $345 billion in 1994, and about 71 percent of which was picked up by the federal government.
And these programs, federal and state, occupy a substantial part of current expenses of federal and state government. We also know that we, having just passed the welfare reform act, are trying to reverse a trend toward rising poverty rates among children, percentages of households headed by single females, rising illegitimacy rates, combined with the fact that two-thirds, as we heard earlier, of the money doesn't end up in the hands of the poor. Most of the poor, for that matter, don't get help.
Now, we've had a monumental welfare reform act this year that doesn't do the job, although as an economist I think that it represents a step in the right direction, merely a modest one, unfortunately.
The broad outlines of this already are clear to all of us here. We know that it ends the existing entitlements in favor of a system of block grants; that it requires approximately half of all single mothers to be working by 2002; that there's a five-year limitation on benefits; bonus payments to reduce illegitimacy; and so forth.
Now that we've passed this Welfare Reform Act, though, it is time to think about what's likely to come next. The danger is that what will come next is a heated debate about whether this act went too far, didn't go far enough, and about whether we want to tighten benefits further and so forth, and how we're going to deal with all the harm that it's going to cause. I'm afraid that that's what the debate is going to be about.
But the debate shouldn't be about that. The debate should be about what kind of a welfare system we want and how we want to use our Tax Code in order to promote social objectives? Let's think for a moment about how an economist would answer these questions.
First of all, it's a given that competition is better than monopoly. Another lesson that we've learned from economics is that altruism, when conducted by government, quickly degenerates into selfishness, coercion and inefficiency.
Finally we need to think, as economists, about whether we want a tax system that works the way it does. What's so special about a tax system that promotes certain kinds of social goals through a system of deductions rather than a system that combines deductions with tax credits.
We have to reflect on this because while we're spending $400 billion a year on welfare, we also have $100 billion a year or more being given by individuals to support charities, which is encouraged by government and for good reason. Government doesn't need to be in the business of providing all the assistance to the poor or providing symphony concerts and supporting art museums and even public policy research institutes.
Another lesson from economics is the great value of unplanned coordination. There's a great deal of fear that under the charitable tax credit the whole charitable system would suddenly be unplanned, uncoordinated by government. But to worry about that is to suggest that we need to put the government in charge of let's say, the Internet, which is unplanned coordination, if there ever was any. Or government in charge of the stock market, or all the other activities that go on without government direction. If unplanned coordination can work in other areas, why can't it work in the delivery of welfare services?
Now, while we're assessing the existing welfare reform act, instead of just complaining and worrying about what it's going to do, let's see what it doesn't do and let's see how we can improve upon that already good step in the right direction.
First of all, the Welfare Reform Act does not do anything about the government monopoly that still controls government welfare spending. We're still going to have money passed out by government, albeit, more of it now at the state level than at the federal.
Secondly, the Welfare Reform Act does nothing to introduce genuine altruism into the process. We've heard today that altruism means volunteerism. We know from the Independent Sector that there are about 20 billion hours a year given by volunteers which, at the minimum wage, converts to about $100 billion worth of value that is added to the welfare system by volunteers.
Genuine altruism means giving of your time and not just of your money. It means tough love along the lines that we've heard earlier today from Lou Nanni and previously, by Marvin Olasky.
Finally, the existing Welfare Reform Act does not address the whole question of whether we want to have the existing set of tax incentives. We could have a discussion about that, even apart from the charitable tax credit. There's a long line of discussion among economists about whether tax deductions are really the best way to promote social goals through the tax system.
In fact, there's a quote from the recently deceased and recent Nobel Laureate, William Vickery, who started this line of criticism in 1947 when he condemned tax deductions for importing a serious plutocratic bias to private giving. There's nothing special about tax deductions. Tax credits could be far better where we want to apply them because of the fact that they allow a greater participation by low-income taxpayers and by nonitemizers than does a tax deduction.
Finally, John Fund read from our survey, a while ago, and that survey reinforces what we already knew. Namely that private charities don't much like oversight.
They want more money. Most of them in our survey said they liked the tax credit well enough, but they do not, however, want to be watched by their donors, particularly, and they do not want to take over an expanded set of responsibilities.
We saw some of that in today's Washington Post where a group of Maryland religious organizations were complaining that they were being asked to pick up a greater share of the burden for caring for the poor.
Well, what's the big surprise? Where you have monopoly, you have resistance to change. Where you have monopoly, you have a fear of the kind of change that could come with a restructuring of the system. No one should be surprised, I think, to see a charitable tax credit being resisted by charities, large and small. Only a few as we've seen today, might see this as an opportunity for them, not only to assume more responsibility, but also to get the kinds of funds that they need in order to do their job more effectively.
There are a number of proposals before Congress and some are sponsored by our co-hosts today, particularly, Senator Coats, Representative Kasich and Representative Knollenberg and the other co-hosts of this conference.
My own institute has developed a proposal that would essentially privatize all federal non-Medicaid means tested spending and could accomplish that with a 100 percent tax credit up to 25 percent of the individual's tax liability.
What do we find when we look at the idea of a tax credit from the point of view of an economist? We find that it would inject competition into the delivery of welfare services. And this is competition between charitable organizations for donor dollars and, most importantly, between charitable organizations for recipients. Recipients now have essentially one monopoly to go to.
Private charity, despite what we've heard today, has been marginalized in its ability to contribute to that process. Now, we'll open up competition between charities, not only for donor dollars but also for recipients. The charitable tax credit puts the taxpayer in charge of how his money is spent.
And, finally, it makes the provision of charity more democratic. It opens up greater participation by low-income taxpayers and by nonitemizers in the provision of welfare services.
We know a few things about how donors and how charities would respond to a tax credit. We know that when the price of giving goes down, the amount of giving tends to go up faster than the amount of tax revenue lost. We know that when government pulls out of providing charity, that taxpayers respond by giving more. We know that when taxpayers are given tax incentives to contribute, they volunteer more. We understand that there is concern on the part of organizations that would be left with only the existing deduction and that would not be entitled to the tax credit. They have a valid concern. I can certainly relate to the idea that we don't want to see donors turn away from organizations that continue to be eligible only for a deduction. Certainly I have a vested interest in that.
However, that issue can be addressed by administrative solutions establishing thresholds of the kind that would make sure that all the new money went to charities that qualified for the credit and that the money going to other organizations did not diminish as a result.
And to support that idea we also know that there's a high correlation between giving, that if people give more to one charity they are likely to give to another.
We have collected a substantial amount of evidence from the states. Since my time is up I would invite you to look directly at the green material at the left-hand side of your folder for more details.
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