Academic journal article Texas Law Review

Keep Charity Charitable

Academic journal article Texas Law Review

Keep Charity Charitable

Article excerpt

This Article responds to recent claims, most prominently by Anup Malani, Eric Posner, and Todd Henderson, that much of the work of the charitable sector should be farmed out to for-profit firms. For-profit firms are said to be more efficient because they can offer high-powered incentives to cut costs. I argue, however, that because of the high costs of monitoring and the presence of externalities, low-powered incentives are preferable for firms that produce public goods, as most charities do. Further, allowing some for-profit firms to receive charitable subsidies would raise the cost of producing those goods in government or other firms because it would diminish the "warm glow" workers enjoy from being recognized as self-sacrificing.

I. Introduction

Everyone likes charity. In the United States, a measure of our warm regard is the substantial tax support we offer to those who make cash or inkind contributions towards charitable endeavors. Ordinarily such largesse is tied to an expectation that those who receive the funds will operate in a charitable way - that they will commit through their organization charter to forgo distribution of profits to themselves or their officers. Leading theorists of the field have maintained that charity could not long maintain its popularity, or even function, without such promises.

Recently, though, some commentators have begun to argue in favor of what might be called "for-profit" charity.1 For example, Anup Malani and Eric Posner argue that philanthropic services could be carried on equally well by for-profit firms.2 Pointing to the charitable efforts of Google and other money-making enterprises, they claim that the deduction is just another form of government contract for the delivery of public goods, much like payments to developers of alternative energy or private security for the Department of State.3 They then offer a series of challenges to the conventional wisdom that these contracts can only be carried out by firms subject to the nondistribution constraint.4 A few other commentators have joined with tentative endorsements,5 albeit sometimes with suggestions for careful internal governance.6

Although these efforts are appealingly counterintuitive, this is one instance in which intuition is not only right but also determinative. As I will argue, the fact that society perceives an organization as charitable is a critical element of the entity's success. By opening philanthropy to potential profiteering, Malani, Posner, and their allies would dilute the power of these perceptions for every firm, including those that remain wholly charitable. And by inviting firms to reward their employees with top payouts for top "performance," they risk seriously compromising the quality of core charitable services - those that cannot be produced in a traditional profit-seeking market precisely because they cannot easily be measured. These dangers far outweigh any potential efficiency to be gained from encouraging charity to cut costs.

Thus, I argue here that federal law should continue to insist that only true nonprofit organizations should be eligible to receive deductible charitable contributions. This claim also implies that firms eligible to receive the deduction cannot pay their key employees with a share of the organization's profits. I do not consider several related but distinct questions, such as whether firms that engage in charity should be exempt from the corporate income tax or whether, at a minimum, a firm should get a corporate tax deduction for the money it spends on philanthropic activity it carries out itself.

The Article proceeds in five Parts. Part II sets out in more detail the theoretical basis for government support for the charitable sector and the traditional explanation - usually associated with the work of Henry Hansmann - for why such support must be tied to a promise not to distribute profits. As Part III explains, Malani and Posner argue that this promise can be replaced with a contract with a private auditing firm. …

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