Taxing Charities

Congress has reconvened and despite a patina of civility my guess is the combatants will shortly withdraw to their respective corners and come out fighting. As we know perhaps the biggest fight will be over the budget deficit. This is always good for lots of ink and some of the more inane ideas that flow from the lips of Congresspersons.

To effect significant deficit reduction spending has to be cut and taxes raised. Duh. The four holies of massive government spending are of course social security, health care, defense and the home interest deduction. Some sensible ideas have been advanced for the first that center on increasing the retirement age for new entrants into the system. That might have a shot. But cutting medicare/medicaid, defense and the home mortgage advantage are in my view much tougher nuts; I do not believe much will or can happen. Clinton erased most of the deficit because he benefited from a rapidly growing economy. Growth is the only realistic driver of deficit reduction.

The entrenched lobbies that drive both houses of congress are formidable. That means the deficit continues to grow but perhaps at a decreasing rate of increase as tax revenues recover as the economy enlarges and modest operational economies are realized in various programs - including cuts that don't require legislative action. Flailing away at so-called "entitlement" programs (in quotes because as my wife says "what 'entitlement?' We pay for both") will, we can be sure, cause the premature death of countless trees.

Meanwhile a number of quixotic notions intended to address the deficit abound. Among them is a proposal that charities be taxed. This is another non-starter because at the federal level a significant revamp of the tax code would be required. On its face that is a better than good idea because there is no way a proposal to tax charities would/could not trigger tax policy overhaul. Of the more than 1.2 million 501-c-3 organizations that file 990s - most are small. Only a tiny fraction have annual operating budgets exceeding $5 million.

But:

• How much tax revenue would charities generate?
• A sliding tax rate or a fixed percentage?
• Exempt religious organizations or not? God.
  
• Forget "death panels:" TV images of starving orphans, abused kittens or closed emergency rooms - i.e. cutting services to pay taxes?I don't think so.

If taxing charities is the best idea Congress can conjure we are either in serious trouble or we can exit laughing.

Ho-ho-ho! The Charity Deduction

In light of the recent extension of tax cuts for the middle class, the rich and the uber-rich full-throated cries for overhaul of the federal tax code have come up (again). Cynic that I am I don't see much emanating from the Cave of the Winds but more wind. But I digress.

In The New York Times on December 19th economist Richard Thaler argues that "it's time to rethink the charity deduction." The burden of his essay is that the donations of the rich are "valued" more than those of the poor because contributions are "subsidized" by the government through tax deductibility. He's right of course. A gift's value is worth more to someone in a 36% bracket than someone at 25% or 15% or zero. His suggestion is that the deduction be replaced by a tax credit to level the field.

We can expect that my industry's lobby will submit that if this happened The-World-As-We-Know-It would end(!) because a tax credit rather than a tax deduction would dis-incentivize and decrease giving at the top. I don't know, nor does anyone else, what the practical effect might be.

To me an equally intriguing problem (about which I have written frequently) is that the 501-c-3 is too broad and many organizations that qualify as "charities" are anything but. There should be a distinction between traditional charity - e.g. serving the poor, helping the sick, etc. and that donations to large and/or less needy charities (size to be determined) should be deductible on a sliding scale - i.e., a higher deduction (or credit) for gifts to the smallest and neediest. I know - how is this to be defined? I have no idea but someone invented the wheel because pushing and pulling was a big drag. This can be solved too.

If you're still awake - who writes about economics at Christmas anyway? - think about it: as a contrarian I pretty much applaud in general the work of WikiLeaks. Quite a show! But is it a charity in the traditional meaning? No. But a gift should be "worth" something but not as much as a gift, say, to a food bank.

Prof. Thaler admits that his other bete noire - the mortgage deduction - should also be one of the first points of attack in re-doing the tax code. His conclusion is that no serious progress can be made on deficit reduction (assuming that is a real concern - economists as usual disagree)and cutting expenses. He also concedes this is a non-starter.

I happen to think messing with the charity deduction is just another dog that won't hunt.

And on that profound note Happy Holidays to all!

HOMELAND INSECURITY: TERRORISTS WIN

ORAM MATTERS focuses on nonprofits, philanthropy and related topics and generally we avoid personal screeds and rants. This blog is a mix of personal and professional because like many of you I am a frequent flier - a road warrior - mainly for work.

I fly out of American at JFK mostly and am pretty much an expert in getting through security without hassle - unless I get stuck behind a family that has gotten into the priority access lane. Until now. Full body X-ray scanners are becoming ubiquitous along with the full-body pat-down (I had a Flair pen in my shirt pocket. Don't ask).

The object of terrorism is first and foremost to intimidate and frighten the civilian population; that is exactly what the Bush and Obama administrations have countenanced. Do you know of a single instance in which a TSA inspection interdicted anything other than your mouthwash and nail clippers? Meanwhile the cargo holds get a pass 98% of the time.

TSA is a huge p.r. boondoggle. Fifty billion dollars or so and counting but I do not feel a whit safer. The invasive X-ray machines should be withdrawn. Up to now inspections have been intrusive, even silly, but tolerable. Now we have crossed a line and without judicial review absolutely compromised Americans' freedom of travel.

Whether the X-ray machines violate 4th Amendment search and seizure the courts will have to decide. I've read that the courts are deferential to the executive branch in these matters so I hold out little hope. Meanwhile we are being bombarded with - according to the government - "microscopic" amounts of X-ray. In my view no one should be exposed to any amount of radiation unless it is absolutely necessary as a health or diagnostic aid.

It is barely possible that public outrage will prevail. TSA has already exempted pilots from the full body scanners; flight attendants are probably next. I don't know if the expediter services that you pay for (and that have not really caught on thanks be) will make any difference. I doubt it.

I hope this image makes you angry and disgusted It's not from J-Date.

If so may I suggest you get to one of the sites that are stirring the pot on this and join in the fight:

http://epic.org/bodyscanner/incident_report/ https://secure.aclu.org/site/SPageNavigator/TSA_Travel_Complaint

MICROLENDING: MACRO FAILURE?

In the 1970s Dr Muhammad Yunus, who went on to win the 2006 Nobel Peace Prize, pioneered in lending very small amounts of money to the very poor and near poor to Bangladeshi villagers enabling them to start small businesses. For example someone would borrow money for a cell phone and then rent out calling time to others. At first interest was modest and repayment was near 100%. Dr. Yunus learned early on that women were more reliable borrowers than men.

This kind of endeavor is known as "contract failure" in academic circles - translated it means nonprofit activity arises when the incentive for profit is either too risky, too scarce or otherwise inadequate to attract investment and return in a for-profit enterprise.

About a decade or so this idea - at least in micro-lending - was turned on its head when banks and other capital aggregators realized they could actually make money lending to the poor if they charged higher interest than a nonprofit investor. And so they did. In India, as today's New York Times and other publications reported, extortionate interest rates have forced poor borrowers to replicate - i.e., borrow from second and third companies to pay interest to the first: a Ponzi scheme in reverse.

All of which brings me to this: in the last half decade a new corporate hybrid has developed. It combines a for profit motive with a greater good (nonprofit) mission. In other words oil and water. I think it may have been Woody Allen who said "when the lion lays down with the lamb the lamb doesn't sleep much." Put otherwise greed trumps need.

In my view the challenge for the hybrid company is to be able to pull this off actually make money and do good. The competition private business has brought to nonprofit micro-lending has essentially compromised an idealistic motive. As today's (Toronto) Globe and Mail wrote on November 12th "A debate is raging between those like Dr. Yunus, who say the sector should remain non-profit with its focus fixed firmly on the very poorest of the poor (those living on less than $1 a day), and entrepreneurs who favour a faster-expanding, for-profit approach backed by investors who want to do good – and see returns."

A related Globe and Mail chart shows what big business this is:

154.8 million Total number of microloan clients around the world as of the end of 2007

13.5 million Microloan clients in 1997

106.6 million Microloan recipients living on less than $1 a day in 2007

533 million Number of people affected by microloans worldwide, when family members are included, as of 2007

1,893 Number of microfinance institutions worldwide last year

$65-billion (U.S.) Size of gross microloan portfolio globally last year

98.95% Repayment rate among borrowers at Kiva.org, the world's first personal microlending website

$381.32 Average loan size at Kiva.

26% Average interest rate for a microloan (though some in Mexico have hit 90 per cent)

(Sources: Microcredit Summit Campaign; Microfinance Information Exchange, Kiva.org, CGAP.)

KIVA by the way is an outstanding vehicle for micro-lending. No it can't compete with predatory lenders

THE GIVING COUNT

On November 11th The New York Times published its annual Giving section; this morning Giving USA Foundation presented the Gurin Forum a timely conjunction. The forum is an endowed program, established twenty plus years ago by the late Maury Gurin one of the country's best fund development consultants, a mentor of mine, an idea machine and a curmudgeon.

This morning's program focused on "The Giving Count -- The Numbers: What Do They Measure? What Do They Mean? Why Do They Matter?" The idea of an open dialog on a subject of common interest to a specific audience is simple enough. But this had never been done in this way for a mostly non-academic audience. Given that 160 people - professional nonprofiteers, philanthropoids, major donors, data researchers and others showed up indicates we touched a nerve (and nearly ran out of Danish).

On behalf of the foundation and the forum I organized and led this event so am responsible for inadvertently failing to invite, among others, Charity Navigator and The Foundation Center, major data compilers for which I apologize and will correct at another opportunity. This collaborative discussion was impelled by the fact that there is a lot of research under way and a lot of data out there, worked on by an array of sources, each working from its own perspective. It's a dog's breakfast so the idea here was to have a cohort of researchers describe their work, tell us what it means, what it measures and why it matters.

There were two panels: the first was facilitated by Stacy Palmer editor in chief of the Chronicle of Philanthropy, Patrick Rooney, PhD executive director Center on Philanthropy at Indiana University; Bob Ottenhoff president & CEO Guidestar USA, Inc.; and Paul Light, PhD Paulette Goddard professor of public service New York University.

The second, facilitated by Ruth McCambridge Ruth McCambridge, editor in chief of Nonprofit Quarterly, facilitated the second panel. that included Charles “Chuck” Longfield chief scientist Blackbaud, Inc.; Ann Kaplan director, voluntary support of education survey Council for Aid to Education; and John Havens, PhD Senior Research Associate & Senior Associate Director Center on Wealth & Philanthropy, Boston College.

An audio of the proceedings has been posted to www.givinginstitute.org. Also available are presenters' PowerPoints.

This could have been a real snooze but because two participants John Havens and Patrick Rooney essentially disagree on each others' methodology. They mixed it up in the donnish fashion expected of academics but proved anew that the death of a drama is the lack of a villain.

FACE OFF

A few weeks ago Facebook Founder Mark Zuckerberg gave $100 million to Newark's mayor so he could improve his city's public schools.This morning it was reported that veteran Wall Street deal-maker and poobah Henry Kravis gave $100 million to his alma mater Columbia University.

At age 26 Zuckerberg is a multi-billionaire on paper. I've seen estimates in the $2-5 billion range. No one knows his net worth because the company is private. Kravis has been exceedingly rich for a long time and now in the late afternoon or early evening of his career has popped for the largest gift he's ever made.

I am fascinated by the juxtaposition of this old and new philanthropy. Both gifts are to education, one from a college dropout (okay Harvard) and one from a B to C student with a Columbia MBA. (I can but conclude that dropouts and C students run the world). Zuckerberg's gift is bold; Kravis' gift is old. Both men are Jewish. I don't know if that matters but they are.

I don't mean to be churlish but Kravis' gift is self-serving, inner-directed like most alumni giving and in support of the status quo. Zuckerberg's gift is outer-directed away from whatever his personal passions are and really quite objective, growing out of a chance meeting (well not exactly chance. Sheryl Sandberg the grown-up Zuckerberg hired away from Google to lend gravitas to what seems a nerdy high-top frat party arranged several "chance meetings" with major philanthropists).

I think Zuckerberg is a genius; I think Kravis is an extremely smart and quite generous transactional society philanthropist (i.e, he likes the limelight) - and a decent fellow from what I've heard. But what has he invented? Produced? Changed? Created? And for this he has made buckets of money. Zuckerberg, whatever you think about Facebook, actually makes a product that doesn't pollute the environment or poison his workers. In the doing he has revolutionized communications less than a generation after Bill Gates and Steve Jobs completely upended computing (as IBM slept). And if he's not quite living over the store his housing arrangements are reported as indistinguishable from a dorm room.

Kravis has a Facebook page. I doubt Zuckerberg even has a broker.

SOROS' GIFT TO HUMAN RIGHTS WATCH

This morning George Soros's $100 million gift to Human Rights Watch was reported. When you look at where these mega-gifts go they are usually to large, well established and well funded higher education or health care organizations, worthy benefactions without doubt. But iconoclast as he is, Soros probably realizes that funding human rights, in which he has long been interested and has long supported, may carry more import than a gift to an already well endowed university or medical center with a development office larger than most state legislatures and a pool of upgradable prospects. It's "setting-out-the-buckets" fund raising.

But funding human rights is a hard slog. There are grim stories of outrages against individuals, families, clans and tragedy aplenty from Afghanistan to Zaire. However systemic efforts to counter egregious abuse are not well understood or effectively communicated. Moreover there are scores of organizations engaged in human rights initiatives. Some tend toward immediate relief or advocacy and all compete for essentially the same donor type.

In Soros's case it seems he wants to give away most of his money in his lifetime and it reminds me of a story. Some years ago I was meeting with a certified billionaire (though not in Soros's class) and he told me he had a problem. Of course I asked what the problem was. "Well." he said, "I want to give away all my money before I die. My problem is I don't know how long I'm going to live."

He's still with us. I occasionally see him on the Times Square-Grand Central shuttle.