Thursday, January 24, 2013

The fight over the charitable tax deduction is a red herring

The following post went "live" on December 17, 2012 by accident, because I had mistakenly mis-set the posting function from "Draft" to "Post." I took it down because what went live really was a draft - I spent several days rewriting it. I'm re-posting it now because, for a variety of reasons, I'm not getting any further on my intended re-write and didn't want to lose this set of thoughts completely.
(Lucy Bernholz, January 24, 2013)

A recent report found Harvard University paid its money managers (of which there are fewer than 100) more than it paid its arts and science faculty (of whom there are 450).This led several wise-cracking Twitterers to note that Harvard had become "A giant hedge fund with a little school attached."

I laughed, then sighed. But I couldn't stop thinking about it (and not just because I am required by the nature of my undergraduate diploma to find every opportunity to laugh at Harvard).

Even if this is what Harvard has become, is such a cross-subsidy model really so bad? If the endowment didn't earn so much, think of how high tuition would be and how little financial aid would be offered.

One service (ad delivery) cross-subsidizing another service (information delivery) worked to support newspapers for over 150 years. Journalists and democracy theorists now bemoan the loss of that cross-subsidy while worrying about the future of news.

We live in a time when the CEO of an organization called the Nonprofit Finance Fund is quoted in The New York Times saying “The actual distinction between the two sectors, for-profit and nonprofit, is starting to collapse.” If this is becoming true, even if just in terms of revenue models, then it's high time to think about what purpose the distinction between sectors once made, and what will be lost by the blurring that is happening.

So the question ought not to be "Shall we save the tax deduction or not?" but "Why, when, and how do (and should) we use private resources for public benefit?" 

Then we can move on to asking "Do we want or need to provide policy incentives to encourage people or corporate entities to use their resources in certain ways?"

I understand this is a much bigger question and thornier policy design challenge than modern day politics makes possible, particularly while edging closer to falling off a fiscal cliff. But, as Ethan Zuckerman has pointed out as part of the future of journalism discussions, ifyou set out to solve the wrong problem, you're probably notgoing to come up with the right solution. Asking the right question provides part of, perhaps the most important part, of a good answer.

Whatever the current budget negotiations yield for the future of the charitable contributions deduction, let’s realize that a resolution on the question is but a start to a series of bigger and larger questions about the future of the nonprofit sector.  If the charitable contributions deduction remains unchanged, the larger forces at work are already changing the fundamental dynamic at the heart of deploying private resources for public benefit.

Go back and consider the power of that cross-subsidy. When it comes to information and data as a resource for good, we've reached an interesting point. Nonprofits are under enormous pressure to earn money from their data. The likely action for many has been to keep data out of the free/public/open realm for as long as they can while they try to earn money from it. But the commodification of data is a train that has left the station, even if nonprofits are racing to keep a step or two ahead with what they can charge.

Interestingly, commercial technology and data companies - which operate on far larger scale and with much greater resources - often donate their tools and talent to social causes. These actions are subsidized by their paying customers outside the social realm. They don't need to earn revenue on their social sector actions - they're doing this work to do good and keep their employees engaged. Many of them see data as a public benefit and are leading the charge for open, free sharing of the data they help collect, manage, or analyze. 

Ironic, eh?  For-profits push for information to be free (and sometimes call it corporate philanthropy or corporate social responsibility, or occasionally social enterprise), non-profits stand back and try to make money off of data.

If you were a policy actor who believed that the provision of data in a transparent and usable fashion was an important lever of change, what decision would you make about how best to serve the public? Would you champion the efforts of nonprofits or of commercial entities?  How is the public best served? Where do the resources come from? What kind of subsidies, and cross-subsidies, are really at work here? This is the weird new world we live in, and the one for which we need to be writing new rules. Data use and ownership rules are the key to this future, not tax deductions for charitable contributions.

The question of how we use our private resources for public benefit is inherently linked to its sister question - how do we use our public resources (tax revenue) for public benefit (services)? This is, of course, the question that dominated the last election (and the current fiscal cliff negotiations).

We may well decide, as a society, that we want to encourage people to give their private resources for the public benefit. And we may decide that some kind of policy incentive is needed to do that. But it is not the case that the current scheme of tax deductions or exemptions are the only tools we have to use for these purposes. These tax rules are the legacy of 100 years of policy horse trading, and like many other rules, are strongly supported by the established constituencies that have grown up around them

They are not the only way of addressing the problem, assuming the problem is identified correctly. 

(The above is mostly about revenue and business models. I'm deliberately not going into issues of governance, choice, freedom of expression, and the associative role of certain organizations. This is a blog post, not (yet) a book. My thanks to Rob Reich (@robreich) for his editorial input on this post)

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