Student Blogger - Can Charities Be Too Rich?
Professor Takeshi Fujitani on charitable wealth accumulation
Charities generally exist to help the poor - but they themselves are sometimes quite rich. Is this a problem? Some people seem to think so. Universities and other non-profit organizations with substantial endowments have been criticized for failing to provide "public benefit". The sharp decline in such endowments over the past year has of course muted this criticism, but the underlying issues remain - many nonprofits still have vast endowments, and these are likely to grow significantly in the future. But what, exactly, is the problem with this? Are charities that build reserves doing anything wrong - should they spend now instead? If we think they should be making different choices, should we change our policies towards tax treatment of charitable giving to realign incentives?
Professor Takeshi Fujitani addressed these issues in his recent paper Does the 'Timing of Charity' Matter?: A Theoretical Reexamination of Tax Policy for Endowed Nonprofit Organizations presented at last week's Works in Progress (WiP) talk. In the paper and talk, he argued that criticism of charitable wealth accumulation is not particularly focused, but that it may have some validity when examined closely. He further suggested that tax subsidies for such wealth accumulation can be separated from those for charitable giving in general, and that the justifications for the former subsidy are much weaker.
Prof. Fujitani starts with the general argument for subsidizing charitable giving - the government is interested in providing various public goods, and could in principle attempt to do so itself. Frequently, the government does provide public goods directly (education, defense, etc.). In other cases, however, private charities provide public goods. This would be inefficient if the government were omniscient, but of course it is not. These private charities, and the individuals who donate to them, usually have a significant informational advantage over the government. They may also have certain functional advantages, such as being able to act more quickly. A democratic government interested in maximizing the provision of public goods therefore does not want to fully occupy the field, but in fact encourage private charities to operate as well. It does this through a tax subsidy - by making charitable contributions tax-deductible, the government gives citizens an incentive to substitute from private consumption to generally more social-welfare-optimal donation to charities. This greater rate of donations increases the number and capabilities of charities, and therefore the total amount of public goods they can provide.
Charities, of course, can do any of a number of things with their donations - they can spend directly on their beneficiaries (for example by buying food for hungry people), they can invest in their future capabilities (for example by starting construction of a shelter, or a classroom building), or they can save the money for the future. Nonprofits are generally tax-exempt, and tax laws do not generally distinguish between these options.
Prof. Fujitani suggests that meaningful distinctions can be drawn here. He argues that there are really two subsidies here - one is the "price subsidy for charitable consumption" (essentially the traditional view described above) and the other is a "capital subsidy for charitable wealth accumulation". He further argues that the core justification for the former subsidy - informational advantage - does not hold for capital wealth accumulation.
But does this really matter? Prof. Fujitani anticipates a counterargument that, since wealth accumulated by charities stays in the charitable sector, and will eventually be spent on public goods, it doesn't really matter that it is not spent now. He offers a few replies to this argument. First, he argues that charitable wealth accumulation is still a redistribution of wealth from current to future generations, even if it is invariably spent on public goods. Since this provision of public goods is in the future (when everyone will presumably be richer), we should probably discount its value - which would make spending now more attractive. Even if we reject this kind of discounting on moral grounds (future hungry people will suffer just as much), there is still an present opportunity cost - money not spent on public goods today means less such goods are provided.
Prof. Fujitani also suggests that there are efficiency justifications for charitable spending over wealth accumulation. It is possible that there is a systematic bias in favor of "endowment" giving instead of giving directed at current spending, perhaps because donors are interested in a "legacy" or have what Prof. Fujitani calls "non-altruistic tastes for status or eternity". In other words, donors (and the trustees that cater to them) may overinvest in wealth accumulation for reasons that have little to do with optimal provision of public goods.
Finally, Prof. Fujitani argues that charitable wealth accumulation can be criticized on distributive justice grounds. Take universities with large endowments - these endowments allow them to provide greater need-based student aid, but this aid does not seem to allow more students to attend universities generally. Instead, it is a means of competitive advantage with which well-endowed universities can entice the best students to attend. This might or might not be a good thing, but it hardly seems like the kind of unambiguous public good we should want government to subsidize. Instead, it seems only to benefit one class of people over another.
Given these problems with charitable wealth accumulation, and his belief that the subsidy for such accumulation can be distinguished from that for charitable giving generally, Prof. Fujitani concludes that critics of large endowments have a point. He further argues that we should consider revising tax policy such that charitable wealth accumulation does not receive a blanket subsidy.
Prof. Fujitani does not argue that some level of charitable saving is inappropriate - charities, like any firm, need to be able to manage their cash flow and save for large projects. Some commenters questioned whether a defensible line could be drawn between this kind of unobjectionable saving and the problematic wealth accumulation that Prof. Fujitani identifies.
Another commenter questioned Prof. Fujitani's argument that information advantage justifies subsidy of donations but not wealth accumulation. As the commenter pointed out, if we think private citizens and charities have informational advantage about how to best provide public goods now, why wouldn't we suspect that they have a similar information advantage in decisions about when public goods could be provided most efficiently?
Some commenters offered counterarguments to Prof. Fujitani's criticisms of charitable wealth accumulation, suggesting that it might allow economies of scale in provision of public goods that wouldn't otherwise be available, or allow for longer-term planning that might result in more efficient charities. Another commenter suggested that problems with wealth accumulation could be lessened somewhat by expanding the legal authority available to trustees to use endowments in the future.
Other commenters suggested that this problem (if it is one) is not restricted to modern charities. One asked Prof. Fujitani to consider looking at parallel arguments made about whether governments should run surpluses, and how such surpluses should be sent. Another perceptive comment identified the medieval Catholic Church as an interesting analogue. Could the Reformation be viewed as a massive movement against charitable wealth accumulation?