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The Charitable Deduction and the Social Contract

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Despite that I'm writing about the charitable deduction, this is not really a piece about taxes. Which is good, because I don't know a lot about taxes.

As someone who has done social services and poverty work for a long time, however, I do know something about the social contract. I also know a thing or two about how public and private entities can, do and could work together to fulfill that contract. Therein lays the rub on the question of the charitable deduction.

The last 25 years have seen an ongoing discussion about privatization of government services at the state and federal level. A quick Google search of "privatizing government Massachusetts" (my home state), for example, led to a swath of academic papers and conference reports on the subject such as "Privatization in State Governments: Trends and Issues" from 2003, a whole body of work on privatization at Cornell called "Restructuring Local Government," and one from the Government Accounting Office itself from 1998 called, "Privatization: Questions State and Local Decisionmakers Used When Considering Privatization Options." This well-covered topic focuses on government agencies contracting the delivery of government services to private providers. Those private providers might be non-profit, and they might be for-profit. Both count as private.

Bear with me here for a minute and we'll get to the taxes thing.

This is one kind of privatization of the social contract. Government doesn't do it; someone else does. The trick with this kind of trend is that, over time, government pays for less and less of the service, expecting the private provider to subsidize each dollar of service increasingly from private sources. For example, when I ran a large social service agency, it was not unusual for us to need to raise anywhere from 10 to 20 cents on every dollar paid by the government in order to actually deliver the service. In essence, our private donors were subsidizing government spending in order to fulfill the work that needed to be done.

There's also a second kind of privatization. In this second kind, we leave certain parts of the social contract entirely to private voluntary undertakings -- say, feeding people who are hungry. The theory goes that such should be the domain of church groups and nonprofit organizations... a "coalition of the willing," of sorts. I think this was the idea Paul Ryan was expressing in his comments last week at a Jack Kemp Foundation dinner. Ryan said:

The truth is, there has to be a balance. Government must act for the common good, while leaving private groups free to do the work that only they can do.

So far, we see less of this kind of privatization, although it can emerge in times of crisis. Research done by the Aspen Institute after Hurricane Katrina showed that local churches and other nonprofits served by default as the network of first responders for disaster victims, and the need for private companies and volunteers to provide early shelter, water and food was all over the news.

So how does all of this relate to the charitable tax deduction? In the following way: it probably isn't a good idea to privatize the social contract in a way that, at the least, requires increasing subsidization of government services by private dollars and, at the extreme, requires complete funding by private, voluntary sources, and then create structural disincentives to private citizens for providing such funding.

This is an untenable squeeze over time. If we want to outsource our care of each other so that it increasingly becomes a private, voluntary act, rather than something that each citizen can rely on as part of his or her citizenship, then it would behoove us to make it increasingly attractive for the private sector to do the work. The nonprofit part of the private sector is the big player here, and their primary source of capital is charitable contributions. Disincentivize those contributions, and the suppliers go away over time due to lack of capital. It's a downward spiral.

There may very well be ways to adjust the tax code so that incentives happen in other ways. As I said at the beginning, I don't know a lot about taxes. I do know that this is the overall structural question, though, and one that I don't think people are grasping sufficiently during our fiscal cliff discussions.

We know we have a social contract. As I've said on these pages before, reasonable people can disagree on how much government is responsible for that contract versus the private sector. That someone has to be, however, is not in dispute. That we have to pay for it shouldn't be either.

Let's not ask people to do so voluntarily while we simultaneously take away their primary incentive for doing so. I may not know a lot about taxes, but I'm pretty sure those numbers won't work.