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I enjoyed this article, thank you. I had always heard talk about how some charities had shifted towards a sort of fundraising and branding industry but I thought they were limited by law and convention to make meeting immediate program delivery and awareness the core part of their business. I was also interested by the point about the vagueness of deciding what constitutes a charitable purpose, which is connected to what constitutes acceptable business practice. I think the implication that we need to have a debate about how to reflect our values in the specifics of policy makes sense given that at $2.8 billion there is a large opportunity cost involved and it multiplies out through the sort of institutions it supports.

Do you have any comments about the gendering of charitable causes in Canada? I know that the Heart and Stroke Foundation has shifted towards the tactics surrounding breast cancer. Much of their recent fundraising efforts have been gendered and I've heard that this is possibly misleading given that those who do not engage in obvious behavioural problems and are destined to die of heart disease would end up some of the oldest women in Canada. It is almost as if public funding has fallen away for traditional women's organizations at the same time that new public and corporate funds chase after branded women's health issues. This suggests to me that there is some sort of underlying economic issue involved - for example the interests of well-off women and corporate brands. It seems surprising that there is $63 million annually to lobby for heart issues - more than all political spending by all parties and candidates in the 2007 Ontario election - but imagining a comparable sum spent on something like lobbying for poverty alleviation or possible structural injustices would seem far-fetched.

Thank you for this very informative post. I received the "Jump Rope for Heart" fundraising appeal in my kids' knapsacks this week, and felt ambivalent about it, in part because it relies heavily on the opportunity for kids to "EARN GREAT PRIZES and a chance to win** a NINTENDO WII AND WII FIT PACKAGE! (**Odds of winning are based on number of entries received...)" Should that bug me as much as it does, or does the end justify the means? The general point of the post is that there is a trade-off between the greater efficiency of using government to raise money for worthwhile causes and the greater freedom of letting citizens choose for themselves, individually, which causes merit their donations. But if I give to the Jump Rope campaign, it will be so that my children don't feel that they're spoilsports in the school's one hour jumpathon. I'm tempted just to give an equivalent amount to Oxfam, say, which seems to spend a much greater percentage of its revenues on programs rather than fundraising and compensation (at least if I'm reading those Schedules you linked to correctly).

Frances: "Raising money through taxes looks good in comparison."

True, although you're ignoring the deadweight cost associated with taxes. It's been a while since I've seen credible estimates of the deadweight cost of public finance in Canada, but I seem to recall that it is significant. And of course, those represent real losses to the economy as a whole, vs. the costs of raising private funds which only involves a redistribution rather than a loss.

I agree with you that private funding of, say, medial research could lead to inefficient allocations of resources and that individuals might not have the information to make good choices. But, the question is, do we think the government is any better? Somehow, I suspect that if you compared private donations for, say, medical research, you'd find that the patterns of government spending tracks the broader patterns of private spending (understandably because public spending is subject to political pressure by the same people who make private donations, i.e., the voters). Moreover, the advantages of havign private charities is that they actually have to pursuade people of the merits of giving them THEIR money, vs. having to pursuade some bureaucrat of the merits of given them someone else's money. Think of it as a market place for charitable ideas vs. lobbyign a central planner - which is going to give you a better outcome? In any event, while it may be a conceit, I like to think that I'm smarter than the government.

Finally, I agree with your point that there are a lot of dodgy charities (though, to their credit, the CRA has begun to crack down hard on them in the last few years - basically unilaterally revoking registration unless the charities can show them why they shouldn't), though I think that just highlights the point that people have to do their due diligence before giving money to anyone.

Donald - this makes me realize I don't know nearly enough about the psychology of giving. Will try to think about this.

Andrew - been there. I wrote the cheque too and ended up with a very expensive water bottle. Or jump rope. I don't remember. But I could afford it. What about people who can't?

Why do the schools sign up? "By participating in JUMP, your school will earn HeartSmart™ Points that can be redeemed for valuable school resources like sports equipment, school supplies and electronics. You'll earn one Point for every student that participates and one Point for every dollar raised."

And it makes teachers feel good.

Bob - I think we agree on the basic issues (the value of individual choice, the presence of dodgy charities). And many charities spend almost nothing on fundraising (e.g. one my family is connected to, the Burnaby Association for Community Inclusion).

There is a difference between the cost of fundraising and the deadweight loss of taxation. When we're talking about 45 percent of spending going to fundraising, we're talking real resources wasted. People spending hours making begging phone calls when they could be out delivering meals on wheels. Tons of paper being mailed across the country - "the parade of the body parts" as one of my colleagues calls it. The deadweight loss of taxation involves people leaving work earlier and spending more time doing home renovations or spending time with their families (see the comments on Mike Moffat's most recent post on income taxes). That, unlike the envelopes I throw in the blue box unopened, is not a complete waste of time and effort.
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Frances,

I have to disagree with your analysis of the deadweight loss. Yes, fundraising costs are "wasteful" in terms of diverting resources from, say, research. But from a societal perspective, that's merely a redistribution of resources from one person(say, a researcher) to another (the fundraiser, the fundraising letter printer, what have you)

In contrast, the deadweight loss of taxation, of necesity, involves an actual loss of well-being to society. Yes, someone might work less and take more leisure in response to a tax increase. But that's not the deadweight loss, that's merely the substitution effect. The deadweight loss comes about because, absent the tax, the person clearly values working (and bringing in wages) more than leisure - that's why he chooses to work those extra few hours rather than to rest. He may now choose (after the tax) to take more leisure, but that leisure is worth less to him than a few extra hours of work (that he would have chosen to work absent the tax), i.e., his wage rate, in the absence of the tax. The deadweight loss is the difference between the value of that extra leisure and the worker's wage rate. And, of course, where we really see deadweight losses are on the investment side, where taxes distort the savings/consumption decision (though, as we're slowly moving towards a proper consumption tax system, that may be less of a concern down the road).

In any event, something to think about.

I am not convinced that subsidizing charities through tax credits is a good idea, for some of the reasons that you raised, as well as others. I am all for non-profit status, with zero corporate taxes etc..., but that is a different story.

As Bob Smith says, there are some dead weight losses associated with taxation, but I doubt they are as high as the waste that attends these large charity organizations and the administrative costs and investment in getting charitable status. Not to mention the large quantities of fraud.

As well, I have a real problem with some of the activities that are subsidized, based on old English law that prioritized religion, but not international development, for example. It is easy to get charitable status to advance religion overseas, but not to advance entrepreneurial skills in a developing country. Go figure. Not the CRAs fault, but the fault of antiquated laws.

If the system was scrapped, some of that money could go to grants for effective programs with effective oversight. Now that would make sense...

Bob: Those fundraisers could have been producing other goods and services. The fundraisers for charity are the equivalent of the tax collectors and tax accountants. Resources that could have been used to produce something, rather than transfer resources from one use to another.

(To put it another way (a way only economists would "see" it): the costs of fundraisers are a rectangle; the deadweight losses of tax distortions are a triangle.)

As someone who works for a charity, I found a very interesting post, and one which my organisation grapples with on a daily basis.

How do we avoid looking after the interests of our organisation to the detriment of the people we support?

I, to a large extent, agree with you that much of what charities do would be better handled by governments. I mean, the Heart and Stroke foundation, especially, will do many things for money that mislead people, like the health check: did you know that a single serving of a health check food frequently has more than the recommended amount of sodium for an entire day? Crazy!

But charities can sometimes fill a gap when the "professionals" in the field often have no idea what they're talking about. Such was the case with people with intellectual disabilities up until a few years ago--many governments across Canada think that the best thing for people with intellectual disabilities is to force them into an institution (which is basically a prison, where you have to obey the staff (guards), and have no control over your life--though the decor is often very nice and they having bowling alleys (give up your freedom and get a bowling alley!)).

My charity, on the other hand, gets people competitive employment and their own apartments in the same buildings as everyone else, and they do fine.

That, I think, is the case where a charity can do better than a bureaucracy, which can sometimes be slow to adapt to change.

(By the way, my organisation spends 5% on fundraising, and has 8 employees. And, FYI, I'm at the bottom of the hierarchy in the organisation. http://www.liveworkplay.ca )

If the fund-raising aspect of charities was removed, what would happen? I'd suggest in the larger charities (those that pay the $300,000 to $349,999 paid to the their top employee) the pay would also decrease, and the skill set of the top people would change - more highly focused on program outcomes rather than fund-raising.

Is the appropriate proxy for these wages "corporate compensation ... the head of an organization with a multi-million dollar budget" or is it in comparison to what the "over 85,000 registered charities in Canada" pay similar people? What private sector corporation would be representative? A private telemarketing firm?

It is I believe an excellent post with a great debate. We cannot say that every charity are all alike but it is a fruitful debate to ask why the government should contribute with loss income tax to charities. If I care I should be able to give without tax reduction.

Nick,

I agree that fundraising cost are similar to the cost of tax collectors or accountants. On that note, it's worth point out that the cost of administering and complying with the Canadian tax system has been estimated at roughly 10-15% of revenue collected (so, worse than at least some charities out there). However, that misses the point. The bigger point is that those compliance costs aren't "losses" to society as a whole. Yes, the cost of collecting taxes reduces the government's net revenue or business' profit, but in the processes it enriches (I'm glad to say) tax lawyers, accountants and CRA auditors. As you say, that's just part of the "rectangle" in a supply and demand curve, it just redistributes income from one person to another. It's the same with charitable fundraising costs, those aren't losses to society as a whole (unless one things that labour markets don't work), they're just a redistribution from one person to another.

However, charitable donations don't cause any deadweight loss. Because charitable giving is, ultimately, a private choice, it doesn't distort the market in the same way that tax collection does. The same isn't true of raising funds through taxation. Taxes (or, at least, the taxes that governments use in practice) cause deadweight losses which are real losses to society as a whole. So, to put it in your way), when you raise a dollar through private charities, there is no cost to society as a whole, whereas raising the same dollar through taxes has a social cost equal to the "triangle".

Or, if one wanted to think of it from the perspective of the cause you'd contribute to (or fund through taxes), the cost of raising a dollar through charity is the fundraising cost (the "rectangle"), while the cost of raising that same dollar through taxes is the fundraising cost (the "rectangle") and the deadweight loss (the "triangle"). Yes, some charities have very high fundraising costs, but it's far from obvious that the government can collect money more efficiently (both because revenue collection isn't costless for the government and because it has a deadweight loss to society as a whole).


Patrice: "It is a fruitful debate to ask why the government should contribute with loss income tax to charities".

Certainly one way of thinking about the tax deduction for charitable donations is that it is a tax expenditure, i.e., the government is giving back money that it is entitled to.

However, if you think that the purpose of a progressive income tax system is to tax people on the increase in their wealth (i.e., their income), then the deduction for charitable gifts is arguably not a tax expenditure, but a way of properly measuring a taxpayer's income (akin to most deductions under the tax system). I.e., if I have an income of $100k, and give away $20k, it is arguably more appropriate to tax me as if my income were $80K, which would reflect the actual resources avaiable to me, than as if my income were $100k. From this perspective,the tax deduction for charitable giving isn't a "tax expenditure" (any more than a deduction, for example, for the cost of a business hiring an employee), it a means of properly measuring a taxpayer's income (i.e., the increase in the economic resources available to him or her).

The question, in that case, is not why do provide a tax deduction for charitably donations, but why don't we provide a tax deduction for other forms of gifts. And the answer, likely, has to do with avoiding inappropriate tax planning (i.e., preventing tax splitting by gifting amounts to children and spouses, for instance, or other unrelated parties).

Sorry, that last sentence should read "related" parties.

My Ontario based brother-in-law has a daughter attending University in Montreal. This past week, he transferred electronically $12 to her account to meet a short term emergency funding requirement. The service charge was $12.15. (Royally screwed)

So, in terms of admin costs, it's nice to see our banks operating more like big charities. Perhaps if we continue to keep them protected, and not open them up to competition, while continuously lowering their corporate taxes, they too will achieve tax free status. Then how will we differentite them? The boundaries continue to blur...

Btw, trying to catch up on some CTV clips on the weekend, and as a result of this blog, I noticed an ad banner for the Heart and Stroke Lottery - "It's raining cash" ..."1 in 3 - best odds ever." hmmmm. I guess life is like one big lottery afterall.

Bob: I agree with what you said in this paragraph:

"Because charitable giving is, ultimately, a private choice, it doesn't distort the market in the same way that tax collection does."

And in the last paragraph. But I still think you are wrong in this paragraph:

"The bigger point is that those compliance costs aren't "losses" to society as a whole. Yes, the cost of collecting taxes reduces the government's net revenue or business' profit, but in the processes it enriches (I'm glad to say) tax lawyers, accountants and CRA auditors. As you say, that's just part of the "rectangle" in a supply and demand curve, it just redistributes income from one person to another."

It's not just a redistribution of income. If there were no taxes, then those tax lawyers, accountants, and CRA auditors would instead be employed producing socially useful goods and services, like...um....err..........OK. I get your point ;-)

Ha, ha! :)


Just: Since Royal Bank (and its various subsidiaries) paid the better part of $1.5 billion in income taxes last year ($split between Canada and internationally, roughly equivalent to an effective tax rate of 28.4%), I'd say it's a long-way from achieving tax-free status.

See note 23: http://www.rbc.com/investorrelations/pdf/cfs_09_e.pdf

Bob, I have no doubt they pay taxes - and with profits up 35% from 1st q last year - they will probably pay more this year. It's the ideological direction that advocates of lower corporate taxes make w/o a strong business case that I object to.

Frances has pointed out the innovative (some might argue disturbing) efforts some charities are taking to get you to give them money. Fund-raisers at schools etc. It's an extremely competitive environment. Opposite of what Canadian banks face.

Now, if my niece was to arrange to pay a charity through automatic withdrawals from her Ontario account, while in Montreal, if she went into the local branch to find out details of a particular questionable transaction at a later date- she wouldn't be able to. That's because in 2010 as Canada's largest bank, in an oligopoly, there is no need or willingness to invest in Information Technology. How big of a rectangle does this create through lost productivity? They could learn a lesson or two from the more nimble charities, I imagine.

Over at Macleans, I raised this point in the comments of a Coyne column - Our banking rules are smarter, not tighter. I purposely did not mention the bank's name. One person involved in IT responded:

I'm going to guess. I know the major IT systems of 3 of the big 6, and a reasonable idea of two others. I have dealt with all 6 in one capacity or the other.

Royal is the worst, with the most sub-regionalized infrastructure imaginable. The right hand doesn't know what the right hand is doing. And the left hand? The left hand is not to be tolerated.

My apologies, Frances for going O/T - though in a way it is related (large charities can also get bogged down in bureaucracy/admin and lose sight of the bigger picture).


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