research institute for compassionate economics

RICE is a 501(c)(3) public charity!

Written by Dean Spears on May 17th, 2011
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We received our determination letter from the IRS yesterday: RICE is now officially a 501(c)(3) public charity. That means that it doesn’t have to pay income taxes, and donations to it are tax deductable (at least for people who itemize their deductions on their income taxes). 501(c)(3) status is also important because other organizations use it as an indicator of being a legitimate non-profit: it is a requirement for a non-profit account at PayPal, to apply for many government and foundation grants, and to have a fundraiser at On the Border, where the charity gets 10% of Tex-Mex sales.

No doubt, RICE’s federal subsidization will soon have important implications for government debt. In the meantime, this seemed like a good occasion to consider the economics of charitable giving, reviewed this week in the Journal of Economic Perspectives by John List. While it is not clear to me how recipients were categorized, List reports that 61 percent of giving by U.S. households is to “religious causes,” followed next by to “help people in need” at a distant 10 percent.

List finds that U.S. charitable giving is strongly associated with the performance of the stock market, but in an asymmetric way: “individual givers are significantly more responsive to macroeconomic improvements than to macroeconomic declines as defined by the S&P 500.” It makes sense that people would give more when the stock market makes them richer, but why don’t they give less when the market taketh away? One possibility List suggests is “social pressure to maintain past giving levels” – once you start to give, you feel expected not to stop. [RICE donors: this means you!] Interestingly, variations in the stock market do not much matter for religious giving; the S&P 500 has a much bigger effect on other causes, such as education.

Part of List’s point is to admit that “many economic facts concerning the charitable market remain unknown” and to rally future research: charitable giving has never been a central issue in economics. But, especially in an age of profound income inequality, maybe it should be. As Diane wrote about a few weeks ago, it is often difficult to figure out what “works” among programs intended to help the poor, and sometimes it is difficult to even understand what “working” means for a program that nobody intends to implement. Thinking about the economics of charitable giving adds another layer to the problem: of an extra dollar given to an average non-profit, how much more does it spend on its programs?

If the program is well-managed but facing a tight budget constraint, the answer might be that spending goes up dollar-for-dollar, certainly the outcome most of us have in mind when we give money. But it could be otherwise. Imagine the opposite extreme: a fundraiser hired by the organization is required to raise a certain amount of money each month. The extra dollar you give simply means that he does not have to work so hard to get there.

There are surely organizations of both types and everything in between. The point is that non-profits should be subject to economic analysis just like firms and governments, and that we should be only carefully optimistic about charitable organizations. List cites a statistic that “charitable organizations spend an average of nearly $100,000 on fundraising.” Luckily, we need not yet worry too much about RICE: we are scarcely able to imagine one day spending that much a year on anything.

Some of the organizations that I have met and admired most have stayed relatively small. Perhaps – if we believe in economists’ “law of diminishing marginal utility” – donations will do more good if given to smaller organizations, as long as those organizations are capable of doing the work?