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Note: This testimony is available in its entirety in the Portable Document Format (PDF).
Mr. Chairman and members of the Subcommittee:
One response to Hurricane Katrina was a very generous outpouring of concern and care by Americans throughout the country. Many of our contributions could be handled immediately only because a solid infrastructure of charities already existed. Our many charities are a tremendous source of strength of which we can and should be very proud. On a personal note, I have been involved with charities at almost every level: as a recipient, as a contributor, as a founder, and as a researcher who studies charitable giving and charitable organizations.
The government interacts with charities and nonprofit institutions on a variety of fronts. Many of its payments flow through charities and provide health, education, and other forms of social welfare. Indeed, more money flows to charities from government fees and contracts than from individual and corporate contributions. With respect to both social welfare in general and to many specific instances of assistance, such as in New Orleans and neighboring areas, the government makes transfers to the needy that are much larger than those provided by individuals. The government often looks to charitable organizations to deliver its transfers because it views charitable organizations as efficient deliverers of services and goods. In many ways, charities and governments complement, rather than substitute for, each other.
The government also affects charities through the tax code. Tax provisions not only provide incentives but are also a powerful signal of the importance our society places on giving-a signal that likely increases giving beyond the pure incentive effect of possible tax savings the taxpayer might receive.
But we should make no mistake about it: the large amount of money flowing to charities from individuals and from government means that a lot is at stake. And because a lot is at stake, we must constantly examine whether that money is being spent well. Can incentives be improved? Can waste be reduced? Can sources of corruption be removed? Waste, inefficiency, and corruption affect more than just the money directly involved. When charities misbehave, for instance, people probably tend to give less and to trust less that charities serve them well.
In recent months and years, the Senate Finance Committee has heard testimony both on bills to expand incentives to give and on ways to reduce inefficiency and corruption within charities and the nonprofit sector. That these issues are by their very nature nonpartisan does not mean that they are easy. Tough choices are required. The two issues are really two sides of the same coin. They reflect the common goal of maximizing the good effects achieved by dollars Americans provide to charities both directly and through tax incentives provided to donors through the government. A combined legislative package could be a clear win-win scenario: good tax policy and good charitable policy. Done the right way, it could significantly increase charitable giving, improve tax compliance, and remove some sources of cheating and corruption associated with individuals and organizations. Think of it this way: every dollar spent on a weak incentive or to subsidize those who cheat is one less dollar available to strengthen the charitable sector in other ways.
I hope that Congress will pull together its two efforts-improving incentives and simultaneously reducing the corruption and noncompliance that remains within the charitable sector. Thus, I strongly recommend that you blend together additional charitable incentives with a clean-up of the charitable sector. One part of the legislative package would include the types of items contained in charitable incentive bills since 2001. The other would focus on curbing problems with charitable giving and governance and seek to improve the IRS's ability to monitor effectively in this arena.
Note: This testimony is available in its entirety in the Portable Document Format (PDF).
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