The American Institute for Economic Research senior research fellow talks with Michael E. Hartmann about the perverse incentives of the tax system on nonprofits, what hypothetically would happen to the third sector absent tax-incentivization, whether progressive Big Philanthropy might do damage to it along with Big Government, and encouraging more bottom-up experimentation in addressing social ills.
Robert E. Wright is a senior research fellow at the American Institute for Economic Research (AEIR) in and the author or co-author of dozens of books and academic-journal articles on economics, finance, and the American Founding, among other things. He has taught business, economics, and policy courses at Augustana University, New York University’s Stern School of Business, Temple University, and the University of Virginia.
Wright’s most-recent book is this year’s Liberty Lost: The Rise and Demise of Voluntary Association in America Since Its Founding. The book offers a history of civil society—including in its philanthropically supported, not-for-profit legal form—and urges a return to the truer, participatory, and voluntary form of democracy that America once knew.
Wright was kind enough to join me for a conversation earlier this month. In the first part of our discussion, which is here, he talks about AEIR and his research there, why Tocquevillian voluntary association became such a beneficial part of America’s social contract, the relationship between volunteerism and governmental and individual sovereignty, and the detrimental effect that enlarged government and its taxation had on voluntariness.
The 19-and-a-half-minute video below is the second part—during which we consider the perverse incentives of the tax system on nonprofits, what hypothetically would happen to the third sector absent tax-incentivization, whether progressive Big Philanthropy might do damage to it along with Big Government, and encouraging more bottom-up experimentation in addressing social ills.
“[T]he income tax has all kinds of perverse implications in it,” Wright tells me. For example, “I am the treasurer of a small NGO called Historians Against Slavery, which is a 501(c)(3),” and
I have not received a single donation since Trump doubled the standard deduction. There is no incentive anymore to give 100 bucks or a thousand bucks to the American Red Cross or to any other tax-exempt entity like that, because I don’t have the satisfaction of seeing my tax my tax bill go down.
Things were much simpler in the time period that I talk about in Liberty Lost up to the Civil War because there is no income tax. … You just gave to charity because it was the right thing to do. … There were all sorts of benefits. … Things were much cleaner then, but we get into the 20th Century, especially in the post-war period when income taxes are very important, and we have these various incentive effects that have distorted things.
If as a hypothetical matter, there were no tax incentives for charity, “the total dollar amount” donated to them “would go down to some extent, but it wouldn’t be vanished, and there are things that we could do to boost it back up,” according to Wright. Those things include “promoting religion” and “getting rid of government schools,” which “would reduce overall tax burdens and people would have more discretionary income that they could donate.
“If there’s something you don’t like, you don’t run to the government and ask them for help,” he continues, “because all they’re going to do is take money from everyone, the taxpayers, or they’re going to borrow it and then this burden just going to go on to your offspring. What we want people to do is, ‘Hey, you see a problem? Well, why don’t you try to fix it? And if you don’t have a lot of money, volunteer your time.’”
Historically, what’s called “the third sector” has “gone under various names, including ‘the forgotten sector,’ and still is forgotten,” Wright says. “It’s not talked about enough. There’s all kinds of problems going on in it, and it’s difficult to have a robust public debate about it. It gets very quickly politicized and it looks like there are some untoward activities going on. We really didn’t have” that kind of activity
in the past because charity was so focused on helping individuals rather than helping political parties or ideologies.
I think we have to talk about it and teach about it, and that’s more important than anything with the taxes. Get back to minimal government and letting people know that if you don’t like something, don’t tweet about it. Go and do something. You’re empowered. You have the liberty to try to address problems yourself.
As for ways in which to improve the nonprofit sector, “I tend to espouse more sunshine, more transparency, more accountability,” as opposed to “having this other party come in and pass a bunch of rules with no real understanding of what’s going on or no real incentive to come up with the right rules or to enforce the rules that are already there in a fair and impartial manner,” Wright concludes. “I’m not for increasing regulation.”