An analysis of American charitable giving and its implications on government efficacy

Calvin Xu, Appleby College, Canada

Third place for the 2020 Politics Prize ​| 6.5 min read 

Among the hundreds of billions of dollars dedicated by Americans towards philanthropy each year, the state receives a minuscule fraction of this money. The ultimate goals of charities and the state are often aligned: to promote social wellbeing and improve the lives of people. The state often does so through the funding of numerous universal social services, while charities tend to focus on protecting the interests of certain vulnerable groups in society. While the state is in many cases more efficient than private charities, the specific niches charities fill, and the contrasting public perceptions of charities and the state make governments unable to compete with private charities for donations. The implication is therefore not that cannibalization of one over the other would greatly serve the social good, but that their coexistence is necessary to achieve common goals.

An intuitive answer to the reason why philanthropic contributions are mostly directed towards private charities rather than the government is a free-market capitalist idea of competition. This reasoning claims that consumers, in this case donors, would choose to make contributions to the institution that would maximize the impact of their donation. However, the idea that the private sector is always more efficient than the state is misleading. The government can provide many public services in a much more efficient way than the private sector. For instance, in the United States, where the private sector has a significantly higher share in the healthcare industry, total healthcare spending per capita in 2019 was around double that of European countries and Canada where there exists universal healthcare under a single-payer model funded by government spending, despite similar outcomes judging by life expectancy (OECD, 2020). Similarly, the government is generally more efficient in the operation of public services. In the UK, for example, public subsidies towards railways actually increased dramatically following privatization, while rail services that remained state operated cost taxpayers less money (Simms & Reid, 2013). This demonstrates a higher efficiency on the part of the state towards the funding of widely accessible social services. This includes, among others, services such as healthcare, public transportation networks, and a social security net.

These services require massive bureaucracies and significant funding to be operational. The US government has the advantage of a far higher budget than the $300 billion dollars Americans donated to charity each year and is therefore better suited to fund most public services.

Therefore, in many cases, the government is not only the most efficient but also an irreplaceable actor in providing critical social services.

A common argument raised as to why the private sector is more efficient is that there exists an incentive structure to constantly improve efficiency to gain a competitive advantage. A charity that provides educational resources in low income communities, for example, has a direct incentive to prove it can do so more efficiently than other organizations performing similar functions, thereby securing more donations. The public sector, opponents argue, lacks the same incentives which is what allows waste and inefficiency. Not only is this somewhat offset by aforementioned advantages of the public sector, the assertion that there exists little to no incentive to improve efficiency in the public sector is also false. Politicians in democratic systems of governance have a direct incentive to improve efficiency as they hope to be reelected by taxpayers. Similarly, bureaucracies operating within the state have an incentive to be more efficient and improve processes because a negative perception towards it will likely result in cuts in funding towards that bureaucracy. For example, perception of wasteful spending on the part of the department of transportation would likely lead to voters calling for reduced funding, or even partial privatization. Therefore, there exists a similar incentive in the public sector to improve efficiency and the management of taxpayer dollars.

 

Given that the state is often more efficient in the promotion of social wellbeing through funding public services, the same line of reasoning of competition would therefore suggest that most charitable donations would go towards the state, rather than private charities, which is contradicted by the actual behavior of donors. This occurs due to two main factors. Firstly, the relationship between the state and private charities is for the most part not one of competition. Instead, the state and private charities complement each other in their functionalities, where private charities are able to fill niche roles where the state has failed or is less efficient. Therefore, while the state may be more efficient in broad social services accessible to wide ranges of people, charities often focus on specific vulnerable groups. For instance, while the state may be an effective provider of a social safety net in the form of welfare checks and food stamps for those in poverty, the specific needs of communities that were placed in poverty in the first place by government neglect or past and current instances of institutional racism on the part of the state are ones that may be better, or uniquely, addressed by non-profit organizations that have a deeper understanding of such a community. Social problems seen as “too small” for governments, but nevertheless have an enormous negative impact on the lives and wellbeing of people, can be combatted through philanthropy. This is clearly understood by governments, because there exist government grants and subsidies for non-profit organizations. In fact, a study done by the Global Centre for Public Service Excellence found “no conclusive evidence that one model of ownership is intrinsically more efficient than the others” (Rao, 2015). Rather, the paper suggests that the type of service and contextual factors generally determined the efficacy of the private versus public sector (Rao, 2015). Therefore, the conclusion drawn is not that private charities or government spending should be abolished in favor of the other, but that the coexistence of both complement each other in a way that is best able to serve the social good.

 

The notion that private charities fill niches governments are unable or unwilling to is further supported by the distribution of charitable giving. In 2018, charitable giving to international affairs as well as environment and animal organizations rose, with giving to environment and animal organizations reaching an all-time high (Giving USA, 2019). This comes amid the current US administration, which has withdrawn from the Paris Agreement and placed lowered emphasis on environmental concerns in favor of economic development (Pompeo, 2019). Additionally, this administration has also been criticized for its handling of international affairs, with global favorability ratings of American foreign policy sliding (Buttigieg & Gordon, 2020). The increase in charitable donations to these areas can be seen as a response to where the government has failed and provides further support for the complementary nature of the government and charities.

Moreover, donors favor private charities because they have a generally better perception than the government and its policies. There are several reasons for this. Firstly, taxation is widely unpopular among the general public. A Gallup poll on the perceptions of Americans towards government taxation policy found that although less individuals today compared to previous decades feel that they pay too much federal income tax, that number is still around half of all Americans and over a third believe that the amount of income tax they paid was unfair (Gallup, n.d.). In fact, since 1956, the percentage of individuals who felt they paid too little federal income tax has never exceeded 4% (Gallup, n.d.). Therefore, due to the ill will towards the existence of what is effectively an obligatory contribution towards the government, and the minuscule amount of people who feel they pay too little in taxes, individuals are unlikely to want to donate to the government.

 

Secondly, the effects of your donation to private charitable organizations is far more observable and traceable. Donations to the government are put into a wide variety of government programs. Therefore, the donor does not know what they are donating to when they are making a contribution. While an individual may support increased funding to healthcare, or roads, or education, they may not support increased funding to military spending and vice versa. Given that the individual is often unable to control the spending of their donation, it is far more appealing for someone passionate about education to donate to a private charity focused solely on education, or for someone passionate about the military to donate to a private charity focused solely on providing financial assistance to homeless veterans. Private charities cater towards specific goals, which allows donors to have increased choice in the spending of their donation, therefore being much more appealing to donors that are passionate about a specific cause or a specific community. Additionally, donating to governments is inherently political, and governments will often allocate spending and enact policies that a significant portion of the population may disagree to, while charities tend to be uncontroversial and universally appealing.

Thirdly, the idea of the government as a corrupt and inefficient bureaucracy is one that is quite pervasive, and many people buy into the narrative that the private sector is more efficient, despite this being inaccurate. Private charities are therefore far more sympathetic, seen as good actors in contrast to the government, even though inefficiencies and corruption exist in equal, or even greater quantities in private charities. This is further exacerbated by advertisement campaigns commonly employed by private charities that portray sympathetic individuals in need and empowering success stories that provoke strong emotions. While politicians also highlight the successes of the government during campaigns for the purposes of reelection, adversaries to the incumbents in power often do the exact opposite, pointing out the failures of the government, creating a less favorable image of the government in general. This means that a significant part of the reason as to why the state cannot compete with private charities for donations lies not in the state’s actual inefficiency compared to private charities, but in the perception of the state in contrast to private charities.

The government provides many critical services that have an enormous impact in improving general social wellbeing among the public, often in a far more efficient way than private institutions. However, there exist needs that the government is unable or unwilling to fulfill, thus creating the demand for private charities aimed at addressing these specific needs. Individuals choose to donate primarily to these private charities because of a negative perception towards the government, whether in regards to taxation, perceived waste of resources, or generally as a sympathetic actor. Additionally, government policies and spending are inevitably controversial, and spread across a broad range of issues concerning the general good. Donors who value choice highly, or who are primarily concerned with addressing specific issues will therefore turn towards charities, who are more focused on an uncontroversial niche. The implications of the apparent disconnect between government efficiency and charitable donations are neither that the inefficient government should be replaced by private sector non-profit organizations, nor that the functions performed by private charities should be cannibalized by the state. Instead, the conclusion that should be drawn is that governments cannot compete with private charities because their relationship should not be one of competition, but rather that they should complement each other in ultimately promoting the wellbeing of a society.

Bibliography

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Gallup. (n.d.). Taxes. Gallup.Com. Retrieved July 12, 2020, from https://news.gallup.com/poll/1714/Taxes.aspx

Giving USA. (2019, June 18). Giving USA 2019: Americans gave $427.71 billion to charity in 2018 amid complex year for charitable giving. https://givingusa.org/giving-usa-2019- americans-gave-427-71-billion-to-charity-in-2018-amid-complex-year-for-charitable- giving/

OECD. (2020). Health spending. OECD. http://data.oecd.org/healthres/health-spending.htm Pompeo, M. R. (2019, November 4). On the U.S. Withdrawal from the Paris Agreement. United

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