Tying charitable deductions to outcomes

IncentivesWhile the jury is out on the effectiveness of social impact bonds (SIB), the fundamental idea of rewarding investment in effective social interventions makes a lot of sense. That core tenant of social impact bonds is so compelling that I’m surprised such thinking has not spilled into the charitable deduction debate.

Ideally, the charitable deduction allows donors to write-off investments in the betterment of society. But with 1.5 million nonprofits in the United States, our definition of public benefit is broad, a point underscored by the clear divide in the types of charities middle income individuals donate to versus the wealthy.

Borrowing from social impact bonds, I started thinking about a charitable deduction schedule that allowed donors to write-off outcomes rather than our current approach which limits donors to writing-off inputs.

Under this tax deduction scheme, charitable organizations’ deduction rates would be tiered based on the marginal benefit of each additional dollar donated. The marginal benefit component allows the donation rate to be tempered not just based on societal outcomes (for example, Carnegie Mellon University has a good argument that its students create a lot of economic value, present company excluded), but what effect each additional dollar has on social outcomes. This caveat is similar to GiveWell’s consideration of not just an organization’s effectiveness, but also its room for additional funding.

Tying charitable deductions to outcomes would open up much of the promise of SIB’s to all nonprofits, allowing high functioning nonprofits to market higher deduction rates to potential donors. Obviously such an approach would be fraught with evaluative difficulties, although no more so than SIBs.

I have lamented in the past how our current funding environment rewards nonprofits for investing in marketing over outcomes. A tier system that assigns deduction rates based on outcomes would better align organizations around maximizing social value. Wasn’t that the point of the charitable deduction in the first place?