The Comprehensive Charity Reform Act
Senate Labor and Human Resources Committee
Subcommittee on Children and Families

Testimony of David G. Tuerck
Executive Director, Beacon Hill Institute
Chairman and Professor of Economics
Suffolk University

March 26, 1996

Good morning. My name is David Tuerck. I am executive director of the Beacon Hill Institute at Suffolk University in Boston, where I also serve as chairman and professor of economics. My remarks, though my own, are based on work at the institute on which I have collaborated with resident scholars James P. Angelini and William F. O'Brien, Jr.

Thirty years ago, the federal government launched a war on poverty that has evolved into a vast array of federal welfare entitlements. Despite the ensuing ninefold increase in government spending, 38 million Americans still live in poverty. Illegitimacy and poverty rates for children and for female heads-of-household have soared.

There are, moreover, gaping holes in the social safety net. Only 41% of all poverty-level families receive government assistance. Only 23% of all poverty families live in public housing or receive housing benefits. At the same time, almost half of those who receive housing benefits are not poor.

Privatization as Welfare Reform
For some, the cure for this problem lies in increased federal efforts to provide day care, education and employment. For others, it lies in devolution and funding cutbacks.

Both views ignore a third option - one that recognizes an obligation on the part of the federal taxpayer to fund a program that is directed at assisting the poor and ending dependency and that shifts the job of providing assistance from government to private charities. This option consists of offering tax incentives to taxpayers to increase their support of qualified private charities.

If, as my co-authors and I expect, the appropriate tax incentives produce a surge of new giving to assist the poor, the result would be privatization at its best - the exploitation of private-sector efficiency and innovation in the implementation of a program, funded by individual contributors, that provides short-term assistance and promotes self-sufficiency.

Much of the infrastructure for implementing that program is in place. Individual contributors already provide about $17 billion annually to assist the poor. In addition, about $14 billion of government welfare spending already goes to some 86,000 private social services organizations that could be enlisted to participate. Many thousands of organizations not funded by government would expand to take advantage of the new funds made available to them, as others were formed to carry out the humanitarian goals of their founders.

Senator Dan Coats has offered a set of tax incentives that, in my judgment, would be highly effective for bringing about this result. The Coats proposal, called the Comprehensive Charity Reform Act (S-1079), allows a tax credit of up to $500 for single taxpayers or $1,000 for married taxpayers filing jointly.

The central argument for the Coats proposal is that it addresses the root cause of poverty, which is the breakdown of the family and the loss of self-discipline and individual responsibility that it is the role of the family to instill. Meaningful welfare reform would combine the responsibility for assisting the poor with the teaching of these virtues.

Dr. Peggy Brown has developed a program based on this principle. The Mandela Town Hall Health Spot and Youth Program in Boston, which she directs, provides food, clothing and competitive athletic activities for inner city youth. Her goal in creating this program is to "empower each youth and enable him or her to move in a positive direction, to move up and out." A condition for joining is hard work and self-discipline.

The economic argument for the tax credit is the same as for any form of privatization: to replace a government monopoly with a system of competing enterprises - in this instance, private, community-based charitable organizations - that vie with each other to provide better services at lower cost. The same humanitarian instincts that lead taxpayers politically to support the idea of a social safety net would lead them to take advantage of the tax credit.

Economic Benefits
The benefits of the tax credit can be measured in four ways:
(1) Increased Giving. The provision of a tax incentive for charitable contributions amounts to a reduction in the price of private giving. Of the 27 studies that we reviewed, all 27 showed that giving rises as this "tax price" falls. Of these, 17 showed that giving rises by more than tax revenue falls. Our estimate shows that a 1% fall in tax price causes giving to rise by 1.12%.

(2) Increased Voluntarism. There is a direct correlation between giving and voluntarism. We estimate that creation of a tax credit would add at least 2 million people to the pool of volunteers for qualifying organizations.

(3) Increased Efficiency. Numerous studies show that private enterprise is more efficient than government at delivering services. Nonprofit organizations achieve efficiencies in large part by utilizing volunteers.

(4) Reduced Crowd-Out. Government spending "crowds out" private giving. A one-dollar increase in government spending decreases private giving by about 10¢. By reducing government spending, the proposed tax credit would increase giving.

Possible Concerns
One possible concern is that the expected expansion in giving and consequent loss of tax revenues would require a substantial cutback in government welfare spending. We find that up to $68 billion in taxes would qualify for credits under the Coats proposal.

The answer to this concern is that the very purpose of offering tax incentives for assisting the poor is to transfer funds from government to the private charities that would take over this role. Both taxpayers and the poor stand to gain from the efficiencies and innovations that would follow.

Most other concerns have to do with administrative details: whether the proposal would discourage giving that is not eligible for a tax credit, whether it would be inconsistent with a flat tax, and whether it would encourage fraud and waste. Our work at the Beacon Hill Institute provides reassurances about these concerns and, where necessary, offers remedies.

I find the Coats proposal to represent an innovative and compassionate alternative to the existing failed welfare system and to many of the other welfare reform proposals that have been brought before Congress over the last year. Thank you.

Questions, comments or requests for BHI's study Giving Credit Where Credit is Due: A New Approach to Welfare Funding  or regarding this testimony should be directed to BHI at fconte@beaconhill.org, or by calling (617) 573-8750.