A War on Charity
Proposed new rules will likely lead to a less efficient and effective allocation of philanthropy.
Having launched wars on unemployment, drugs, inflation, whalers, disadvantage, downloads, pokies, doping in sport, bankers salaries, greed, neo-liberalism and most other things… Kevin Rudd is looking to extend his targets to include charity.
Rudd’s war on charity is a strange one. The government’s plan is to over-regulate charitable funds (called "Prescribed Private Funds" or PPFs) and require them to distribute 15% of their assets every year. This will lead many PPFs to close down and it will deter people from setting them up in the first place.
Recognising this as bad policy is the easy part. The hard part is working out why the government is attacking the charitable sector. In their discussion paper the government tries to explain itself by saying that groups which distribute 10% of their assets to a charity are "not philanthropic". Huh?
The best excuse for the proposed policy is this: sure, over-regulating PPFs will probably decrease the amount of money going to charity, but perhaps the government rules will lead to a better allocation of philanthropy? Perhaps donors are considered too stupid or selfish to correctly distribute their money, and so politicians should step in to regulate when they donate.
In reality, it turns out that the proposed new rules will most likely lead to a less efficient and effective allocation of philanthropy.
The great virtue of PPFs is that they allow people to shift their tax-free philanthropic giving between different years. For example, a donor might contribute a regular amount towards their PPF over a number of years and then give this money to charity in a time of special need. Or a donor who wins the lottery could put a large chunk of money in a PPF in one year, and then distribute it over a number of years.
So the freedom to control the timing of donations is actually a positive thing. And the proposed restrictions on those freedoms will make it harder for donors to match their funds to the most appropriate charities. This means the new laws will likely lead to less philanthropy that is allocated less efficiently. A classic lose-lose situation.
Australians are a generous bunch of people. In 2008 there was about $13 billion donated to welfare, health, education, foreign aid and other philanthropic sectors. That is about the same as the entire GDP of Afghanistan, and theoretically enough money to give about $50,000 to the poorest 5% of families in Australia.
This is something that should be encouraged, not undermined. Since 2001, over 800 PPFs have been registered, helping to improve the effectiveness of charity. The government should abandon their war on charity and their plans to over-regulate PPFs.
John Humphreys is a Mannkal Scholar/Research Fellow with the Economics Programme at the CIS. He previously worked as a policy analyst for the Commonwealth Treasury and as a consultant for the Centre for International Economics. He is also the Director of the Human Capital Project, a non-profit that provides financing to Cambodian university students. John has an Economics (Hons) degree from the University of Queensland. His paper In Defence of Civil Society was released by the CIS in February 2009.
Gary Looney
April 10, 2009 at 2:24 pm
QUOTE: In their discussion
Modern scams to take advantage may be behind the problem with philanthropic definition?
Many charities now have commercial and philanthropic parts, which seemed to be, at least in part due to GST introduction and accounting.
I notice just as an observer that the face of charity has changed, in my view some roll back needs to take place in order that charities survive in the current environment. We currently have a more pressured charity sector with less philanthropy in general which puts our Government under more workload.
Not sure I have added anything, or have an in-depth understanding but hope ideas are being looked at!
Gary
A Citizen of Australia and all its Territories!
denis.tracey
April 15, 2009 at 6:25 am
War on Charity
John Humphrys makes sense. It's hard to see what benefits will come from tightening the rules for PPFs. But perhaps it's time to consider how successful PPFs have been in any case.
Introduced in 2001, they were intended as a simple, relatively cheap way for individuals, families and other entities to set up philanthropic programs. So far about 760 have been established with a total value of (pre GFC) $1.58 billion. This does not seem cause for celebration. According to the Capgemini Merrill Lynch World Wealth report for 2007, about 161,000 Australians hold financial assets (that is, not counting the house) greater than US$1 million.
Maybe these people are giving directly to charities rather than setting up PPFs, but according to all the research I've seen, they are mostly keeping it for themselves.