Numerous recent articles have tried to address whether health cost growth is slowing more permanently. Though I have entered that debate at times , I must admit that it’s a complex question for which there is no definite answer. Policymakers and private practitioners have improved some of the ways that health care is priced and delivered, and more improvements are no doubt forthcoming. But the stories of Gilead and its $1,000-a-pill Hepatitis C drug make one point entirely clear: improving health care costs selectively is like making indentations in a full balloon. Pushing down the air in one place merely makes it pop out somewhere else.
Consider how the government has designed health insurance, particularly Medicare. Essentially, it has delegated its constitutional powers of appropriation to private individuals and companies like Gilead. Congress doesn’t vote to spend more on hepatitis cures. It lets Gilead, along with patients and doctors, make that decision and then shift the costs back to other citizens. As long as Congress refuses to exercise its appropriations responsibility, every cost-saving measure could be nullified by a new Gilead.
The original sin of health insurance, public or private, has been to allow patients to demand and providers to supply more health care while pushing charges onto others. In the extreme, at a zero price to the patient per service received and a potentially unlimited supply of services for which more compensation and profits can be made, it is not surprising that health costs in this country have grown from about 5 percent of GDP in 1960 to around 17 percent today.
Many efforts aim to limit some of our bites of the forbidden apple but not others: fixed payments to accountable care organizations, health maintenance organizations, and preferred provider organizations; bundling of payments; limits on payments for re-admitted patients to hospitals; and so forth. Yet, yet… without absolution from the original sin.
Hospitals and doctors adjust in newer ways not restricted by selective limits. They add extra treatments and service providers. The ability to add on services is often voiced as the problem with fee-for-service medicine, where the quantity of services increases even for those whose prices are regulated or constrained. But there’s more to it than that; adding services is only one way that the air pops out somewhere else. In an industry with significant technological breakthroughs—and make no mistake, Gilead’s hepatitis drug is a major breakthrough—costs can be increased simply by charging a lot more for the new item or shifting services quickly toward areas of high profitability or compensation.
Even where a health improvement might be well worth the cost in one sense, it might still be unreasonable in another. In a typical open-market industry, we might be willing to pay a lot more for any particular good or service than we do, but competition among suppliers helps reduce costs. With the current design of health insurance, competition is fairly limited. My own brief examination of growth industries in the United States shows health is the one sector where above-average growth in the quantity of goods and services sold was accompanied by above-average growth in prices. Think of electronics, or telephones, or other advanced industries as examples of how increasing quantity usually pairs with decreasing prices.
The hepatitis C drug debate often confuses this value proposition in another way. Let’s accept that the $84,000 treatment with Sovaldi—or the newer, perhaps only $63,000 Hepatitis-C treatment with Harvoni (Gilead’s latest offering)—improves patient well-being and even life spans substantially. If the improvements make retirement years happier and longer, rather than being matched by greater productivity and more years of work, then Gilead and its beneficiaries still shift costs onto society, and health costs rise as a share of GDP.
Now, you might ask, what constrains the costs of inventions in non-health industries during those initial years when patents provide a potential monopoly? You and I do. If the cost is too high, many of us simply don’t buy the good or service. The company keeps prices lower to expand market share before competitors come along when the patent runs out. If the government says it will buy the new good or service for us, the limited-demand constraint that we otherwise provide is removed. Government simply cannot promise both that an inventor can charge what he wants for an invention and that the government will buy it for anyone who wants or needs it.
Thus, regardless of the rate at which health costs rise, it will remain unreasonable as long as the original sin of health insurance remains. Without true budget constraints, improvements will be limited because incentives are limited. With government programs, my own view is that every health care subsidy must be put into a budget, with limits raised over time by Congress but in a fair competition with other societal demands, be they education, defense, or currently unsubsidized forms of preventive health care.
Let Democrats use price controls. Let Republicans use vouchers. Let both work on other efficiency improvements that are more likely to be adopted when budgets are constrained. There is no one-time, permanent solution to how best to regulate this rapidly changing industry. With a constrained budget for each government program, however, Gilead would be unable to charge $1,000 a pill, or other health care providers would face a more rapidly declining price for their services, or both.
When it comes to how we spend our money, we seldom dwell on what we’re not buying. But money spent in one place cannot be spent in another. With the release of Kids’ Share 2014, the eighth in an annual series, my fellow Urban Institute researchers and I assess what share of the federal budget goes for kids and what shares go to other priorities. The word “share” is chosen deliberately: it forces us to recognize that a larger piece of the pie for someone must mean a smaller piece for someone else.
One major conclusion: despite several years of modest economic recovery and some budgetary successes for kids in previous decades, our elected officials—Democrats and Republicans, conservatives and liberals alike—have decided that kids must take it on the chin for the foreseeable future. Meanwhile, the rest of us will continue to gain, mainly when we hit older ages. Our retirement and health benefits will continue to grow, and we will continue to keep our taxes too low to pay for these benefits and the rest of government, no matter how well the economy is doing. Not that we or our elected officials would ever say this directly: you’ll be lucky to hear any discussion of these choices in any 2014 campaign.
No one votes formally to cut the kids’ share of the pie. They simply allow other shares to increase, driven by laws set in motion years and decades ago. Our priorities mainly revolve around ever more money for health, retirement, and tax subsidies, along with taxes so low that our children also get left with those bills and the higher interest costs that accompany them.
Let’s be clear: this scheduled hit on the kids’ budget does not derive from living in an age of austerity, an idea vying for first place on the list of really stupid interpretations of our current circumstances. We live in an age of extraordinary opportunity, not austerity. Despite the Great Recession, our total GDP per household (over $140,000) has never been higher. Ditto for measures of our national wealth, though those are perhaps inflated by current monetary policy. And there’s more to come. Within a little over a decade, despite lower economic growth, the budget offices project an increase in GDP per household of another $25,000 or so and increases in total government spending and tax subsidies of more than $10,000 per household.
And the kids? Well, they get close to none of it. Actually, less than none if you count out their very modest sharing in the large growth in health care spending.
It doesn’t have to be that way. For over twenty years, a consensus of sorts has developed that early educational and similar interventions, if done well, are a solid investment in our future. Yet progress here has been extremely slow. Child advocates are told that even $20 billion a year is out of reach in our “time of austerity.” But $20 billion is only about 1/40th of the expected growth in annual spending on Social Security, Medicare, and Medicaid (excluding the children’s share) by 2024. There’s also a growing consensus on creating a budget more oriented toward mobility and opportunity, but it’s still mainly rhetoric.
The simple question I’d like to ask is whether the numbers below, taken from Kids Share 2014, represent the direction that you want the government to take with the total increase in spending scheduled by 2024, a large share of which is made possible by economic growth. You can up that total or reduce it, depending upon your view of the optimal size of government. But either way, consider how you would assign the shares over the next 10 years or so. My guess is that almost none of you would allocate them this way.
Share of Projected Growth in Federal Outlays from 2013 to 2024 Going to Children and Other Major Budget Items (billions of 2013 dollars, except where noted)
Major budget items
|2013||2024||Growth, 2013–2024||Share of growth|
|Social Security, Medicare, and Medicaid||1,472||2,259||+787||58%|
|Interest on the debt||221||714||+493||36%|
|All other outlays||777||881||+104||8%|
|Total federal outlays||3,455||4,821||+1,366||100%|
Federal Expenditures on Children as a Share of GDP, by Category, 2013 and 2024
I’m pleased that politicians from both sides of the aisle are focusing on economic mobility. In life, the deck gets stacked fairly early and connections play a big role. In an open and democratic society like the United States, it’s not so much that a person can’t get a hit; it’s that one person steps up to the plate with three balls and no strikes, and the next with no balls and two strikes. The odds that the second person ends up with a higher batting average than the first after 10 times at bat is just about nil.
One reminder of how connections and early stacking of the deck reinforce each other came in the mail a few days ago: a chance to cast my vote for the officers of the American Economic Association (AEA). I’m supposed to select five people from nine candidates. The list shows some diversity along lines now somewhat demanded by society—that is, three women and one person of color. But, seven of the nine—and all six white males—have a connection with the Massachusetts Institute of Technology, or MIT (five PhDs and two faculty), so I have to vote for three MIT-connected economists at a minimum. Harvard lost its usual spot; only five of the nine have a major connection, including three with bachelor’s degrees from there. In fact, only one of the nine does not have a Harvard or MIT connection—though she has taught at Princeton, which usually gets at least token representation in this annual vote.
I know many of these candidates and have great respect for them. But I doubt that most of them believe fully in the hierarchical system from which they are now beneficiaries.
A number of years ago I had two colleagues who had done all but dissertations (ABDs) in history at the University of Virginia, ranked as one of the better schools in the country for that subject. Both were told by an adviser it wasn’t worth the trouble to write their dissertations. Jobs teaching college history and requiring a PhD, they learned, were so rare that they were already doomed: they were from too low-ranked a high-ranked university.
The financial industry has an extensive old boy (and occasionally old girl) network with the Ivy League. One of my daughters went to Princeton; though a biology major, she was recruited to join Wall Street (she didn’t accept). A former research assistant I knew got an MBA from the University of Texas at Austin when it became well-known for its rigor. Despite doing quite well, he later complained that without the Ivy League connection he couldn’t even get interviews with Wall Street firms.
Richard Perez-Pena recently penned a piece for the New York Times detailing the lack of progress among elite colleges in enrolling low-income students (not yet a standard along which politically correct diversification levels are expected). For instance, studies out of the University of Michigan and Georgetown University find that at 82 schools rated most competitive by a Barrons profile, only 14 percent of the student population comes from the poorer half of the nation’s households.
Look at top appointees under this president and former ones. Many come from a very few colleges— particularly the ones with which the presidents are connected (Obama loves Harvard; his predecessor, Yale), or have parents who owned banks, or other crucial connections. Even in sports, which is relatively competitive, think of the quarterbacks (RGIII) or golfers (Tiger Woods) who got a start even before age 10 learning from a parent or other close contact. And do you really think that all the current Hollywood stars with famous actresses or actors as parents just came out of genetically superior material?
I could go on, and I’m sure there is not a reader among you who couldn’t expand the list. In fairness, I should add some of my own early and lucky links, such as attending St. Xavier in Louisville, KY, perhaps the top high school in the state, where my family had gone for generations.
Researchers today work long and hard at trying to figure out which policies could help create a more mobile society, one where of starting at the bottom still left decent odds of making it to the top, or where success didn’t get defined so intensely by early connections or the track on which one started. So far we haven’t been very successful, though there are clearly some government steps that can be made, such as creating more equal access to subsidies for saving. But much is still determined by how we organize ourselves socially outside of government and just what we expect from our institutions. And, in truth, a thriving society should want successful parents to teach their kids all that they can, so simplistic leveling policies can easily start to threaten both their freedom and the wider societal growth that their successful kids can generate.
Still, I think it clear that many of the ways we select and discriminate hurt our society and hinder many from achieving their potential. So do I vote for MIT, or for MIT, or not at all?
Jim Brady, who died on August 4, 2014, will be remembered for many things. He taught elected officials, analysts, and citizens alike not to take ourselves so seriously when engaging in policy. He brought humor to many situations, even at a cost to himself, as in the famous anecdote when he shouted “killer trees” while pointing out the window from the Reagan campaign plane after the candidate had questionably argued that trees caused air pollution.
The lesson from Brady I never forgot was BOGSAT—“Bunch of guys sitting around a table.” Brady was the first from whom I heard this quip, though I cannot track down the occasion(s). BOGGSAT (I’ve removed the sexual bias in the acronym by adding an additional “G” for “gals.”) is the best description I know for how most policy, at the end of the day, is decided. Often I write about Republicans or Democrats, liberals or conservatives, adhering to some position that I believe violates some core principle such as efficiency or equal justice under the law. There’s just a better way, I suggest, to achieve the goals that the adherents seek. But reflecting back a bit, much of the existing policy I criticize did not derive from some elaborate analysis of what was best for the country or even for the favored constituency, but as an almost accidental byproduct of a BOGGSAT.
Examples are common, and I’m sure you could come up with many. Here are some of my favorites. Social Security’s current imbalance? Some BOGGSAT of early Social Security reformers and bill developers failing to adjust the retirement age for increased life expectancy. Today’s farm bill support for corn, soybeans, and cotton, but not many other crops, in the name of “food security?” Some Depression-era congressional BOGGSAT trying to support their favorite farmers. The largest tax subsidy? Some IRS BOGGSAT determining that health insurance was compensation that shouldn’t be taxed. The continued allocation of state “economic development” subsidies to a few businesses? BOGGSATs in almost every state deciding whom to favor and whom to exclude. A rule that one shouldn’t have to pay more than 10 percent of income for health insurance? A BOGGSAT that worked this parameter into Obamacare despite the fact that health costs absorb almost one-quarter of all personal income.
When it comes to new policy design, the BOGGSATs continue their wily ways. Washington is full of think tanks that purport to provide new agendas for each major political party. Some advocates propose to convert pensions subsidies to simple credits for deposits to retirement accounts without accounting for the simple fact that a one-time deposit that withdrawn one second later doesn’t really represent saving. Others want to expand low-income access to home mortgages without worrying about the regulatory tendency to engage such efforts when market valuations are high and to discourage them when market valuations are low. Many want to cut taxes without cutting spending, which is simply a shifting of the spending burden to future taxpayers. A BOGGSAT likes to feel it is moving policy in some particular direction but often fails to consider all the alternatives or worry about the unintended consequences.
In both current law and many proposals to change it, a BOGGSAT loves to use nice round numbers with limited or no analytic justification. Think of “10-5-3” (the new cost recovery or depreciation system for deducting costs of investments, as enacted in 1981) or the 50 percent Social Security spousal benefit (the percentage added to a worker’s benefit that is paid out freely to the couple and paid for partly small part by single people and even abandoned spouses who can’t get the benefit) or “9-9-9” (a tax system with three taxes with a rate of 9 percent each, proposed by Herman Cain in the 2008 Republican primaries).
When I’m honest about it, I have to admit that many of my family’s decisions to spend or give away money come about through the BOGGSAT method. I’m guessing the same is true for you. But the BOGGSAT doesn’t have to operate purely on instinct, or the emotion of the moment, or the bargaining power of those at the table. The next time you’re engaged with others in deciding something for yourself or promoting something for the broader community, think back to Jim Brady and his quip about how decisions are made. And consider the consequences not just of the decision but the way it was decided.
Thanks, Jim. Just one more item to add to your list of lifetime gifts to us.
The 50th anniversary of President Johnson’s War on Poverty has led to a flurry of articles and debates about whether that war succeeded. That debate has been reenergized by Thomas Piketty’s best-selling book, Capital in the Twenty First Century, which argues that inequality is rising because returns to capital have risen relative to average economic growth. A solution to this inexorable force, Piketty claims, lies in some form of worldwide wealth tax.
In both cases, I find the political debate largely unproductive. Many conservatives and liberals pick at pieces of data and history to support their own forgone conclusions. Rather than seek practical margins for making progress, much of the discussion turns to thumbs up/thumbs down rhetoric or totally impractical solutions.
Here’s how the data play out. Since the late 1970s, market-based measures of poverty and the distribution of income (that is, measures of income before taking account of government redistribution through taxes and transfers) improved very little in the first case and got worse in the second. Both did much better a few decades earlier, including up to the mid-1970s. PIketty bases his broad historical conclusions about growing inequality largely on market measures. In turn, researchers ranging from Gary Burtless at Brookings to Tim Smeeding at Wisconsin to Richard Burkhauser at Cornell to Diana Furchgott-Roth and Scott Winship at the Manhattan Institute have shown greater reductions in poverty and less growth in inequality of income or consumption when market-based income is adjusted for government taxes and transfers.
These two different ways of looking at the data make for strange bedfellows as the debate turns political. Conservative critics of the War on Poverty combine with liberal world-always-getting-worse warriors, who like to cite Piketty, to form conclusions based largely on the before-tax, before-transfer measures. They unite to attack the status quo, with one suggesting fewer transfers (the war failed) and the other higher taxes on the rich (the tax system failed). Liberal defenders of social welfare programs and conservative opponents of higher tax rates, in turn, conclude that on an after-tax, after-transfer basis the world is a lot better off than the other side asserts. They defend the status quo.
Here are the statistics that I ponder. In real terms, social welfare spending averaged about $7,500 per household at the time the War on Poverty was declared. By the time that Ronald Reagan was inaugurated in 1981, spending per household had grown to $15,000. And today it has doubled again from the start of the Reagan administration to about $32,000. (These figures do not even include tax expenditures for social welfare, such as pension, housing, and wage subsidies, which averaged about $7,000 per household in 2013.) Meanwhile, GDP per household grew from about $70,000 in 1964 to nearly $140,000 today.
Over this same 50 years the official thresholds for measuring who is in poverty have not grown one dollar in real terms. These measures, adjusted only for inflation, in a sense, are based on absolute poverty, unadjusted for the new goods and services a growing economy provides or, said another way, for whether a household’s income keeps up with average or median income in the economy. For a family of four, for instance, the nonfarm poverty threshold is crossed when a household’s income falls below roughly $23,550 today, essentially the same level as in 1964. For a single person, the poverty threshold equals $11,490
“Wait a second,” you may think. The government spends far more on social welfare than would be required to give every household support above poverty levels. And in almost every year there have been substantial real increases in the amount of transfers made. Why, then, has the poverty rate not fallen more?
There is no single answer. Here are four pieces of the puzzle:
Huge gains at the top. Inequality in market-based income DID grow substantially since the late 1970s, the period when progress against poverty slowed. The ability of high-income individuals at the top of a winner-take-all economy to capture much of the extra rewards that derive from monopoly or oligopoly settings does help explain some of the stagnation in earnings growth for those with average or low earnings.
It doesn’t explain why the public supports, which have continued to grow, haven’t made greater headway in improving the skills of the population enough that their market incomes would rise more. That brings us to the next three pieces of the puzzle: the extent to which the public money has been spent to help providers, help the middle class, and pay for health care.
Providers. Beneficiaries include providers who have captured large portions of government, not just private market, money. Before you start looking elsewhere, just remember that providers include, among others, doctors, drug manufacturers, social workers, lawyers, lenders, other financial intermediaries, builders, housing officials, software developers, tax preparers, government contractors, and, for that matter, researchers like myself.
The Middle Class. The middle class rather than the poor has also captured very large portions of the social welfare budget, largely in ways that have for decades encouraged them to retire and work less for greater portions of their lives. Early growth in Social Security benefits, for instance, did a good deal to reduce poverty, but in more recent decades has made less progress because growth—the marginal increase in payments—has been concentrated preponderantly on more years of support and higher levels of benefits for everyone, from rich to poor alike. Remember that a program can on average be successful in meeting some objectives, yet still target its incremental budget poorly. Incremental spending in our public retirement programs in the modern age increasingly operates to decrease the market incomes of the middle class and, despite billions of additional dollars spent each and every year, only modestly increases the transfers received by the poor.
Health Care. A large share of the growth in the income of almost everyone but the rich has come not in cash but in the form of government and employer-provided health care and insurance. One-third of per capita income growth in our economy from 1990 to 2010, for instance, went simply to pay for real increases in health care, as average annual health care spending per household from all sources ballooned to approximately $24,000. Measures of both market income (e.g., Piketty) and most measures of after-transfer income (e.g., the official poverty measure) fail altogether to count this major source of income. Yet for many, particularly those below median income, that item has dominated the way their income has grown for perhaps three decades. The CBO has tried very recently to count health insurance received as income in some of their work, but its efforts are an exception to the rule.
These four pieces interlock in various ways. For instance, more years and money in Social Security support, particularly as people live longer, has encouraged the average worker to retire for more than a decade longer than in 1940, when benefits were first paid, thus reducing their market income. Because many of the government’s expenditures on health care have been captured by providers, the public’s gain in benefits comes out to only a fraction of each additional $1 the government spends, while in the private sector cash compensation stagnates to pay for higher costs of health insurance.
In sum, the debate over poverty and inequality deserves renewed attention. However, it provides a quandary to many in both major political parties, who are largely mired in mid-20th century debates and fighting the thumbs-up, thumbs-down battles that blocks improvement from either side. The times beg for a 21st century agenda (an issue I try to address in my new book, Dead Men Ruling).
A personal note to you, my readers and friends.
My latest book, Dead Men Ruling, is in many ways the most important that I have ever written. I try not only to diagnose the disease that underlies so many of our economic and political problems today, but also to attack the wrong-headed notion that we live in an age of austerity and limited possibility.
Consider: the gross domestic product per household is $141,000 today and is projected, even with slower growth, to reach $168,000 in 10 years. Over that same period under Republican and Democratic budgets alike, government at all levels is likely to increase spending and tax subsidies from $55,000 to around $65,000 per household. Our budget may be terribly allocated, and the way we tax and spend can be quite inequitable, but do these numbers suggest a nation that must continue to turn its back to the ocean of possibilities that lie right at our feet?
I hope you will read Dead Men Ruling. Even more, I hope that you recommend it to friends and elected officials who want to move beyond yesteryear’s stale debates toward a 21st-century agenda—particularly when it comes to promoting opportunity and mobility, prioritizing children and their future, and creating a government that can be both effective and lean.
If you cover the news, are organizing an event, or have a group interested in the book, I can help. Please contact me.
Because I make no money on the book, my motivation is purely aspirational. I strongly believe that the country is at an inevitable turning point, requiring honest leadership. Though it will take time, together we can make that turn well.
At DeadMenRuling.com, you can order copies directly and find many related recommendations, videos, and interviews. As a Government We Deserve reader, you can use discount code KCD4. Or you can use various book venders (including Amazon).
To tease your interest a bit further, I include the preface below.
Low or zero growth in employment… inadequate funds to pay future Social Security and Medicare bills…declining rates of investment… cuts in funding for education and children’s programs…arbitrary sequesters or cutbacks in good and bad programs alike… underfunded pension plans…bankrupt cities…threats not to pay our nation’s debts… inability to reach political compromise…political parties with no real vision for 21st century government.
I’ve come to a strong belief that these and a whole host of seemingly separable economic and political problems are symptoms of a common disease, one unique to our time and shared widely throughout the developed world. Unless that disease and the history of how it spread over time is understood, it’s easy to fall prey to believing in simple but ineffective nostrums, hoping that a cure lies merely in switching political parties or reducing the deficit, expanding our favorite program, or hunkering down to protect it. My first purpose in writing this book is to accurately diagnose that disease so we can attack it at its roots
But my fonder hope is that we reawaken to the extraordinary possibilities that lay right at our feet and restore the American can-do spirit that has prevailed over most of our history. Despite the despairing claims of many, we no more live in an age of austerity than did Americans at the turn into the 20th century with the demise of the frontier. Conditions are ripe to advance opportunity in ways never before possible, including doing for children and the young in this century what the 20th did for senior citizens, yet without abandoning those earlier gains. Recognizing this extraordinary but checked potential is also the secret to breaking the political logjam that, as I will show, was created largely by now dead (and retired) men.
House Ways and Means Committee Chair Dave Camp deserves credit for proposing a tax reform that takes on many special interests, something too few other elected officials are willing to do. But one provision mistakenly threatens the survival of most community foundations without improving the tax system or strengthening the charitable community.
The proposal would effectively eliminate most donor advised funds (DAFs), the major source of revenues to community foundations, so they could no longer provide long-term support for local and regional charitable activities. Instead, those funds would need to pay out all their assets over a period of five years.
DAFs support community foundations in two ways. First, donors pay about one percent of asset value to the foundation for sponsoring the fund. Second, community foundations distribute donor gifts to many local charities. By simplifying giving and reducing costs, they make it possible for people who are not wealthy to endow charitable activities.
Requiring a community foundation to pay out all its assets over five years is equivalent to telling the Ford Foundation that it, too, must pay out all of its endowment over a short period of time. But the draft bill only targets those with limited funds, while it leaves the really big guys like Ford alone.
Usually, I analyze tax policy as a disinterested observer. But as chair of a community foundation called ACT for Alexandria, I have a personal interest in this issue.
So let me tell you how this proposal would lead to the demise of many of our activities and, likely, the community foundation itself.
Each year we engage in a one-day fundraising effort for the charities of Alexandria, VA, a city of about 145,000 across the Potomac River from Washington, DC. This year we raised over $1 million for 121 local charities, and many contributions to support the effort itself, not just the charitable contributions themselves, came from our donor advised funds.
The fees we earned from the funds supported our program to train local charities on how to better use social media and do online fundraising. No one else in the community does this coordination and training.
In addition, several of our donors create DAFs, often small, to engage their families in philanthropic efforts. By doing so, they encourage a new generation to make charitable giving part of their lifestyles.
DAFs give donors flexibility to vary their gifts as circumstances change. For instance, one of our funds provides long-term support for schools in Afghanistan through U.S.-based charities, but there is no guarantee that any particular Afghanistan project would be strong enough to merit a direct permanent endowment. Other funds support a long-term examination of early childhood education opportunities in Alexandria, a project likely to change as needs change. DAFs or equivalent funds also allow “giving circles” that combine small gifts to assist an activity without having to create a new charity every time.
Without these funds, we likely would be unable to support a grant program for capacity building and training of local nonprofit leaders.
I doubt seriously that Chairman Camp’s staff saw fully how they would wipe out most community foundations and confine endowment giving only to the rich. By making it more complicated and expensive to engage in such activity, they would move almost all endowment decision-making to elite, often established institutions where the average citizen has little or no voice and where the operational expenses are greater.
Why are critics of DAFs so worried about someone having a say over an annual grant of $5,000 out of an endowment but not when the President of Harvard decides over time how to spend billions of dollars out of the income from an endowment?
There are legitimate concerns over how such donor advised funds should be regulated. It may even be possible to design a proposal for a minimum annual payout, though, if badly designed, such a limitation could curb the ability of some people to build up assets to make a major gift to try to achieve some large charitable purpose.
The very small literature I have seen arguing for this type of proposal entangles DAFs and community foundations with separable issues. For instance, one can argue about the extent to which givers to charity should be allowed special capital gains treatment. But those discussions go well beyond DAFs, and removing DAFs as a source of more endowed funds hardly targets the perceived problem.
Still, I also understand why tax staff and policymakers sometimes see charities as just another special interest. The charitable sector needs to go beyond its “we’re all good, leave us alone” mantra, and address real problems as they arise.
There are ways for Congress to reform the tax laws that would raise revenues and strengthen the charitable sector. But this DAF proposal would wipe out most community foundations, increase administrative costs, and raise nothing or almost nothing for Treasury.
This post originally appeared on TaxVox. An earlier version of this column stated that a fund-raising effort by ACT for Alexandria supported over 200 charities; the corrected number is 121 charities