Tax expenditures as foreign aid.

• Author: Pozen, David E.

Few issues in global politics are as contentious as foreign aid--how much rich countries should give, in what ways, to whom. For years, it has been a commonplace that U.S. policies are stingy. The Organization for Economic Cooperation and Development (OECD) routinely ranks the United States far behind its industrialized peers in official development assistance (ODA), measured as a percentage of gross national income (GNI). (1) An endless parade of critics has implored the government to do more; some suggest that the Bush Administration's support for the Monterrey Consensus, which sets a goal of increasing assistance to 0.7% of GNI, commits it to do more. (2) Against these allegations of miserliness, executive officials and certain sympathetic scholars have begun to argue that the published statistics are misleading because they fail to account for individual and corporate philanthropy. What the OECD misses, this argument runs, is the exceptional extent of Americans' private generosity. (3)

What both sides of the debate have missed, this Comment proposes, is not the role of the private sector in generating foreign aid but the role of tax expenditures in subsidizing it. Tax expenditures are deviations from the normal tax structure "designed to favor a particular industry, activity, or class of persons." (4) They take the form of deductions, exemptions, exclusions, deferrals, credits, or preferential rates. Economically, these "expenditures" may be seen as equivalent to direct government outlays: if U.S. taxpayers saved $70 billion last year from, say, the mortgage interest deduction, the government therefore gave a $70 billion (implicit) subsidy to homeownership. Stanley Surrey pioneered the theory of tax expenditures in the late 1960s, and the concept is now widely credited. Since 1974, Congress has required the annual publication of a tax expenditure budget. (5)

Although not immediately evident from the budget data, in recent years a growing amount of expenditure has gone toward foreign aid. The reason lies in America's tax treatment of nonprofit organizations. Whenever U.S. charities and foundations spend money overseas--as they have increasingly been doing--some portion of this spending can be attributed to the support they receive from numerous state and federal tax privileges. Unlike traditional ODA, these tax expenditure funds are privately organized and distributed, yet unlike voluntary transfers they are paid for by the public fisc. This is not private aid; it is privatized aid.

The basic, descriptive goal of this Comment is to show, in Parts I and II, how nonprofit tax policies have shaped the content of American aid. The broader goal is to begin to connect this insight, in Part III, with the literatures on tax expenditures and international development--and, in so doing, to illuminate some attractive and unattractive features of using tax expenditures in the foreign aid context.

1. HIDDEN SOURCES OF AID

   No other tax system is as generous to its nonprofit organizations as that of the United States; (6) U.S. nonprofit law is, in large measure, a coordinated regime of tax privileges. Many nonprofits are exempt from income, property, sales, and franchise taxes at all levels of government. Contributions to charities may be deductible under state and federal income, gift, and estate taxes. Section 501(c)(3) nonprofits are allowed to issue tax-exempt bonds. (7)

   Not everyone agrees that these tax privileges constitute tax expenditures. The Joint Committee on Taxation (JCT) and the Office of Management and Budget (OMB), for example, include the charitable contributions deduction but not the income tax exemption in their annual tax expenditure compilations. (8) Because of the special nature of charitable giving and nonprofit enterprise, one might view the forgone revenue from these provisions as a necessary concession to measurement difficulties, donor equity, or the conceptual integrity of the tax base. Among tax scholars, however, the mainstream position is to view both the deduction and the exemptions as tax expenditures--as government subsidies justifiable, if at all, on consequentialist grounds. (9) The Supreme Court seems to concur. (10)

   If one acknowledges the nonprofit tax preferences (or some subset thereof) to be tax expenditures, it follows that the government acts as an indirect fiscal sponsor of the beneficiary organizations, in all that they do. When the organizations expend funds on grants, technical support, or submarket-rate loans in foreign countries "with the promotion of economic development and welfare as the main objective," (11) it is hard to see why, analytically, the tax expenditure portion of these funds--the portion effectively paid for by the government--should not count as official aid.

   With the charitable deduction, the foreign aid subsidy occurs anytime individuals or corporations make contributions to a U.S.-based nonprofit that runs or supports appropriate programs outside the country. Federal income tax deductions are not available for gifts made directly to foreign recipients, but the rules allow full deductibility for gifts made through an American intermediary. (12) With the various entity-level exemptions, the foreign aid subsidy can occur whenever a U.S.-based organization sends abroad money it would have otherwise lost to taxes. Other tax expenditures (arguably) made by the U.S. government, such as tax sparing provisions in treaties with developing countries, might also be classified as "hidden" foreign aid. I focus only on the nonprofit sector expenditures because measures aimed at incentivizing foreign investment have a weaker conceptual claim to being aid and a weaker empirical claim, I suspect, to having fostered global development. (13)

   As the U.S. nonprofit sector has grown larger and more international, it stands to reason that tax expenditures on foreign aid have swelled correspondingly. Of the 2078 public charities classified by the IRS in 1998 as "international and foreign affairs" entities, 88% were founded in 1970 or later and 62% were founded in 1985 or later. (14) Internationally focused charities and foundations currently make up about 2% of the nonprofit sector, in numerical and revenue terms, and this figure is expected to rise. (15) Many of the domestically focused organizations, moreover, have expanding overseas roles. (16) These trends reflect a distinctive feature of tax expenditures as compared to direct expenditures: once the triggering tax preference is established, the expenditure becomes a function of exogenous factors and can grow or shrink dramatically without any government action. Indeed, the recent growth in America's tax expenditure aid cuts in the opposite direction of its post-Marshall Plan secular decline in official aid. (17)

2. ESTIMATING THE EXPENSE

   So how much does the United States "spend" in tax expenditures on foreign aid? There are numerous, perhaps insuperable, obstacles to divining a reliable figure. First, there is the aforementioned debate about which nonprofit tax preferences (if any) should count as tax expenditures. Second, many states do not produce tax expenditure estimates, and...