Greed is Good (for Philanthropy)

Why profit may belong in the charity business

Before Google went public, founders Sergey Brin and Larry Page informed potential investors that they wouldn't be seeing all of the company profits. A small percentage of it would be set aside for a charity project to be determined later. Last month, Brin and Page finally revealed what they planned to do with those company funds when they announced the founding of Google.org, a charity operation designed—modestly, humbly—to solve all the world's problems and provide us all with awesome electric cars besides. That rich internet entrepreneurs would want to start a charitable organization is about as surprising as Bill Gates' wardrobe. The corporate form Brin and Page chose for their new charity, however—that was something completely different.

Brin and Page are doing something almost no one else does. They made Google.org a for-profit charity. The company already had a reputation for creative, counter-conventional thinking. This is, after all, the same company that took as its motto "don't be evil," and includes a button on its main page reading: "I feel lucky." But pairing profit and charity? Isn't that a bit like pairing gasoline and fire, cookie monster and cookies?

The popular idea that profit and charity are mutually exclusive goes beyond general sentiment. It's inscribed in our tax law. Anyone can send money to a charity and deduct it from their taxes. This is how our government encourages support for charitable organizations. But the catch is, you can only contribute and deduct if said charity is defined as such by section 501(c)(3) of the tax code. That same section defines a charity as a nonprofit. In other words, you can only contribute to a charity and deduct the contribution if the charity follows all the restrictions of a non-profit. This gives not-for-profit charities (e.g., practically every charitable organization but Google.org) a big advantage. A donor is much less likely to donate to a for-profit outfit when he or she can deduct a donation to a not-for-profit charity and get more value out of it.

As far as the government is concerned, that is how it is supposed to be. Profit doesn't belong in charity, and Uncle Sam doesn't plan to use tax breaks to support that sort of thing. The American public is about as interested in changing section 501(c)(3) as in free limb amputation. But there are reasons to believe chanign the code might make some charities better at what they do. It might also encourage more talented people to start them.

Brin and Page at Google.org really don't care about any of this. They aren't angling for tax-free donations because they don't need them. They can operate without any non-profit restrictions since they get all the funding they need from the mothership. At the same time, however, they demonstrate that a for-profit can do charity just fine, even if they don't have the typical non-profit's view of profit. Few entrepreneurs can rely on a bank the size of Google's, though, which may explain why experiments like Google.org are so rare.

University of Chicago Law Professors Eric Posner and Anup Malani have been wondering about the role of profit in charity since before the Google.org announcement. They noticed that where non-profits entered the for-profit arena—as in when, for example, a museum opens a gift shop—tax law allows them to act as a for-profit. But when a for-profit operates as a charity, the tax code offers no symmetrical arrangement. "At Starbucks, for example, when I buy a coffee, I have to pay an extra 5 cents for free trade," explains Posner. "I don't get a tax deduction. But if I give the 5 cents to a charity that gives aid to Central American farmers, I do. That's odd because Starbucks may do a much better job [helping Central American farmers]. So I buy less free trade than I would. The tax code causes a distortion and the people hurt are the farmers."

In their paper "The Case for For-Profit Charity" Posner and Malani ask if there is a good reason to keep tax-free donations from for-profits (if you agree that the government should be subsidizing charity at all). They consider the common arguments in favor of the tax code discrimination and find them seriously lacking. A few of the assumptions Posner and Malani address:

Non-profit charities are for creating public goods. Actually, a for-profit charity can create public goods just as well as a not-for-profit. As Posner and Malani point out, the Feds directly subsidize for-profits such as ethanol producers for precisely this reason.

Tax code restrictions admit the altruistic and keep out the greedy. As a matter of incentives, this tax code restriction may also admit the lazy and dissuade the driven. Non-profits can't give out performance bonuses or independently set their own raises. In that environment, a less conscientious operator might choose to put in less work at their charity and go home early. In other words, the 501(c)(3) does not guarantee virtuous behavior.

A for-profit charity can scoop up donations, call them profits, and take them home. Sure, the profit incentive would encourage unscrupulous entrepreneurs to do just that. Nevertheless, the private sector does provide ways a foundation could ensure a donation would be a good charitable investment. One way is through legal contract. An entrepreneur could hire a manager to run a for-profit charity and promise to pay him or her only a fixed wage—no profits, no shares. Or, an entrepreneur could hire a private auditor to oversee the workings of the foundation—a role the IRS performs (at no bargain rate) for non-profits.

In other words, if we care about results over intentions, there's no reason to limit tax advantages to non-profit charities. "We shouldn't discriminate," concludes Posner. "If you think it's a good idea to give tax breaks to charities, they should go to all charities, for-profit or not. If you think it's a bad idea, you shouldn't give tax breaks at all."

If the tax code changed, we could have a lot more Google.orgs. These new firms could rely on donations and remain free to experiment with corporate form, to attract more talent (through higher salaries and bonuses), and to partner with venture capitalists. They would also have the incentive to streamline administrative costs, which could result in leaner, meaner charities. Profit wouldn't necessarily make sense for any and all charitable firms. (For a charity organization that does very little but pass donations on to recipients, for example, the profit incentive wouldn't make very much sense; an entrepreneur could only take bigger profits by offering fewer services.) But other areas of the charitable world may find that experimenting with for-profit models suits them just fine. We could find ourselves flooded with new, innovative charitable firms.

Or it could all amount to nothing. We won't know unless we try.

 

Aaron Steinberg is a freelance writer in Washington, DC.

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