Document Type

Article

Publication Date

2007

Disciplines

Business Organizations Law | International Law | Law | Tax Law

Abstract

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). 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. 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.

What both sides of the debate have missed, this Article proposes, is not the role of the private sector in generating foreign aid but the role of tax expenditures in subsidizing it. Better known as tax breaks or loopholes, tax expenditures are deviations from the normal tax structure "designed to favor a particular industry, activity, or class of persons.” 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, though not universally, credited. Since 1974, Congress has required the annual publication of a tax expenditure budget.

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. More controversially, several other domestic tax expenditures, such as the deferral granted to foreign source active business income, might also be seen as providing foreign assistance. 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 Article is to show, in Parts I and II, how nonprofit tax policies have shaped the content of American aid. This analysis implies that the definition of ODA should be revised, as the next Part explains. The broader goal is to begin to connect these insights, in the balance of 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. While my focus throughout is on the United States, the central argument can be generalized to any country with broadly analogous international tax policies.

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