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Charitable subsidies are supposed to encourage positive externalities from charity. In principle, the government can pursue this goal by evaluating specific charitable initiatives and deciding how much each should receive. Although the government sometimes makes this sort of fine-grained judgment, this Article focuses on two income tax rules that leave the government essentially no discretion about which charities to fund: the deduction for donations to charity ("the deduction") and the exemption of a charity's investment income ("the exemption"). With each subsidy, federal dollars flow automatically as long as charities satisfy very general criteria.

As a result, these subsidies are especially important when political institutions are deadlocked. Even if the government is too divided to address an issue, nonprofits can still do so with government money. Indeed, the federal government invests billions of dollars each year in these subsidies.


Law | Law and Economics | Nonprofit Organizations Law | Tax Law