In a similar vein ...MOST ACADEMIC PARTICIPANTS IN the ongoing debate over income redistribution are aware that it is not possible, ever, for government to tax one set of persons and redistribute the same amount to a set of subsidy recipients. Some fraction of each dollar taxed will always be absorbed in wages and salaries of the administrative bureaucracy, costs of purchasing, powering, maintaining and replacing equipment, buildings, etc., and other overhead costs. Only the remainder will actually be received by the target population in the form of cash or in kind payments. Many advocates of compulsory income redistribution have tended to ignore this inconvenient fact altogether in their writings, however. >>>
Of course it is also true of private charities dependent on voluntary donations that they have costs absorbing part of their revenue, but there is a huge difference in the efficiency with which they operate relative to government. Contrary to Okun, public income redistribution agencies are estimated to absorb about two-thirds of each dollar budgeted to them in overhead costs, and in some cases as much as three-quarters of each dollar. Using government data, Robert L. Woodson (1989, p. 63) calculated that, on average,
70 cents of each dollar budgeted for government assistance goes not to the poor, but to the members of the welfare bureaucracy and others serving the poor. Michael Tanner (1996, p. 136 n. 18) cites regional studies supporting this 70/30 split.
In contrast, administrative and other operating costs in private charities absorb, on average, only one-third or less of each dollar donated, leaving the other two-thirds (or more) to be delivered to recipients. Charity Navigator (
www.charitynavigator.org), the newest of several private sector organizations that rate charities by various criteria and supply that information to the public on their web sites, found that, as of 2004, 70 percent of charities they rated spent at least 75 percent of their budgets on the programs and services they exist to provide, and 90 percent spent at least 65 percent.
The median administrative expense among all charities in their sample was only 10.3 percent.The basic reason for this large differential in costs between private and public agencies is not difficult to see. Depending largely on voluntary contributions, most private agencies are under strong pressures to operate efficiently and keep costs low.
Benevolent citizens naturally wish a large fraction of their donations to reach the needy, and many will not keep donating to an agency that does not accomplish that. Donors can select among private nonprofit charities, and competition between charities for donations tends to insure efficiency. Public aid agencies, in contrast, are budgeted their funds by Congress, which obtains them through compulsory taxation.
These agencies are not under competitive pressures to keep costs down that are remotely equivalent to those of private charities. Indeed, their incentives may be much the opposite, as Niskanen (1994) has argued. Yet another factor promoting efficiency of private charities is that
those operating at levels of inefficiency comparable to the average government agency are often prosecuted—by the government (which never applies the same standards or threat to its own agencies)—for fraud. Pressure on private charities to avoid such prosecution, and the bad publicity and loss of public trust resulting, is strong.
In fact, the average cost of private charity generally is almost certainly lower than the one-quarter to one-third estimated by Charity
Navigator and other private sector charity rating services, for at least two reasons. For one, many are either run by or affiliated with religious organizations, where much of the labor is donated, further reducing overhead costs. Charity Navigator does not even include
religious charities in its huge sample, focusing instead only on tax exempt 501(c)(3) organizations required to file informational tax returns. Perhaps more important, an unmeasured but certainly very large fraction of private charitable aid is administered directly to recipients by kin without any institutional intermediation at all. This widespread private family charity (and similar gifts) is the only case in which dollar-for-dollar charitable income transfers can occur.
HELPING SOME BY HARMING OTHERS—A LOT
One implication of the high cost of government income redistribution comes into focus when costs are understood correctly as alternative opportunities forgone. If a government agency delivers only one-third of each dollar budgeted to it as subsidy to its target population, then it must be budgeted three dollars for each dollar so delivered. Assuming that the cost of collecting the tax revenues to be budgeted to redistributive agencies is zero, then for each dollar delivered to a subsidy recipient, whether in the form of rent subsidy, food stamps, welfare, prescription medicine, or whatever, the taxpayers who had earned that money productively in the market must be deprived of
three dollars worth of the things
they want.
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THE COSTS OF PUBLIC INCOME REDISTRIBUTION AND PRIVATE CHARITY(SUMMER 2007)
