While there is much to be said in favor of this sentiment, there is another option, one that links the taxpayer more closely to the poor, that provides assistance and at the same time lessens dependency. This alternative is the compassion tax credit, which offers tax incentives to taxpayers to increase their support of qualified private charities. In December 1995, the Beacon Hill Institute took a leadership role in the national debate over welfare reform when it offered a proposal whereby taxpayers would be able to deduct 100 percent of their contributions to eligible nonprofit organizations to up to 25 percent of their federal tax liability. The central argument for the compassion tax credit is that it addresses the root cause of poverty, which is the breakdown of the family and the loss of self-discipline and individual responsibility that the family is intended to instill. In addition to giving the taxpayer control over where his dollar is spent, the compassion tax credit injects much-needed competition into the currently monopolized welfare market.
Competition leads to economic efficiency.
While much of the earlier research has focused on the feasibility of compassion tax credits at the federal level, devolution argues for application of the same concept at the state level. Many states already have innovative programs that offer tax incentives for donations to private charities. We have strong evidence that donors will respond positively to tax incentives for charitable contributions and that nonprofit organizations will be able to operate more efficiently and effectively in providing services. Questions remain, however, concerning how the tax credit will bring about the expected behavioral responses by donors, recipients and charitable organizations. In designing the plan, we sought the input of public management professors, private charitable organization directors, Department of Social Services officials and licensed social workers.