Global Philanthropy Depends on Tax Laws

As President Bush aggressively pursues the wars on terrorism and on Iraq, anti-American sentiment is growing in many countries, not only in those that are predominantly Muslim. Worldwide antiwar protests proliferate, anti-American speeches and votes dominate the United Nations, and the Internet virtually seethes with anti-Americanism.

One important way to contribute to resolving the problems underlying such deep divisions between the United States and the rest of the world is to encourage America’s citizens, corporations, and nonprofit organizations to provide financial support overseas in order to expand the number of nonprofit groups, to stimulate economic development, to promote health care and education, to build social capital, and to take other steps to foster free, stable, and open societies. Thus, global philanthropy is a key ingredient. But for it to be truly effective as a major component of America’s foreign policy, we must make changes to our tax laws.

The September 11 tragedies offered a gruesome reminder of why it is important for the U.S. government, donors, and domestic nonprofit grant-making organizations to provide financial support for efforts to build civil society abroad. The terrorist attacks were a reaction to worldwide disparities in value systems, religious and political beliefs, and loyalties; to political repression, social inequalities, and economic deprivation experienced by people around the world; and to the fragmented world connected by technology and trade. The terrorists delivered a sobering message about weaknesses in America’s alliances and shortcomings in its foreign policies.

Many of our income-tax rules that govern charitable giving were put in place long before U.S. foreign policy reinforced the nation’s commanding international role and before the era of globalization. International interests have been afterthoughts, when weighed at all, rather than well-considered focal points in the design of our charitable tax policy and tax laws. As a result, our income-tax system needlessly presents formidable obstacles to overseas giving by America’s individual and corporate donors and many domestic grant makers, especially private foundations.

In particular, the current tax rules may discourage foundations, which have resources that can make a big difference abroad, from providing direct financial support to legitimate overseas charitable organizations and groups that pursue lawful and charitable purposes. As a result, many foundations decide either to refrain altogether from giving money for charitable use abroad or to give the money to American charities that work overseas. A foundation that does choose the latter approach nonetheless often finds it unsatisfactory because the foundation is precluded from controlling the selection of overseas grant recipients and projects, overseeing programs it supports, maintaining continuing relationships with recipients, and being acknowledged for its financial support.

The income-tax rules that govern international giving do have positive goals. For example, the provision that permits individual and corporate donors to write off charitable contributions seeks to achieve responsible “governmentally subsidized” gift giving for appropriate charitable purposes. Provisions relevant to grant-making foundations were designed to ensure their transparency and accountability, as well as that of the overseas grant recipients. Such rules recently have become important to making sure that American money is not channeled to terrorists and unsavory organizations overseas. But such positives could be maintained under a tax policy that promotes global philanthropy and under restructured tax laws and regulations.

The history of charitable-contribution income-tax write-offs shows how little importance U.S. lawmakers have given to global philanthropy. In 1935, Congress expanded to corporations the charitable-deduction law that, since its passage in 1917, had covered only individuals. Lawmakers were still worried about the effects of the Great Depression and the welfare of the United States. That mentality led them to insist that corporate donors could claim deductions only for gifts to charitable organizations formed in the United States. Moreover, corporations could write off contributions to a domestic unincorporated “trust, chest, fund, or foundation” only if the funds were confined to use within the United States.

In 1938, Congress voted to extend one of these geographic restrictions for individuals. As a result, individual donors became entitled to write off a gift made to a charitable organization created in the United States regardless of where the donated funds were used. Although Congress has reconsidered charitable tax write-offs numerous times since the post-Great Depression era and even during the recent era of accelerating globalization, no further changes were made to modify or remove the geographic limitations for deductibility.

Similarly, Congress also has done little to encourage domestic private foundations to make direct grants overseas, even though it might have done so in 1969 when it debated and passed the laws that govern those organizations. For example, a foundation that wants to provide direct support to a charitable organization abroad must figure out whether the grant recipient meets the same standards that the Internal Revenue Service uses to determine whether an American organization qualifies as a charity for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. A foundation that doesn’t want to undertake the costly and time-consuming process of operating like a small-scale IRS has an alternative, but it is also complex, time-consuming, and problematic for most grant-making private foundations.

Perhaps because of such substantial legal and administrative burdens, few foundations give money to international projects. In 1998, of the nation’s 50,000 private foundations, only 576 foundations, most of which were large and mature (rather than new or small), engaged in global philanthropy. And as private foundations deal with a sharp decline in assets in our weak economy, the number of American foundations making charitable grants abroad, as well as the total dollars committed, is likely to decline precipitously. Just-released figures show that domestic private foundations gave $399-million for international projects in 2001, compared with $414-million in 2000.

To encourage more domestic private foundations, as well as individuals and corporations, to give overseas, federal tax policy and tax laws must make it easier for them to be efficient and effective in their giving. Global considerations must be central to the design of both tax policy and tax laws; they cannot be mere afterthoughts.

More research is needed before lawmakers can design appropriate standards that will reduce legal and administrative complexities.

Reform must wisely balance the many indispensable but straightforward factors — the preservation of the U.S. tax base, the protection of assets from misuse or misallocation, and the accountability of donors and grant recipients — against the need for flexibility and freedom in crafting giving arrangements that are crucial in our rapidly changing and increasingly “globalized” world.

Our government’s adoption of a global philanthropy policy, supported by thoughtful and informed changes to our tax laws and regulations, would send the important message of America’s commitment to, in President Bush’s words, “actively work to bring the hope of democracy, development, free markets, and free trade to every corner of the world.” Such a symbolic move, followed by our citizens’, corporations’, and nonprofit organizations’ dedication of increased donations to charities overseas, may help reverse the distressing anti-American sentiment now expressed across the world and may eventually return luster to America’s image.

Nina J. Crimm is a professor of law at St. John’s University School of Law, in Jamaica, N.Y.