Paul L. Caron

Monday, October 20, 2014

Frye: Crowdfunding as a Solution to the Inefficiency of the Charitable Deduction

Brian L. Frye (Kentucky), Solving Charity Failures, 93 Or. L. Rev. 155 (2014):

Kickstarter Logo“Crowdfunding” is a way of using the Internet to raise money by asking the public to contribute to a project. This Article argues that crowdfunding has succeeded, at least in part, because it makes charitable giving more efficient by solving certain “charity failures,” or inefficiencies created by the inability of the charitable contribution deduction to subsidize the charitable giving from low-income donors. The economic subsidy theory of the charitable contribution deduction explains that the deduction is justified because it solves market failures and government failures in charitable goods. According to this theory, free riding causes market failures in charitable goods, and majoritarianism causes government failures in charitable goods. The charitable contribution deduction solves these market and government failures by indirectly subsidizing charitable contributions, thereby compensating for free riding and avoiding majoritarianism. Crowdfunding is successful because it provides a technological solution to some of those charity failures. While the charitable contribution deduction causes charity failures because the deduction cannot subsidize contributions from low-income donors, crowdfunding can subsidize those contributions by offering rewards instead. As a result, crowdfunding should solve at least some of the charity failures caused by the deduction through providing an incentive for low-income donors to contribute. The remarkable success of crowdfunding suggests that the inefficiency associated with charity failures is quite large.

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