Dynamic Deductibility

The Chronicle of Philanthropy is out with their 2004 rankings of the Philanthropy 400. No, this is not a version of the Forbes 400. It doesn’t tell you how the 400 wealthiest people in the world use their money for something other than consumption and further enrichment. Rather, the Philanthropy 400 reports the annual donations received by the 400 largest charities. In 2004, those gifts totaled $53.9 billion — roughly 25% of the $248.5 billion the American Association of Fundraising Counsel estimates was raised by America’s more than one million non-profits.

The United States has a $12.4 trillion economy. $250 billion in charity represents 2% of that amount. Meanwhile, assuming that there are at least 1,000,400 non-profits, these numbers mean that roughly 1.5% (three quarters) go to a million organizations. In dollar terms, that means the typcial non-profit takes in about $187,000 a year.

At wage, benefit and support (i.e. rent plus some overhead) levels of, say, $40,000 per person — a number I think is actually too low — this means the typical non-profit is a tiny (and struggling) team of four or so folks trying to respond to needs ranging from social services to education to arts to health and so forth.

Put differently, the non-profit sector is characterized by complexity at small size.

According to wikipedia, stock market capitalization is roughly equal to GDP of $12.4 trillion (and that only reflects publicly traded equities — wikipedia estimates the size of all equities is maybe double, or $25 trillion).

Equities, of course, represent only part of the capital markets. Still, these number provide some sense of the tremendous lift that could happen if we could find some way to link non-profits to the capital markets — other than through ‘annual giving’.

In On Value and Values, I propose ‘dynamic deductibility’ as an avenue to link the non-profit sector to the wonderful engine of efficient capital markets.

Here’s a snapshot of how it works: Non-profits would have the option of issuing ‘dynamically deductible units’ (“DDUs”). Purchasers of DDUs would not deduct the money in the year they provided the money — but, instead, hold the DDUs for a later trade in the market for DDUs. Holders of DDUs would take their deductions in the year they sold the DDUs.

For example, you purchased 100 DDUs from Charity X at $25 per DDU this year (2005). You would not deduct the $2500 this year. Instead you would hold the DDUs. Say you sold all 100 DDUs in 2007 for $32 per DDU. In that year, you could deduct $3200 (minus any charge for ‘capital gains’).

2% of GDP is a pitifully small amount of resources with which to tackle the tremendous challenges that the non-profit sector now confronts. This is made all the more difficult by a non-profit industry structure that is way too complex and filled with far too many ‘tiny’ players. (All industries benefit from ‘tiny’ players — my point is not to denigrate small size. Rather, it is to point out that all industries also benefit from structures that also have large players in representive numbers and scope — something mostly lacking in non-profit industries).

Yes, by all means, let’s do whatever we can to encourage Americans to give more — to raise the 2%, say, to 2.5% or 3%. But, even at those levels, we’d still face a non-profit sector overmatched by the challenges and expectations confronting it.

We need to fix this. And a powerful way to do so is to link our incredibly large and productive capital markets to organizations who only need capital to grow. ‘Dynamically deductible units” — or other proposals in this vein — can do this. And, in the process, make us all better off.

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