Replace the Nonprofit Tax Deduction

One of my long-term irritations with nonprofits is that donors can get deductions for donations to organizations that don’t have as much social impact as other organizations. I don’t think that donations to most large-city symphonies, or yet another $100M to Harvard, makes much of a social difference, but the donor gets the same tax incentive as donations to other, high-impact organizations.

One way to solve this problem, and tackle a few others as well, would be to replace the standard nonprofit tax deduction with a sliding scale deduction based on impact.

The idea is to create a system of standards bodies that can evaluate the impact of a nonprofit’s operation, a bit like Underwriter’s Lab and Consumer Reports, but for social good. These organizations would audit a nonprofit’s operations and assign it to an “impact class.” Then, the deductions to the organization would be higher for organizations in higher impact classes. There would probably have to be retroactive consideration, so a donor who contributes to a new, unproven project could get a tax break after a program is proven to be successful.

A system like this would solve a lot of problems: it would use a market-based approach to pushing donations to the most valuable programs, so good programs would get more funding, it would force nonprofits to run high-quality evaluation programs, and whole sectors would benefit from having excellent cross-organization data, allowing donors to make direct comparisons.