Decoupling?

In “The Case for For-Profit Charities,” Professors Malani and Posner urge an end to the coupling of certain tax benefits and the nonprofit corporate form.  Unlike many theoretical essays in taxation, they conclude with rather concrete policy proposals. As a first best option, they suggest that if the government is going to give tax advantages to community-benefit activities, then it should extend those advantages across corporate forms. For the weak of heart, they propose as a second best, less dramatic alternative that the IRS relax constraints on the ability of nonprofits’ managers to take incentive pay. Malani and Posner have failed, however, to make the affirmative case for their broad recommendation. The case for relaxing the constraints on incentive pay is stronger, though not, as I suggest below, without problems.

Malani and Posner intend their arguments to generalize to all community-benefit activities, whether charitable or commercial, and often speak generically about “tax breaks.” For purposes of this Response—and in keeping with the authors’ primary focus in their essay—I will limit my discussion to charitable firms and to the specific federal income tax benefit of the deduction for charitable contributions under Section 170 of the Internal Revenue Code. Malani and Posner conceive of the charitable firm as involving three parties: a donor, an entrepreneur, and a beneficiary. The charitable firm on this view is essentially a conduit, with the entrepreneur channeling funds from the donor to the beneficiary. Focusing on these parties and on the particular tax benefit of the charitable deduction for contributions to the firm, one can sharpen the authors’ policy proposals as follows: Their broad proposal would permit the deduction of contributions to firms even where the nondistribution constraint is relaxed with respect to entrepreneurs and donors.  The narrower proposal entails that contributions to firms should be deductible where the nondistribution constraint is relaxed with respect to entrepreneurs.

I consider these two proposals below, but as an initial matter I note that the current nonexistence of “for-profit charities” presents something of a puzzle for Malani and Posner. Their argument is one that sounds in efficiency. Tax differentials in the current system, they argue, prevent optimal incentives.  They are of the view that removing these distortions could yield substantial efficiency gains. Moreover, the authors claim that “for-profit charities” do not exist because of tax disadvantages (the chief disadvantage being the inability to receive deductible contributions). But this fails to acknowledge important nuances in the charitable deduction under Section 170. For decades that deduction has been capped. Currently, one may not deduct more than 50% of adjusted gross income.  Although it is extremely difficult to know how much donors contribute to nonprofit organizations in excess of the cap, it is commonly accepted that at least some donors do so. If the efficiency advantages that Malani and Posner claim for “for-profit charities” in fact have value, then one would expect a sorting of donors and contributions. That is, one would expect at least some contributions that are non-deductible in any event to flow to for-profit charities, in light of their supposed advantages. But the form essentially does not exist. Why? I think there are a couple of possible explanations for the puzzle, both of which run against the grain of the basic proposals in the Essay. One possibility is that the form of “for-profit charity” is problematic in terms of corporate law. It would be disfavored, that is, even if the tax law did not disadvantage it. Another possibility, of course, is that the efficiency gains are simply not to be had.

PPACA in Theory and Practice: The Perils of Parallelism

PARALLEL pathways are pervasive. Blood flows from the heart to the brain through three separate arteries; in the event of a blockage in one artery, blood is routed through the other two. We have two kidneys but need only one. If I want to drive from Champaign to Charlottesville, I can go by way of I-70 or I-80, or I can explore the blue highways. If I want to get from Champaign to Chicago, I can fly, take the bus, drive, or take the train. If I drive to Chicago and get caught in traffic on the Dan Ryan expressway, the side streets are always an option. And so on.

Parallel pathways can operate simultaneously or non-simultaneously. Simultaneous pathways are generally preferable since they provide an increased margin of safety from real-time redundancy. Both kidneys work continuously; they do not alternate or take vacations. The same goes for eyes and ears. The existence of multiple modes of transit between Champaign and Chicago means I can almost always get there, one way or another. The Boeing 777 can fly on only one engine, but both engines are used simultaneously. If you want to be safe, a “belt and suspenders” approach is better than either one alone.

What, if anything, do parallel pathways have to do with the Patient Protection and Affordable Care Act (“PPACA”), apart from the coincidental usage of two “Ps” in each? In their insightful and tightly reasoned article, Professors Monahan and Schwarcz work their way through a series of interlocking provisions in PPACA and explain how they make it possible for employers to “dump” high-risk employees onto the state-run exchanges scheduled to commence operations in 2014.

Stated less pejoratively, PPACA makes it possible for employed workers to obtain health insurance coverage through either their employer or an insurance exchange, with differing financial (and potentially health) consequences depending on whether the employer is offering affordable coverage (or coverage at all) and the income and health status of the employee. This parallel pathway expands the options through which employees can get to their desired (and/or mandated) destination—having health insurance.

The Market for Union Representation: An Information Deficit or Rational Behavior?

The National Labor Relations Act provides the legal framework for private-sector workers to choose collective representation. The National Labor Relations Board (“NLRB”) supervises this process and relies on an election campaign model that is premised on the assumption that competition between the union and the employer will generate sufficient information to enable workers to reach a rational decision. In his recent article, Information and the Market for Union Representation, Professor Matthew Bodie asserts the NLRB’s model fails to ensure the inclusion of sufficient relevant information. Offering a “purchase of services” paradigm as an alternative way to understand the decision to choose or refrain from choosing to join a union, Bodie conceives the representation election as a collective economic decision rather than the end result of a political campaign. In order for the market for union representation to function satisfactorily, adequate knowledge is required. Bodie states that this market is afflicted by a number of difficulties, including information asymmetry, inverse employer incentives, absence of competition among unions, and the lack of public confidence in labor unions. Information deficiencies impair employees’ capacity to act rationally. Professor Bodie tenders a provisional solution—mandatory disclosure aimed at boosting public confidence in the market for union representation.

Based on insights derived from mandatory disclosure requirements within the nation’s securities market, Bodie concedes that additional disclosures may “create costs and . . . change market dynamics in inefficient ways.” Despite these welcome caveats, Bodie’s proposal suffers from a number of shortcomings. First, unions may resist disclosure initiatives unless they are paired with a card-check certification program, which defeats the goal of enabling workers to make rational decisions about union membership. Second, Bodie’s conception of capture focuses on employer capture and ignores the problem of capture by outside interest groups aligned with union hierarchs. Finally, Bodie’s mistaken conclusion that unions secure better conditions for workers leads to a faulty assessment of the problem of free riding. This response addresses each problem in turn.