Arts For Artists and Investors (aka the Dullest Post of the Year)
posted by on November 15 at 14:45 PM
A new(ish) article on Slate proposes an interesting solution to the nonprofit fundraising problem: Get investors. But since nonprofits are, you know, profitless, the investors would pursue their gains backwards—the “shares” in a nonprofit would be valued according to their tax deductibility.
The financial incentive created by the tax deduction is among the finest traditions in our law. Still, it treats you as a donor, not an investor.
The new [proposed] legislation changes that. It permits the Red Cross to issue “dynamically deductible shares.” Say the DD shares are offered at $10 each. You buy 60 of them, paying $600. You are not permitted to take a tax deduction, however, until you sell the shares. You choose to risk the size and timing of your deduction, based on your confidence that the price of Red Cross DD shares will go up.
Your bet pays off. Two years later, your 60 Red Cross DD shares are worth $16 each, or $960 total. You ask your broker to sell. That year, you get a federal charitable deduction of $960—worth $240 to you, assuming you’re in the same tax bracket. You have done good by providing capital to the Red Cross. And you have done well by reaping a gain of $90 (the difference between the $150 savings on federal taxes you would have gotten for a donation versus the $240 savings from investing in the DD shares).
And unlike private stock (sold by the company once, then sold between investors), each time an investor buys DD shares, the nonprofit gets a donation:
For the nonprofit, it provides an injection of capital every time DD shares change hands. You buy the 60 DD shares and the Red Cross gets $600. You sell the 60 DD shares two years later, and the Red Cross gets the proceeds as well—either the increased value, if the price has risen, or the decreased value, if it has dropped.
The article is a little fuzzy on how the market would work, leaving the heavy lifting to the Invisible Hand.
I’m not sure what I think about this scheme. Investors are going nuts for innovative futures, ETFs, and other new ways to gamble. Poorly-rated nonprofits wouldn’t necessarily suffer—they could keep fundraising the old-fashioned way—and new nonprofits with great ideas and no capital might get a leg up. But the possibilities for abuse seem legion—and at the expense of the vulnerable interests nonprofits are supposed to protect—and call me a big, fat socialist, but opening nonprofits to market forces seems worrysome. Then again, the nonprofit model doesn’t seem to be working so well these days.
Anyway. Thanks to Gavin for the heads up and the rest of you for snoozing through. Now please enjoy this video of Steve Coogan being extremely funny:
I dunno, the whole deal smells a little, how you say, fishy?
For one thing, only taxpayers who itemize on a Schedule A currently enjoy the tax break for charitable donations, which, if this were to be handled similarly in the Tax Code would a disincentive to many "small investors", who might otherwise be inclined to purchase one or two "shares" in their favorite non profit.
Also, I don't necessarily see that this would increase the available pool of money out there currently being donated by private individuals; instead, it would most likely have the effect of shifting their contributions from a straight charitable donation to this "market-driven" structure.
In the long run, it might generate some extra revenue for the non profits, but it sounds more like an investment scheme designed to, like current stock trading systems, maximize shareholder value, which seems to me to be a recipe for disaster when applied to the arts.
Don't be hatin on the ETF: it's the greatest invention ever for the small investor in search of diversification.
Some Jerk:
I'm not hatin' on the ETF. I'm just saying it's a new instrument for gambl—pardon me, investing.
On first reading, this subject seemed odd, turning human suffering, in an aspect, into something for personal gain. Seems odd, but not so odd, if a person forgets that "non-profit" doesn't directly translates into "charity", "serving the poor", "helping the less fortunate", grassroots or not... as in charitable social service agency which feeds the poor, like Boomtown Cafe. This is not so, PBS, The Red Cross, United Way, Audubon Society, WWF, etc. are non-profits with an operating and financial structure similar to for-profit corporations; their benchmarks for success are measured by hard revenue and not such "fuzzy", hard to quantify, concepts as "lives changed for the better", "low income individuals served", etc.
The idea that $600 turns into $960, is odd, if you are talking about how feeding the homeless, or something similar, would add real value onto a tax "donation/investment".
The oddity comes from the concept that feeding the homeless (as in, being a fully functioning, profitable, soup kitchen. Whatever that would look like) can somehow add a 60% value over two years onto the value of the "stock/donation/investment". It is easy to see, if the "non-profit" is something like SAM, Vera Project, PBS, or some other agency that has a hard, tangible, and very financially reportable revenue stream. A stream which is not donor based, but product based. So gains in value could be possible.
I would hope though, that if this sort of "stock" was being issued, private trading companies would be prohibited by law from making any profit from the buying/selling of the stock. Too much public money is already dispersed through quasi-government agencies who "whet their beaks" through fees. Fees which are recorded as profit in the real for-profit sense, but the money was not earned, it came directly from the government to distribute and they took some off the top, as it were. Hopefully all gains would go back to the "stocks" owner and non-profit compan. But that is not the climate of government we live in, so I am very suspicious.
It's an interesting concept, but I would guess that the costs associated with rating/buying/selling DD shares would more than outweigh the additional benefit that it would bring to the nonprofits.
Also, if you assume that there is a fixed number of dollars that will be donated each year, there would be the potential that this program would concentrate donations in the more palatable nonprofits (Habitat, etc.), at the expense of other very worthy nonprofits that may be less likely to receive a high rating (needle exchanges, chronic public inebriate housing agencies, etc.).
However if the program actually managed to grow the net (after transaction costs) "pie" of donations - it might be worth it.
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