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Fiscal Models of Public Financial Support to CSOs
Some Input from the Social Sciences
Introduction
In the context of this paper, the topic of different models of public financial and fiscal support
to Civil Society Organizations (CSOs1) will be dealt with in a more general approach, not to
much going into technical details but more to provide the reader with an overview of a more
analytical perspective. This can be useful for a better understanding of the institutional
context, political decisions are made in.
To approach the central question here, the argumentation will be as follows:

Address of the question of why should public bodies support CSOs in the first place?

Discussion of different forms of public support for CSOs

Presentation of an economic model to calculate the relation between tax deduction of
donations and level of giving

Some remarks on shortcomings of the economic model

Discussion of restrictions to institutional choice between different forms of fiscal
support of CSOs

Some words on the Social Origins Theory on third sector development

Summary: Necessary conditions to successful increase private giving by fiscal means
Why are CSOs something desireable?
One has to think at least shortly about the basic question of why are CSOs considered to be
something good? This question relates to a deeper structure that is decisive to the social
location where public goods are produced. This could not only be civil society or the state,
families or households and the economy are other social institutions that could be made
responsible for the production of public goods. Of course, this is a idealized decision and
empirical reality is always a mixture of all four options.
1
There is no real consensus on the definition of Civil Society Organisation. Sometimes, it is referred to as
NGOs, Nonporfit Organisations, Public Benefit Organisations etc. Since this presentation is not the place to
discuss these definition issues, I stay with the term Civil Society and define it as private entities that have no
profit distributing purpose, that are self governing and voluntary (see Anheier, Helmut K. und Wolfgang Seibel.
2001. The Nonprofit Sector in Germany. The Johns Hopkins Nonprofit Series, edited by Lester M. Salamon and
Helmut K. Anheier. Manchester: Manchester University Press.)
In general, the functions of CSOs can be divided in a more non-materialistic (or idealistic)
and a more substantial cluster. In the first case, CSOs are regarded as elements of democracy
where citizens can participate in the process of public decision making and articulating of
opinions. Further they are features of a lively and ‘modern’ civil society by providing means
of pursuing purposes, citizens find important.
In the other more materialistic case, CSOs can pose as means to substitute public engagement
in some areas and therewith to relieve public budgets. This depicts the purest form of the
institutional choice, mentioned above. When CSOs are regarded as complementary producers
of public goods, one has to analyze in how far they are capable to fulfill this role e.g. in health
care or care for the elderly.
State
Substitution?
Production of
public goods
CSOs
Financing CSOs by Taxes or Private Giving?
Especially in the later case, one main difference between state or private provision of public
goods is the way, programs are financed. Public provision of public goods is dependant on
taxes and CSOs more on private donations.2 This again is a heuristic idealization. Most CSOs
are financed not from a single source alone but from different income streams.
When we speak about substitution between tax / state financed and privat / by donations
financed programs, we have to point out the main differences:

Taxes are
o Compulsory and therefore issue of political debate, public legitimacy and
possible conflict
o Relatively good to calculate, at least in a certain frame. BUT also dependant on
economic and demographic situation.
2
Nevertheless one should keep in mind that the share of private donations for many service providing CSOs is
not very large. In many cases they depend on public financing to a much larger extent.
o Much larger in amount than any other source of income or redistribution.3

Donations on the other hand are:
o Voluntary and subject to private interests and decisions (keep in mind this
point. This is where cultural aspects come in!
o Not very good to predict. Only on the basis of ex-post analysis of historical
data.  very difficult in a context where CHANGE is a desired thing!
o Not that extensive than other sources of income for nonprofits IN AVERAGE.
BUT: for some sort of organizations, private donations are merely the only
source of income (i.e. Terre des homes and other human rights organizations)
Taxes
State
Production of
public goods
Private
Householdes
Donations
CSOs
If the state now has accepted CSOs as something it wants to support, i.e. by means of public
decision making it is legitimate to allocate the production of public goods at least partially in
the hands of private actors, there are different ways to do so.
Forms of public support to CSOs
Public support to CSOs can take direct forms like real money transfers and grants or more
indirect forms like the granting of (especially) tax privileges that favors these organizations in
comparison to others.
Despite of the huge economic relevance of direct public grants to CSOs, in the context of this
presentation I concentrate on the latter. Further, the forms, tax privileges can take, can be
differentiated in regarding the income side or the expenditure side of CSOs activities and the
side of donors4 that give money to these organizations. Because the tax treatment or
exemption of CSOs is closely connected to the status as ‘public benefit’, I do not go into
detail here but concentrate on the donor side and the tax treatment of the donation.
3
Germany: public financing of nonprofit sector ca 60%
Donations ca 5%
4
The differentiation between private and corporate donors is neglected here. From the perspective of public
budgets, the effects are similar enough to treat these two types of donations and donorship alike.
State
Tax privileges
Direct grants
Private
Householdes
Donations
CSOs
Production of
Public Good
Expenditures
In general, there are two models of tax reduction for donors: a state that is interested in higher
amounts of private donations regards the introduction of tax privileges to private donations as
a means of attracting more donations. The tax reduction should in some way be relative to the
amount of the donation and reduce the tax burden of the individual. And this in turn can mean
that the donation (fully or partially) either reduces the total tax load of the donor for a certain
amount or it reduces the income that is relevant to taxation and therewith the basis of taxation.
In the first case, every donor gets a tax reduction of the same sum for every monetary unit
spent. In the second case, the tax reduction is relative to the marginal tax rate, the donor is
subject to. The higher the tax rate, the larger is the tax reduction.
In the following, I want to discuss these two options for treating donations fiscally a bit more
in depth. First concerning the respective mechanism and second I want to point out some
consequences, the models have.
A tax reduction in general means for the donor that for one monetary unit given, the costs in
terms of abdication of disposable income / consumption options are smaller than one
monetary unit. In other words, the state supports the purpose, the individual chooses to be
worth giving for by not collecting tax payments that otherwise would be due.
In economic terms, the difference between the amount of money spent and the factual loss of
consumption options is regarded the price of a donation. And like for other goods that have a
price, one could construct an economic model of demand for the good “donation”.5
In the case that the tax deduction is calculated for a certain sum for every unit spent, the price
for the donation is the same for every single donor, irrespective of his (income-)situation.
This model sports a more egalitarian character, for every monetary unit given is treated
equally by the tax system, i.e. the price for a donation is the same for everyone.
5
For the following see: Ludwig von Auer; Andreas Kalusche (2007): Spendenaufkommen, Steueraufkommen
und Staatsausgaben: Eine empirische Analyse, in: W. R. Walz, L. von Auer, T. von Hippel (Hrsg.), Spendenund Gemeinnützigkeitsrecht in Europa, Tübingen: Mohr Siebeck, 13-86.
The second option for fiscal treatment of donations, discussed here is the reduction of the tax
relevant income of the individual giving.
The basic principle of this system is that for every Euro given, the income taxation for the
donor is based on his income minus the given Euro. That makes the tax reduction dependant
on the personal income situation of the individual and the donation is ‘cheaper’, the higher the
respective tax rate.
On first sight, this model differentiates between different donors and gives a “price
advantage” to wealthier individuals. In other words, it seams to (negatively) discriminate
donors that have a smaller income because they loose more of their disposable income when
they donate money.
What is the logic to make the commodity “donation” more expensive for citizens that have a
smaller income? It is not a discrimination against people with fewer resources. But the hope
that richer people would give more if the commodity donation is cheaper for them. This on
the other hand could only be desirable (out of a state perspective) if the gain in donations for
the common good that occurs because of the lower prices for the rich is overcompensating the
loss in tax income caused by the price differentiation itself.
There is at least one empirical study that tried to calculate the „optimal“ tax deduction rate for
donations (in Germany).6 In this study the main variables were:

the price elasticity of donations

the respective marginal tax rate

and the effect on the public budget
The result is that a tax reduction rate of 48% for every monetary unit given (in a tax system of
the first type mentioned above) would ‘optimize’ private giving in Germany.
Institutional choices for the relation between CSOs and the state
Irrespective the simplification used in the description of the economic modeling used in the
above, there is one more severe shortcoming of this models that should be addressed here.
From social sciences we learn that choices between models of taxation like the two types
depicted above are not taken in empty space. Rather there are narrow institutional borders that
limit the options, political decision-makers can opt for.
6
See footnote 5.
As I tried to show, the decision between the two models of tax deduction not only reflects
different understandings of the interrelation between the factors regarded but also a different
logic of how to treat a donation from a normative point of view.
This holds true for every institutional choices to be made: they are made in a certain political,
social, cultural and economic context and that makes them dependent to a certain extent on
their surroundings, maybe more than one would think in the first place.
It is a major task of social sciences to explain differences in institutional choice, taking into
account the different constellations, context variables can take. For the ‘Social Origins
Theory’ of the Nonprofit-Sector7 offers a profound understanding of why we find different
forms (intentional and extensional) of the nonprofit sector in different countries. The main
independent variables that explain theses differences are historical patterns of developments,
such as the relationship between the state and the church, the power of landed elites and the
power of the working classes.
“Central to this line of thinking is the notion that complex social phenomena like the
emergence of the "welfare state" or "democracy" cannot easily be understood as the
product of the unilinear extension of a single factor, such as industrialization or
working class movements. Rather, much more complex inter-relationships among
social classes and social institutions are involved.” (Salamon; Anheier (1998): 230)
With this theory, scientists try to explain the empirical clusters of nonprofit-regimes that can
be found. It was developed as a macro-level theory in response to the limitations of economic
approaches on the one hand, and conventional welfare state literature on the other. It is an
institutional theory that emphasizes different ‘moorings’ of nonprofit sector and it is
comparative historical in its approach.
7
See: Salamon, L. M. and H. K. Anheier (1998). "Social Origings of Civil Society: Explaining the Nonprofit
Sektor Cross-Nationally." Voluntas 9(3): 213-248.
Government
social
spending
Economic Non-profit Sector Size
Low
Low
high
High
Statist
Liberal
(Japan, most
developing
countries)
(US, UK)
Social
democratic
(Sweden, Norway,
Denmark,
Finland)
Corporatist
(France, Germany,
Italy?)
The authors of the theory identify four distinct clusters of countries that differ significantly in
economic size of the nonprofit sector and government spending on social issues.8 They
differentiate these clusters along the dominant institutions that shape the sector (working
classes; the state; elites and bourgouise middle classes.
The types of nonprofit regimes are theoretical constructs that are not found in pure form in the
empirical reality.9 Nevertheless, the allocation of an actual case in the quadrivalent room of
ideal-types can lead to an increase in understanding of the ‘spirit’ of the institutional setting,
represented in the case. It would be e.g. hard for political decision makers to introduce
programs that does not fit to the institutional type of the regime.
That does not mean that change in the sense of a shift from one type to another would not be
possible. But there are institutional restraints that make such a shift more difficult than simply
to decide it on the political level.
The successful implementation of political measures that do not match the type of regime a
political system belongs to, requires thus more than the political will to do so. Further there
must be a certain political, social and economic context that allows these changes to take
place.
Without a certain culture of giving, the tax system will not change the income side of CSOs in
any way; without the possibility of political coalition-building, a change in taxation will not
become legislative reality and in a society, that does not have anything to spend because of
8
It is important to note that these are relative figures. It might well appear that from the viewpoint of a single
public budget a rather large sum is spent on social matters. But as a share of total spending and in relation to
other countries, this figure might as well be rather small.
9
Note the differentiation between ideal- and real-types, introduced by max Weber.
the overall economic situation, there will be no noteworthy amount of private giving,
irrespective of the tax system.
Conclusion
The aim of this presentation was to show different models of public support for CSOs and to
discuss there mounting in the institutional setting that the political and social system poses.
From the perspective of social sciences, it is important to know in which context a potential
decision is made to evaluate the chances with which it will have the desired effect. And for
political decision makers, not only a desired outcome of a legislative initiative should be of
interest but also the social and cultural framework that limits the chances of its realization.