Having completed my latest set of comments for the China Philanthropy Research Institute (CPRI) on its ‘Charity Law’ draft (latest version July 2014; the work was commissioned by the Asia Foundation), I feel it is important to address one topic that is not covered by the draft: advocacy by charities. Steeped in the common law tradition, in which charity advocacy is restricted for prudential reasons, I am of the definite view that such restrictions are appropriate. In this post I set out my views in that regard.
There are essentially three types of reason why advocacy restrictions are warranted – relating to history, fairness and practicality. These will be explored in order. But it is first important to clarify that the issue is not one of restrictions on advocacy per se, but rather restrictions on advocacy by tax-benefited charities. Advocacy itself, particularly in China, is an unalloyed good. Certainly advocacy by charities should be allowed and even encouraged!
The genesis of restrictions on advocacy by charities is the common law in England, where early cases forbade the entanglement of the political branches in advocacy by charities. Since the state was to remain neutral with respect to the dissemination of ideas, charities could not be permitted to advocate political ideas. They received from earliest days a huge benefit – charitable trusts are permitted to exist in perpetuity, while other trusts are not. Receiving such a benefit meant that their activities could be curtailed in the interest of prudence.
A further historical reason arose both in the US and in the UK. Charities are also in receipt of important tax benefits, not so much because of tax exemption but because of the subsidy provided to the charity’s donors through the tax deduction or other tax benefit. In the US, for example. if the donor is in the 40 per cent tax bracket (combined state and federal), s/he only pays $60 of every $100 contributed to charity. The government picks up the tab for the other $40. This seems reason enough to place restrictions on tax-benefited charitable advocacy.
In that context we must also look at the issue of whether businesses – which also engage in issue advocacy – are permitted tax deductions for such advocacy (this would be the functional equivalent of the deduction for donors to charities since it would also reduce the tax burden). The answer is no. Since that is the case, tax fairness suggests that restrictions on advocacy by charities would serve to level the pitch.
Finally, it is relevant to note that it is easy in most common law countries to set up an advocacy sister organization to a non-advocacy charity. A good example is the organization Tobacco Free Kids, which is an education charity in the US. Its sister, The Campaign for Tobacco Free Kids, is not a charity and is permitted to engage in a significant amount of advocacy, though that may not be its principal purpose.
If restrictions on charity advocacy are put in place in China, it would be easy enough to provide for this alternative. This is something the drafters of the proposed Charity Law could consider.
What limits on charity advocacy are warranted and why?
While there should be some restrictions on charity advocacy in China for these three reasons, it seems clear that the restrictions should not be absolute. There is a practical reason for this. Unlike businesses, which have unrestricted access to capital markets for the purpose of raising investment funds, charities do not. Investors tend to shy away from them because they are subject to the ‘non-distribution constraint’, which forbids them from paying a return on invested capital. As a result, their advocacy is implicitly restricted when compared with advocacy by business enterprises (eg tobacco companies) that also compete in the marketplace of ideas. As such, charities should not be subject to a complete ban on advocacy activities that further their charitable purposes.
Current US law in this regard is tangled and obscure. The simple rule imposed on charity advocacy in earlier times warrants consideration in China. Under that rule charities were permitted to engage in cause-related advocacy up to one-third of their total expenditures. This seems to be an appropriate rule in today’s China and should be considered for insertion in the next drafts of the Charity Law.
Karla W Simon (西 门 雅) is chairperson of ICCSL