How Countries Can Develop Their Nonprofit Sectors

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Encouraging Charitable Activity

An Overview

 

In this edition of my newsletter, I describe the United States’ experience in encouraging charitable activity and then discuss how policymakers in other countries can promote the development of their own domestic nonprofit sectors. The size and scope of the nonprofit sector in the United States is larger than many people realize. Approximately $316.23 billion was donated to nonprofit organizations in the US in 2012. Additionally, volunteers donate billions of hours of their time each year to nonprofit and charitable activities. The value of goods and services provided by US nonprofit organizations was approximately 5.37% of gross domestic product in 2013.

 

A number of factors have contributed to the growth and development of the nonprofit sector and charitable activity in the United States. These factors include an underlying foundation of supportive laws and policies, tax incentives, culture, tradition and individual example. Many additional countries also have well-established nonprofit sectors and deeply-rooted charitable traditions. There are a variety of lessons that policymakers can learn from the experience of the United States and other countries with nonprofit organizations in order to help promote the development of dynamic, well-governed and accountable nonprofit sectors in their home countries.

 

Encouraging the development of a country’s nonprofit sector can be valuable for a number of reasons. Nonprofit and charitable organizations provide social services that might otherwise need to be provided by the state. Nonprofits create jobs. By fostering the development of a robust, well-governed nonprofit sector, policymakers can help a country strengthen its legal and institutional framework, diversify its economy and develop an additional source of economic dynamism.

 

Encouraging Charitable Activity

The Experience of the United States and Other Countries

 

The Size and Scope of Nonprofit Activity in the United States

 

The nonprofit sector is larger and plays a more dynamic role in the US economy than many people realize. The US recognizes a number of different types of nonprofit organizations. These include universities, hospitals, arts organizations, cultural organizations, youth sports programs and religious organizations. Nonprofit organizations provide a wide variety of goods and services, including food, health services, education, job training, child daycare and economic development services. The value of goods and services provided by US nonprofit organizations was approximately 5.37% of gross domestic product in 2013.

 

Nonprofit organizations receive their funding through fees, private donations, government grants, investment income and other sources. Approximately $316.23 billion was donated to nonprofit and charitable organizations in 2012, of which $228.93 billion was from individuals, $45.74 billion was from foundations, $23.41 billion was from bequests and $18.15 billion was from corporations. Additionally, volunteers donated approximately 7.9 billion hours of their time to nonprofit and charitable organizations during 2011. In 2011, more than 64.3 million Americans worked as volunteers.

 

The US nonprofit sector has become an increasingly entrepreneurial and dynamic part of the US economy. Nonprofits play a central role in many of the leading parts of the US economy, including higher education, health care and basic scientific research. Proportionately, the nonprofit sector grew faster from 2000-2010 in terms of employees and wages in the US than either business or government.

 

Factors Underlying the Development of Nonprofit and Charitable Organizations

 

A number of factors have contributed to the growth and success of the nonprofit sector and charitable activity in the United States. Part of this growth and development can be attributed to laws, policies and institutions that federal, state and local governments have developed over time. Culture and individual involvement also play a very important role.

 

Factors that have played a fundamental role in the development of the nonprofit sector in the United States include:

 

  • An underlying foundation of laws and policies;

  • Tax policy and tax incentives;

  • Culture and tradition; and

  • Individual example and leadership.

 

Working together, these four factors have helped create an environment in which people are comfortable with giving their time and money to charitable causes and organizations. These factors have also helped create an environment in which nonprofits can thrive as individual organizations.

 

Each of these four factors is discussed in greater detail below.

 

Laws and Policies Underlying Nonprofit Organizations

 

Over the years, a legal and policy framework has been developed in the United States to encourage the establishment and growth of nonprofit and charitable organizations. At the foundation of this framework are laws and polices whose objectives are to encourage the development of transparent, well-governed and accountable organizations. Corporate law and tax law both play an important role in the regulation of nonprofit organizations. (Tax policy is discussed separately below.)

 

Most nonprofits are organized as corporations in the US. Being organized as a corporation requires a nonprofit to fulfill a number of ongoing financial, recordkeeping and corporate governance requirements. A board of directors is responsible for overseeing the management of a corporation. Directors are required to perform specific duties, including monitoring for potential conflicts of interest and exercising independent judgment for the overall benefit of the corporation. The corporate structure protects nonprofit staff and board members from being personally liable for actions of the corporate entity. Nonprofits are required to file tax returns and are subject to being audited. Nonprofits are also generally required to submit annual financial reports to the state in which they are incorporated.

 

The transparency of nonprofit organizations is enhanced through the work of organizations like GuideStar USA, Inc. GuideStar is a nonprofit that has created a database of information from the federal tax returns of nonprofit organizations and additional sources. Donors, grant makers, nonprofit leaders, government officials and others use GuideStar’s website to find information about the programs, finances and impact of more than 1.8 million nonprofits recognized by the US Internal Revenue Service.

 

Tax Policy and Tax Incentives

 

Tax policy and tax incentives are a second important part of the legal and policy framework that has been developed in the United States to encourage the growth and development of nonprofit organizations. The US provides tax incentives to encourage individuals and corporations to make donations to nonprofit organizations. Contributions of cash and property to qualified organizations can be deductible for individual income tax purposes. Additionally, corporations can claim a limited deduction for charitable contributions made in cash or property.

 

Under the US Internal Revenue Code (the IRC), organizations that are organized and operated for exempt purposes may qualify for tax-exempt status. Organizations qualifying for tax-exempt status are exempt from paying federal income taxes. Usually, federal tax exemption will also trigger tax exemption at the state and local level. Organizations may also be exempt from sales tax and property tax.

 

The IRC recognizes several different types of nonprofit organizations. About half of nonprofit organizations in the US are exempt under Section 501(c)(3) of the IRC. Charitable organizations qualifying for Section 501(c)(3) status include nonprofits organized for charitable, educational, religious, scientific, literary or cultural purposes. Contributions made to 501(c)(3) organizations can be tax-deductible to the donor, up to specified limits. The IRC also offers federal tax exemption to foundations (grant making organizations), civic leagues, labor and agricultural organizations, chambers of commerce, veterans’ organizations and additional types of organizations.

 

Nonprofit organizations provide a variety of services that federal, state and local governments in the US might otherwise be required to offer. By providing tax exemptions, governments support the work of nonprofits and receive a direct benefit. Tax exemptions help qualifying nonprofit organizations pursue difficult, long-standing issues that would be challenging or impossible for a for-profit entity to pursue on an on-going basis.

 

Culture and Tradition

 

Culture and tradition play an important role in encouraging volunteering and charitable activity in the United States. The tradition of charitable activity runs deep in US culture. People have been volunteering and helping each other much longer than the United States has been a country. Volunteering and charitable activity long predate any formal government policy. Given the long tradition of charitable activity in the US, perhaps it is not surprising that people continue to be so generous with their time and money today.

 

Individual Example and Leadership

 

Through their leadership, insight and example, a number of individuals have also played an important role in helping give shape to the nonprofit sector as it exists in the United States today. There is a long history of inspired leadership in the nonprofit sector. Philanthropists have made major donations to address fundamental issues like health, literacy and economic opportunity. Nonprofit executives have brought an increasingly professional, result-orientated approach to managing nonprofit organizations. Together, these people and others provide an important example and inspiration to the tens of millions of people in the US who volunteer and make charitable donations every year.

 

Charitable Policies and Practices in Other Countries

 

The United States is not the only country with a well-established nonprofit sector and a deeply-rooted tradition of charitable activity. A number of countries have legal, tax and policy frameworks in place encouraging the growth and development of nonprofit and charitable organizations. Some of these policy frameworks are more extensive than others. Additionally, the percentage of people who give money and give time to charitable causes in a number of countries is relatively high (and similar to the percentage in the US). Newly wealthy individuals and members of rapidly growing middle classes are also expressing increased interest in charitable activity in many countries.

 

The results of surveys conducted in 135 countries by Gallup for Charities Aid Foundation illustrate the breadth of participation in charitable activities worldwide. The practice of donating money to charity is widespread among the people of many countries, regardless of the level of economic development of a country. Ranked in terms of the percentage of their population who donate money to charity, eight of the top ten countries are not members of the Group of Twenty leading economies. Similarly, the rate of participation in volunteering is also high in many countries.

 

Economic development, wealth creation and demographic trends suggest that interest in volunteering and charitable activities should also be higher in many countries in the future. As new wealth is created in a number of countries, there appears to be a corresponding increase in interest among newly wealthy individuals in making charitable donations. Additionally, as large numbers of people advance economically and join the middle class, there appears to be an increased interest on their part in volunteering.

 

Laws and policies of countries outside of the United States relating to nonprofit and charitable organizations will be examined in greater detail in a future edition of this newsletter.

 

How Countries and Policymakers Can Promote the Development of Nonprofit and Charitable Organizations

 

There are a variety of lessons that policymakers can learn from the experience of the United States and other countries with nonprofit organizations in order to help promote the development of dynamic and well-governed nonprofit sectors in their home countries. Worthwhile, quality policymaking requires an understanding of the bigger picture and an appreciation of how laws, policies, institutions, culture and individual behavior interact. A number of factors work together to help create a vibrant and successful nonprofit sector.

 

In order to help encourage the growth and development of a successful nonprofit sector, policymakers should consider the following:

 

  • Laws, Policies and Institutions. Policymakers should review the current state of their laws and policies regarding nonprofit and charitable organizations and revise them as appropriate to encourage the development of transparent and accountable nonprofits. Corporate laws should be written specifically for not-for-profit entities. Policymakers should also address the continuing process of developing the institutions and expertise necessary to develop and support a well-governed nonprofit sector. Potential donors are much more comfortable giving their time and money to charitable organizations that are open and transparent about their activities and finances.

 

  • Tax Policy and Tax Incentives. Policymakers should consider adopting tax incentives to encourage individuals and organizations to make charitable donations. Tax incentives play an important role in encouraging individuals, corporations and others to donate hundreds of billions of dollars to nonprofit organizations in the United States every year. While it is difficult to quantify with precision, it appears that the US is receiving significantly more in the value of goods and services provided by nonprofit and charitable organizations than it is forgoing in potential tax revenue.

 

  • Culture and Tradition. A deeply-rooted tradition of charitable activity is not unique to United States culture. The rate of participation in charitable acts and volunteering is high in a number of countries. Policymakers should work to create and strengthen laws, policies and institutions to help individuals direct their charitable aspirations in constructive and meaningful ways.

 

  • Individual Example and Leadership. Through their leadership and example, nonprofit leaders, philanthropists, volunteers and others play an important role in encouraging many additional people to volunteer and perform charitable acts. With the creation of significant new wealth in a number of countries, there appears to be a corresponding increase in interest among newly wealthy individuals in making charitable donations and providing leadership to nonprofits. Additionally, with millions and millions of people joining the middle class worldwide, there appears to be increased interest in volunteering. By creating and strengthening laws and policies that encourage individuals to provide an example through their charitable donations and organizational leadership, policymakers also help make the broader growth of volunteering and charitable activity more possible.

 

Creating a successful nonprofit sector is a complex process that requires the active involvement of government, the private sector, the nonprofit sector and individuals. The factors discussed above work together to help create an environment in which people are comfortable with giving their time and money to charitable causes and organizations. These factors also help create an environment in which nonprofits can thrive and flourish as individual organizations on an on-going basis. Creating a successful nonprofit sector benefits a country in numerous ways.

 

Nonprofit Organizations And A Country's Bigger Picture

A New Source of Economic Dynamism

 

Encouraging the development of a country’s nonprofit sector can be valuable for a number of reasons. Nonprofit and charitable organizations provide social services that might otherwise need to be provided by the state. Nonprofits create jobs. Nonprofits promote community building. There are additional benefits as well. By fostering the development of a robust, well-governed nonprofit sector, policymakers can help a country strengthen its broader legal and institutional framework, diversify its economy and develop an additional source of economic dynamism.

 

The potential of a well-developed nonprofit sector to contribute to a country’s bigger picture is something that should not be underestimated. As noted above, nonprofit organizations are an important source of job creation and wage growth in the United States. Nonprofits play an important role in many leading economic sectors. Nonprofits are increasingly being managed in a professional, results-orientated manner. Additionally, interest in volunteering and other charitable activities is widespread worldwide. Given the economic and social benefits that a well-organized nonprofit sector can provide, policymakers are well advised to closely examine creating and strengthening the laws, policies and institutions necessary for a successful nonprofit sector.

[1] Based on data from the Bureau of Economic Analysis, U.S. Department of Commerce.

[2] Charitable donation data and volunteer data are from “Giving USA 2013: The Annual Report on Philanthropy for the Year 2012,” researched and written by the Indiana University Lilly Family School of Philanthropy.

[3] Based on World Bank population data and Giving USA volunteer data.

[4] From The Nonprofit Almanac 2012, using estimates based on data from the Economic Census, the Bureau of Economic Analysis, the Bureau of Labor Statistics and the National Center for Charitable Statistics.

[5] Nonprofit organizations are subject to tax on Unrelated Business Taxable Income (UBTI). UBTI is income from a regularly maintained trade or business that is carried on by the organization and does not further the organization’s exempt purpose (other than by generating income). Income generated by a museum gift shop is an example of UBTI.

[6] To achieve and maintain tax-exempt status under Section 501(c)(3), organizations must comply with specific limitations and restrictions. These include limitations on unrelated business activities, private benefits and lobbying and a prohibition on political campaign activities.

[7] For additional commentary on philanthropy and individual example, see Edition #8 (December 17, 2012) of my newsletter.

[8] Based on data from the Charities Aid Foundation’s World Giving Index (December 2013).

[9] Burma was the country with the largest percentage of its people donating money to charity (85%). World Giving Index (December 2013).

[10] With government debt levels increasing and populations aging in many countries, it is possible that policymakers in more countries will want to look to organizations like nonprofits to help provide social services in the future.

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