Sunday, December 30, 2012

Myths about charitable giving

By Ken Stern 12/27/2012

1. Charities are principally dedicated to serving the poor and needy.

The term “charity” is associated with helping the poor and downtrodden, but American charities — 1.1 million organizations with $1.5 trillion in annual revenue — make up a large, rapidly growing economic sector that includes health care, higher education, scientific research, social services and the arts.


2. Donors should reward charities that have low overhead.

The notion that charities should put as much money as possible into services and as little as possible into overhead expenses is widely accepted. Overhead ratios, which measure the relationship between a charity’s income and expenses, are one factor in popular rating systems such as Charity Navigator and the Better Business Bureau’s Wise Giving Alliance.


But charities need to spend on research, training and financial systems, all classified as “overhead,” to be effective. Those that shortchange these investments — and many do — are less likely to achieve their goals. The American Red Cross, for instance, struggled during Hurricanes Katrina and Sandy in part because it hadn’t invested enough in the infrastructure necessary to handle complex emergency relief.

That lack of investment is partly due to public pressure, rather than a shortage of funding. When then-Red Cross chief executive Bernadine Healy tried to appropriate unused money from the 9/11 Liberty Fund to correct weaknesses in the group’s broader emergency response capacity, she was forced to resign.


3. Tax incentives are critical to charitable giving.

People with income in the lowest quintile give a higher percentage of their earnings to charity than do more wealthy Americans. This pattern persists despite the fact that low earners have less disposable income and rarely take advantage of itemized tax deductions for charitable donations.


5. It is easy to find a good charity to support.


Finding good charities takes time. It means using the few organizations, such as GiveWell, that do in-depth studies of charities’ effectiveness.


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