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If the welfare state has given charity a bad name, the private charitable sector has also recently suffered setbacks. The nation was scandalized by revelations of personal extravagance tolerated at the highest levels of United Way. And the bankruptcy of the Foundation for New Era Philanthropy, apparently little more than a traditional pyramid scheme, was a serious blow to many religious institutions which trusted the organization to invest their money.

In both of these cases of philanthropic failure, the cause was bad judgment or personal malfeasance. They revealed no systemic flaws in the charitable sector itself. Moreover, the events teach some valuable lessons. First, non-profit institutions purporting to help others can get too big, so they become an end in themselves. Second, charities are not capable of financial alchemy; donors should look carefully at the operations of organizations claiming to do the impossible.

What's notable in both these private-sector cases is that the failure was caught and corrected, even if at some expense. Several billion dollars were involved, but compare this with the record of government charity. Since the Great Society, government has spent nearly $6 trillion to alleviate a wide variety of social ills. Yet on no front are we better off and on many fronts we are worse off as a result.

Meanwhile, the welfare state has transformed American life by allowing intrusive bureaucracies to intervene in every social problem. There are essentially no mechanisms to hold the advocates and managers of the welfare state accountable. There are even fewer ways to bring about change to the system. Even under the Republican's budget plans, the welfare state will remain largely intact.

Beyond fundamental reform, which left and right agree we dearly need, there is still a magnificent alternative to government failure. Tens of thousands of private charities help people every day, and they do so efficiently and effectively when compared to government efforts. Most impressively, they do so by soliciting the voluntary support of the American people. In 1994, charitable giving was up 3.6 percent to a total of $130 billion. Four-fifths of that amount was given directly by individuals.

Those numbers reveal the extraordinary generosity of the American people. There is, moreover, no reason why these figures could not grow even larger. Experience shows that the level of giving closely tracks the business cycle. In recessions,people give less; in economic recovery, they give more. This suggests that the charitable sector is dependent on the personal financial calculations of families. The question of whether to give always comes down to: How much can we afford?

The tax deduction for charitable giving doesn't subsidize contributions. It removes the tax penalty for giving money away instead of saving the money or spending it on personal matters. It is truly a sacrifice for anyone to give to charity. If there are any ways to make such gifts even less punishing for families, policy makers would be wise to pursue them. Surely that is something that everyone, regardless of politics, can agree upon.

A step in the right direction is a bill introduced by Reps. Joseph Knolienberg of Michigan and Jim Kolbe of Arizona. Called the “Choice in Welfare Tax Credit,” this creative plan uses economic incentives to increase private giving. If caring for those in need is what we desire, this bill would do more “work” than any welfare spending measure likely to come up in this Congress. And it doesn't cost the taxpayers one dime.

Here is how the Knollenberg-Kolbe plan would work. The tax code would be changed to allow individuals to donate up to $100 every year to a private charity and have that $100 deducted from the amount they owe in taxes. What was previously a tax liability is then converted to a charitable donation. It's that simple. (In keeping with “revenue neutral” rules, the failed Earned Income Tax Credit would be simultaneously cut.)

This idea is certain to raise billions for the charitable sector, at no cost to the taxpayer. But the real beauty of the proposal is what it may illustrate about people's preferences. When riling taxes, one way or another, $100 will be taken from a person's personal income. People will have to ask the question: Do I want my dollars to go to a Washington bureaucracy or to the homeless shelter down the street? Taxpayers will face a choice, and their choices will tell us about the confidence they have in government vs. private charitable solutions.

Some people might object that the money deducted from taxes might end up subsidizing the New York Philharmonic rather than helping a Bronx soup kitchen. The bill is designed to meet that objection. It requires that charities receiving the money assist people who earn 150 percent of the poverty line or below, and that the organizations spend no more than 30 percent of their budgets on administration, fund raising, lobbying and litigation. That way, the recipient institutions are certain to be directly involved in helping the poor.

Organizations would qualify for the program on an annual basis by providing information to the Internal Revenue Service just as they do now. Even religious charities, including churches, would qualify if they have specialized ministries designed to help those in need. Would the slickest promoters get all the contributions? Not at all. With their own money at stake, taxpayers would have incentive to give money to those groups that do the best job.

This idea requires no new bureaucracy, no new monitoring, no new spending and no new taxing. What it would do is give the charitable sector a huge financial boost. Such an effect would help create a substantial cushion which may be needed as cuts in the welfare state are enacted by the new Congress. Bit by bit, the private sector would reassume its status as the primary provider of charitable services.

For ideological reasons, some people would rather redistribute wealth through government coercion than see voluntary efforts bring about real change in people's lives. Is that an unfair charge? Perhaps so—in which case, liberals have no reason to object to the Knollenberg-Kolbe proposal. The welfare state's moment of truth is fast approaching.