Should Tax Incentives for Social Enterprise Stop?

I recently attended the launch of a report by the Centre for the Study of Financial Innovation entitled “Investing in Social Enterprise; The Role of Tax Incentives”.  What followed was one of the most vigorous and lively debates in which I have ever participated in this sector.

The report catalogued the considerable number of tax incentives available for investors in social enterprise in the UK—many of which have been available for some time.  Government officials in many countries are studying case studies like the UK and toying with alternatives.  At the CSFI debate, numerous practitioners argued for a series of sensible refinements.  Others noted that the field of play should at least be level with the private sector.  There is, however, a compelling case for an end to all incentives.

First, there is little evidence they succeed.  In the UK it seems the progress of the sector has happened despite and not because of the incentives.  Areas of particular benefit seem to have enjoyed less rather than more growth.

Second, the vast array of incentives is a highly complex and difficult and expensive to negotiate.  Small wonder the cover of the report was an image of a maze.

Third, they are highly distortive.  There is considerable evidence they also displace important private sector efforts in the social enterprise area.  When these incentives are augmented by the creation of Government funded or backed vehicles, as in the UK or Ontario, Canada, for example, (thus far the US has been relatively light on such distortions) this can seriously impede private sector involvement.

Fourth, Government incentives can be highly volatile and vulnerable to a shift in the political winds.  Thus, well-intended initiatives can be undone at the stroke of a pen, which is disruptive and damaging to the operations impacted.

Fifth and most importantly, at such times, it is difficult to argue that our sector is as deserving as so many whose lives have been destroyed by such man-made calamities as the credit crisis and the resultant fiscal retrenchment, or the recent oil spill in the Gulf of Mexico.  Our genuine concern for the social impact of our sector needs to take into account the human suffering around us.  Moreover, with private capital making its way into the social or impact investment space, are we really in a position to justify our pleas?

Nevertheless, questions remain:

  • Are there specific areas where there is simply no choice but to require governmental capital or fiscal incentives to correct a genuine market failure (rather than frustration over speed)?
  • Which sorts of governmental activity can have the biggest impact? In which circumstances?
  • Are any particular countries especially effective in social enterprise development as a result of governmental action? Many of my examples reflect my own Anglo-Saxon orientation.  Are there other models which are working?  Do recent fiscal programmes in France offer a new path to follow?

First published in The Social Edge in July 2010.