" How to fund nonprofits ?"

Abstract :
Governments support nonprofits through direct grants and tax incentives for private donations, but the optimal mix of these tools remains unclear. I develop a model in which households donate to multiple causes and the government can use both instruments to support nonprofit funding. A key determinant of the optimal policy mix is tax discrimination—the ability to vary tax incentives by cause. When tax discrimination is possible, warm-glow giving makes private funding more efficient, reducing the need for grants. But when discrimination is limited, grants become essential to offset the rigidity of the tax system. In a calibrated example, the optimal government share of nonprofit funding increases from 0% to 60% as tax discrimination becomes more constrained. When donations are leaky, delivering less than a dollar of value per dollar given, the importance of tax discrimination declines. In the extreme case of uniform leakage, grants combined with a uniform tax credit—as in Belgium, France, or New Zealand—can achieve Pareto efficiency. In contrast, tax deduction systems (U.S, Germany or Australia) are generally Pareto-dominated.