Regulating Charities in the Twenty-First Century: An Institutional Choice Analysis

For more than fifty years scholars, practitioners, and government officials have debated whether the federal government, the state governments, or the charitable sector itself can best ensure that charity leaders fulfill their fiduciary duties. The dramatic growth of this sector, recent highly publicized governance scandals, and a push in Congress and the IRS for more federal involvement in this area have now brought this issue to a head. This article lays a foundation for resolving the dispute by developing an institutional choice framework for considering and comparing the various available options. Applying that framework, the article concludes that the best regulators of charity governance would most likely be state-level government agencies that work with but have a limited degree of independence from the state attorneys general.

The article also determines that the best way to ensure adoption of this institutional choice—and limit potential weaknesses—is for the federal government to provide dedicated funding for such agencies, which could be obtained through the already existing private foundation investment income tax.