Social Entrepreneurship Tax Credit

I typed “social entrepreneurship tax credit” into Google and the top result was this page on BarackObama.com.  There are some good ideas there, and I hope they get implemented once he takes office.  But I’d like to see even more.

What I had in mind when I started thinking about this subject was how there is a structural deficiency in our duality of for-profit and non-profit organizations.  Specifically, I feel we need to support social entrepreneurship, which is a new category that sits between these two endpoints.  Social entrepreneurs (SEs) are not opposed to (and often strive to) make profit, but they also have the goal of doing good for society, the world or for a specific subset thereof.  The very existence and growth of this category of organization and business model suggests the deficiency of which I speak.

The straw-man argument against explicitly supporting SEs is that they don’t need support.  They are either for-profit and thus the market is the best (and only) support out there, or they are non-profit and already have all the proper incentives and mission to do good.  I believe that the world (and the U.S.) would be a better place if there were an explicitly recognized and supported a third type of organization that was suited for SEs.

I am not going to propose that I know what mechanisms are best to support SEs, but here are some thoughts on the subject.  What if we explicitly incentivize the non-monetary goals (as defined in a strategic social mission document) using tax credits?   And what if we used prediction markets to determine the amount of credit the organization receives?

For instance, let’s say that the One Laptop Per Child initiative, instead of being non-profit, was set up as suggested above.  That is, a for-profit with a SE strategic mission document.  Let’s pretend the document said that it had a goal of delivering 100 million laptops to children by the year 2015.  It doesn’t matter whether some of those were bought and paid for, sponsored by a third party, donated by the company or whatever; the mission is simply to deliver.  Then there could be a prediction market claim based on whether that goal will be reached by 2015.  At the end of each tax year, the price of the claim (or perhaps the 52-week average) would be used to determine the percentage of tax credit the organization receives.  For example, let’s say the company makes $5M in profit in 2009 and the price of the claim is $35, then they would get a 35% tax credit.  Meaning that whatever their computed tax burden would be as a for-profit, they would get to retain 35% of that amount.

Thoughts?  Alternatives?

  • You should look into these two types of structures.

    1) B-Corporation: http://www.bcorporation.net/

    “B Corporations are a new type of corporation which uses the power of business to solve social and environmental problems.”

    2) L3C: http://www.nonprofitlawblog.com/home/2008/07/l3c.html

    “The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization.”

    Personally, I’m a huge advocate of “for-good / for-profit companies” which you talk about in your post. I like your thinking around aligning the incentives to the social impact (results-driven). Most non-profit organizations spend so much time raising money to stay afloat, they actually never get to fulfill their original mission.

    Playing devil’s advocate, if we use your laptop example, it’ll fall into the same problem with the print industry. Historically, magazines float their circulation numbers to get a higher circulation to charge higher advertising rates. If this happened in the predication model market, you can argue that OLPC would get rid of as many laptops as possible each year for the tax benefits. You would also attract a lot of for-profit companies that would do the same for the tax-benefits, especially if it was targeted towards for-profit companies.

  • Very interesting, I didn’t realize there were some structures that were attempting to solve this issue legally, but I’m glad that there are. I think for B-Corps or L3Cs to actually be viable and attractive, they need explicit recognition and special treatment from the IRS and (to a lesser extent) each local tax jurisdiction. I do like how B-Corps seem to end-run the tax situation by providing positive business incentives for electing to become a B-Corp. But I fear that critical mass on that will be hard to achieve because and thus the proposed benefits may never materialize.

    Regarding your devil’s advocate argument, the interesting thing is it doesn’t matter. If the incentives are ones that truly achieve the social-good aspect of the mission, then you want companies to “game” the system for tax advantage. In other words, if OLPC really does get 100 million laptops into the hands of children around the world, then we should be happy that they (a) pay no tax and (b) make a ton of money in the process.