I’ve had so much trouble understanding how 52 Senators could decide against giving and protecting the right to vote for all American citizens, as they did last week, that I’m reduced to reflecting on absurd questions such as: Why doesn’t Tarzan have a beard; why are nickels bigger than dimes; why does Hawaii have an interstate highway; why do the Flintstones celebrate Christmas; and why, oh why, do taxpayers pay billionaires to give money to charity?
Of these, easily the most absurd is our charitable tax system and its role in shoring up our nation’s plutocracy (which may have had a lot to do with last week’s Senate vote).
Here’s How the System Works
When a billionaire (billionaire is a stand-in for the wealthy, i.e., the 0.1% who have assets greater than $30 million) makes a charitable donation it often is to their private foundation or donor-advised fund (DAF). For every $100 given, the federal government gives the donor roughly $40 back as a charitable deduction. If the gift was an appreciated asset, like stock, the donor avoids paying tax on the gain, saving an additional $23. If the billionaire happens to live in California or another high-tax state, the state throws in another $10-13. In other words, federal and state governments pay the billionaire from $40 to $76 to make a $100 contribution to their private foundation.
The $100 is then invested by the billionaire’s private foundation. Assume it earns 7% ($7) per year on average going forward (it’s been 10% over the last 10 years), virtually tax-free. The foundation is required to distribute 5%. After about 20 years the annual distributions add up to the original $100 contribution, of which as much as $76 was taxpayer money. But the foundation still has approximately $150 from its earnings. Let’s say the foundation decides to give it all away in year 20: At a cost of only $24, the billionaire’s original contribution less the tax benefit, he and his foundation determine how $250 of public investment is made! This is powerful leverage.
What if instead the billionaire makes a $100 cash contribution directly to a nonprofit. The federal tax benefit is $40. If the average citizen were to make the same $100 contribution, more than likely she will get no tax benefit because she doesn’t itemize deductions. Even if she did itemize the tax benefit would be considerably less than $40 because she is in a lower tax bracket. Does it make sense that the billionaire’s contribution is more important and costly to the Treasury than hers?
Billionaire Philanthropy is an Oxymoron
The average citizen’s contribution can be called philanthropic, likely being both altruistic and generous (representing a meaningful percentage of her disposable income). The same cannot be said for most billionaires’ contributions.
Billionaire philanthropy has three benefits not enjoyed by the average citizen: it is a highly leveraged (as noted above) extension of their power; it serves to whitewash reputations; and it provides an alternative to giving (too much) money to relatives or friends.
Much has been written often about the power that comes with Big Philanthropy. It dominates every aspect of our social lives, our politics, our sources of information, and on and on. And while death is inevitable, even for the wealthy (unlike taxes, apparently), the private foundation (or DAF) allows them to continue to exert influence for at least another couple of generations.
There are very few cases where someone can accumulate a billion dollars– unless by inheritance–without stepping on some toes. But put your name on a symphony hall, a university science building or a hospital wing, and people may overlook some transgressions. It might even keep the pitchforks at bay.
U.S. billionaires now have $5 trillion to transfer in the coming decades. Although they haven’t taken the charity option too seriously yet, they must grapple with making grandchildren baby billionaires without spoiling them with too many billions? The Giving Pledge, where billionaires promise to give half their money to charity (only 155 of 750 billionaires have signed) seems meager at this level of wealth. Some, like Warren Buffett say they’ll give away 99%. But for Buffett that still leaves over $1 billion going to the next generation(s) of plutocrats.
A Better Way
When Andrew Carnegie and John D. Rockefeller launched what we know of as philanthropy today, there was no charitable tax deduction because there was no income tax. Instead of a government incentive, they recognized the advantages of giving some of their money away. Even today various studies, albeit inconclusive, have shown that rich people do not need a tax incentive to give. A starting place for modest reform would be limiting the charitable deduction for the estate tax to 50% (instead of 100% now), and 30% for donations to private foundations or DAFs. An incentive to donate remains while ensuring the Treasury gets its fair share. Instead of using income tax dollars to subsidize Big Philanthropy, we should be encouraging average citizens to play a larger role in determining where and how charitable dollars are spent. The simplest way to do that is convert the income tax charitable deduction to a 20% tax credit (possibly above a threshold amount), whether one itemizes or not. In that way, at least, the average citizen and the billionaire get the same tax benefit for their contribution. For the more “radical” among us, that credit could be reduced or eliminated for wealthy taxpayers. Radical or not, this proposal suggests that in philanthropy, nickels are bigger than dimes! And I’m sure both the Flintstones and Tarzan would approve.