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Institute for Policy Studies

Blogging Our Grand Divide

The Dangers of Big Philanthropy

When billionaires write charitable gifts off their taxes, the rest of us pick up the tab.

It’s the season of giving.

When you hear about a billionaire “giving back” — like Nike founder Phil Knight’s $400 million gift to Stanford, or hedge funder John Paulsen’s $400 million donation to Harvard — do you feel a warm glow?

charitable-donation-taxes-600x417They could’ve kept their money and bought another house or private jet, you might think. But what if you heard that the tax write-offs billionaires claim for gifts like these force the rest of us to shell out more?

Suddenly that glow doesn’t feel so warm.

Compare that generosity to what you’ve probably seen in your own community. In every small town in America — at the local convenience store or diner — there’s “the jar,” a special collection for someone who needs an operation or has faced one of life’s misfortunes.

Everyone who can chips in. No one writes it off their taxes.

Keeping score that way would be as unseemly as asking for a tax break for coaching a neighborhood youth sports team, volunteering at a shelter, or making a casserole for someone coming home from the hospital.

The wealthy, on the other hand, use the tax deductions that come with mega-gifts to dramatically reduce, and sometimes eliminate, their tax obligations. They do it at the behest of “wealth defense advisers” — tax lawyers, accountants, and estate and trust planners — whose job is to maximize their clients’ wealth and minimize their taxes.

Those headline-making gifts you hear about may be motivated by a generous impulse, but they’re also another tool of tax avoidance — especially when it comes to donating appreciated stocks, artwork, and land, which help them avoid paying capital gains taxes.

The rest of us have a stake in these gifts. For every dollar donated to charity by a wealthy individual, everyone else effectively chips in 40 to 50 cents. When their tax bills go down, we pick up the slack to pay for public services such as infrastructure, research, and defense.

For every dollar donated to charity by a wealthy individual, everyone else effectively chips in 40 to 50 cents.

Unfortunately, this is the wave of the future. More and more, our country’s charitable giving is dominated and controlled by billionaire mega-donors, their foundations, and donor-advised funds, according to a report I coauthored for the Institute for Policy Studies.

Between 2003 and 2013, itemized contributions from people making $10 million or more increased by 104 percent. The number of private grant-making foundations, mostly established by wealthy individuals and their families, has doubled since 1993. Today there are over 80,000.

Meanwhile, charitable giving by low and middle-income donors has steadily declined, reflecting stagnant wages, declining homeownership, and growing economic insecurity by low- and middle-income families. From 2003 to 2013, itemized charitable deductions by donors making less than $100,000 declined by over a third.

This top-heavy philanthropy poses a danger to charities, too. It makes their funding less predictable and pressures them to focus on wooing a finite, relatively small number of mega-donors, rather than on doing the important work many of them do.

But the largest peril is for our democracy. Unchecked, private foundations can become blocks of concentrated, unaccountable power with considerable clout in shaping our laws and culture. They can become extensions of the power, privilege, and influence of a handful of rich families.

In this season of giving, we’ll hear plenty about billionaires “giving back” through donations to education, the arts, health, and medicine. But let’s not lose sight of the fact that you and I are subsidizing the charitable choices of the wealthy.

Maybe we’d all be better off if these billionaires just paid their fair share of taxes.

Originally published OtherWords.

  • ari9999

    A social experiment: eliminate the charitable tax deduction. All of it. Poof. Gone. No longer bribe people to be generous.

    You’ll donate to a school, or cause, or charity you believe in — or you won’t. Period.

    Will some people keep the money? Do they currently donate only if we taxpayers bribe them with a deduction?

    One might argue that the act of bribery by its very nature corrupts and perverts a social good, ipso facto.

    Chuck Collins points out that most of us donate without itemizing deductions, that is, without seeking or expecting a bribe…

    …Not because we are holier than thou, but because we are poorer than thou. For us proles, the so-called standard deduction is usually the better deal. A substantial majority, 7 out of 10 of us, do not itemize. (But remember, itemizing deductions isn’t just about charity. For higher earners who are likely homeowners, the mortgage interest deduction is a biggie. State income tax and local property tax are also deductible.)

    Some people argue that virtually all deductions should go away. That’s a conversation for another day; this talk’s about charitable contributions.

    So let’s test the character of better-off folks. Sweep away the charitable deduction. Let’s see how authentically generous folks are without all the fancy footwork. And tax work.

    If you were well off, or even rich, would you really let children starve because you couldn’t get a tax deduction?

    Will overall charitable contributions suffer? Perhaps. At least for awhile, until unrewarded generosity becomes more deeply ingrained in our culture, as (arguably) it should have been all along.

    When we reach that point of cultural adjustment — quickly, I’d hope — it’s possible that charitable giving might exceed even the current bribed level. Sounds like a conjecture for a future Freakonomics radio show! It might also be explored in academic studies, if it hasn’t already. An intriguing thought.

    Even if contributions did decline, tax revenues would rise in any case, providing extra public funding for the social safety net and education, which in turn might ease the burden on some hard-pressed charities.

    At least, that’s the idea.

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