We Need to Reform the Philanthropic Sector

Marty Levine

November 17, 2023

A few days ago, I wrote of my worry that it we were reaching a point of no return. The combination of an economy and tax system that has allowed a small number of men and women to accumulate so much wealth combined with a system that allows that wealth to shape law and policy may have reached a point where we can no longer reverse or even stop this distortion of American democracy.

A government that is responsive to the needs of each of its people, which looks for equity (ensuring that all get what they need) in its efforts, is threatened by the distortion we are seeing. But our nation, uniquely, as Alexis de Tocqueville observed in 1835  when he wrote his seminal work, Democracy in America, observed, “In the United States associations are established to promote public order, commerce, industry, morality, and religion; for there is no end which the human will, seconded by the collective exertions of individuals, despairs of attaining.”

Recognizing that our approach to ensuring equity, to helping those in need, was going to be a combination of governmental and non-profit organizations, we, as a matter of national policy, set up a system of incentives to encourage charitable giving.

A just-released report by the Institute for Policy Studies (IPS), tells us that the philanthropic community which, in concept, allows the public to augment their government in ensuring we all live in a humane society, is being warped in the same way our political system is being warped by those who have been allowed to horde wealth. Entitled “The Cost of Billionaire Philanthropy,” it focuses on how the rise of a class of mega-rich men and women, the wealthiest .1%, “…is having a corrosive impact on our nonprofit sector. U.S. nonprofit charities are currently experiencing a transition from broad-based support across a wide range of donors to an increasing reliance on a small number of ultra-wealthy people, a trend we have called “top-heavy philanthropy.”

In 2021, amidst the economic and human destruction that the COVID pandemic had caused, I observed that “Private charity is just not up to the task of creating a robust safety net. The resources are too small. As impressive as it is that annual giving exceeds $400 billion and that, of this total, individual gifts comprise more than $200 billion, those sums dim when we consider how large the need is.  In a year that the need to protect so many from grave economic threats, threats that meant tens of millions struggled to keep paying their rent and feeding their families, that limitation is highlighted when we recognize that only about 21% of total individual giving flows to social service and health organizations. In its base budget, the Federal Government budgets more than $800 billion for similar purposes. In face of the recent crisis, it was only the Federal Government and not private philanthropy that was able to raise its support in line with the rapidly increasing need.”

Two years later, with COVID no longer an emergency and the economy doing well by many measures there is no reason to see this differently. The data collected by IPS illustrates how flawed it is to think that even if enough money could be raised philanthropically, it would be able to make up for what our nation should be doing as a matter of national policy.

The major structural flaw in our nation’s approach to solving public problems through private effort is that it relies on individual rather than collective action. The responsibility for ensuring our national welfare, of building a safety net, is why we have established government. The public-private partnership that we have built provides incentives for private funding but abrogates a responsibility for ensuring that those benefits are actually supporting the efforts we as a nation need and want. Each donor gets to decide what is important individually and we as a nation have given up any degree of control. The incentives are for giving and not for the benefits that those gifts might achieve.  

Any gift to an organization that the IRS and state authorities has designated as a charitable organization (a 501c3 corporation under the federal tax code) earns the donor tax savings in several possible ways. The breadth of things that qualified charities do is wide, and there is no connection between any set of national priorities and tax deductibility.

Consider, as I do, that we remain a nation struggling to ensure that everyone has access to safe and secure housing. In my hometown, we will soon be asked to vote on a plan to increase the city’s real estate transfer tax in order to generate a stable, significant pot of money each year to be spent on affordable housing and social services to help those who need them to make use of that housing. (“Bring Home Chicago”) This is on the ballot because of the work of citizens advocating over a number of years. As clear as this effort has been in expressing what the people of Chicago see as important, as clear as that will be after the citizens of Chicago vote on this item next March, it cannot impact the billions of dollars of philanthropic funds that are raised and managed in Chicago and ensure that these too are focused on this issue of public importance.  

In our current approach to philanthropy, we do not treat donations to organizations working on the same direction that government is moving any differently than donations to any other charitable organization. Nothing in our tax codes makes the investment we make in uncollected taxes focus on the things we see as shared, societal priorities.

Regularly publications like the Chronicles of Philanthropy share where large donors have decided to make large gifts. One

Our tax codes and the regulations that govern the large non-profit/philanthropic sector are totally disconnected from the consideration by our government of where we as a nation need more money to fulfill our collective responsibility and no requirement that national priorities should determine what is tax deductible. We just allow each donor to decide what is important and then invest the tax revenue that would have been collected in that individually determined priority.

The concentration of wealth and the increasingly larger and larger share of charitable giving coming from the very wealthy makes this flaw a real problem. When a large share of annual giving came from a large pool or smaller givers individual idiosyncrasies would have less of an impact. But when more and more giving come from very large donors it makes this a real problem.

Franklin Antonio the $100 donor to SETI does little to create an imbalance but Franklin Antonio the $200 million donor makes us all have a major investment in supporting this work, even if it has no connection to the nation’s interest.

The amount of our giveback to the wealthiest among us is huge. Here’s how IPS has quantified the use of our philanthropic system by billionaires:

• We know for certain that $73.34 billion in tax revenue was lost to the public in 2022 due to personal and corporate charitable deductions.
• If we include just the little data we have about charitable bequests and the investments of charities themselves, the revenue loss is pushed up to roughly $111 billion.
• And if we also include the capital gains revenue lost from the donation of appreciated assets, the true revenue costs of charity likely add up to several hundreds of billions of dollars each year.

Would we not be a better country if these hundreds of billions of dollars were targeted where we the people want them to be targeted? Alas, these hundreds of billions of dollars are not ours to target where they go… and that is the fault of how our charitable system works.

IPS has focused its attention on the flawed details of our current system as it recommends a series of changes to the rules that govern the charitable vehicles that the wealthy are using to manage their philanthropy:

It is time to modernize the rules governing philanthropy to discourage the warehousing of charitable funds; align tax deductions with the public interest; and encourage more broad-based giving. We provide a full discussion of recommended reforms at the end of this report, but the most important include:

• • • Implementing a payout requirement for donor-advised funds
    • Raising the minimum payout rate requirement for private foundations
    • Preventing grants to DAFs from counting towards payout
    • Requiring sponsors to report on DAFs on an account-by-account basis
    • Implementing a universal charitable tax credit for non-itemizers

All of these changes would make the current system more transparent, would move more money into action, and encourage smaller donors. These are all good.

 But even if we cure the abuses in our Donor Advised Fund and Foundation systems to ensure that donated money is actually put to use it will not change the fact that our current system is based on our trusting the wisdom of the wealthy. It is very definition of noblesse oblige in action.

If you are asking yourself if there are specific ways to try to fix a very broken system here’s a link to IPS’s campaign to push Congress to make needed changes.

But I hope you will also join me in raising this concern. Right now it does not seem to be on the agenda of the non-profit world as it will destabilize an existing system that benefits some at the expense of us all.It is not on the agenda of legislators at the State or Federal level. It is not even on the agenda of the growing number of critics of the current philanthropic regime like those at the Institute for Policy Studies. But it needs to be and can be if more of us begin to talk about it.