Wealth Hoarding Is The Real Problem

Marty Levine

May 6, 2024

A few days ago, I received this announcement from a coalition of organizations working to reform the laws governing our nation’s Philanthropic system:

Over 160 prominent philanthropists and seven national funding and policy organizations are launching a “Donor Revolt for Charity Reform” campaign to call for “common sense charity reforms,” including requirements to boost foundation payouts, increase transparency, and close down abuses of donor-advised funds (DAFs).

…Launched by the Patriotic Millionaires, the Institute for Policy Studies, Inequality.org, Solidaire Action, the Excessive Wealth Disorder Institute, Resource Generation, the #HalfMyDAF Campaign, and the Decolonizing Wealth Project…

Here’s what they are specifically calling for:

     To reform private foundations, we should:

• Increase the minimum payout requirement from 5 percent to 7 percent to discourage donation warehousing (and increase it to 10 percent for private foundations with assets over $50 million)
• Cap management expenses that can be counted towards payout at 1% of assets
• Exclude compensation to family members from payout calculations
• Exclude private foundation grants to DAFs from counting towards payout

To reform donor-advised funds, we should: 

• Require DAFs to pay out funds within 5 years of receipt
• Exclude DAF grants to other DAFs from counting towards payout
• Require sponsors to report on DAFs on an account-by-account basis
• Change the tax benefits for DAFs to match those of private foundations

To reduce top-heavy philanthropy, we should: 

• Limit the estate tax charitable deduction to a percentage of the estate’s value, with a lower percentage for gifts to private foundations and DAFs
• Provide a charitable tax credit for non-itemizers
• The specific changes being advocated are designed to address some of the ways that the current system can be manipulated to minimize how much of these gifts end up supporting the work of building a better society rather than being warehoused by wealthy donors.

All of these changes are good and needed.

But they do not address two issues that I believe are more critical:

• the disconnection of philanthropy from national priorities
• and, growing wealth inequality.

Our current system allows every donor to decide how to direct their charitable giving. It makes it easy to establish a tax-exempt organization or foundation that will allow their donors to qualify for federal and state income tax deductions.  But while we are collectively forgoing the tax revenues by giving those deductions, we have no requirement that those funds will be used for activities that align with a set of national, state, or local priorities. It allows those controlling these non-profit organizations to use these funds with no requirement that they receive meaningful public input or oversight for their priorities and strategies.

As I wrote some months ago:

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.

When the US Supreme Court heard a case, CITY OF GRANTS PASS V. JOHNSON, that considered whether unhoused people could be punished for sleeping in public spaces when there was no other available housing, they thought our nation was relying on philanthropy to pick up where government funding fell short.  In the discussion, it was clear that many of the Justices recognized that there was a real housing shortage as well as government funding and they emphasized the role non-profit organizations should be playing.  But whether or not philanthropic funds are targeted to this need depends solely on the decisions of individual donors.  If it falls short, the victims in this case are the unhoused, but every donor still gets out of paying their fair share of taxes.

Housing may be a priority, but it does not stand in front of adding to billion dollar endowment funds held by elite (and very selective) universities when it comes to earning a tax deduction. Nor before any pet project that a donor, particularly a wealthy donor, chooses to establish a non-profit organization to tackle. All are equal in the eyes of our current tax code. Unhoused people be damned.

This is made worse by the growing wealth inequality in our nation, a subject I have been writing about for years. And it is a problem that we refuse to tackle.  According to a study recently released by Americans for Tax Fairness:

America’s more than 800 billionaires now own over 50% more wealth than does the entire bottom half of U.S. society, or roughly 65 million households ($5.8 trillion versus $3.7 trillion). Under the current tax code, however, these staggering wealth gains are unlikely to ever be taxed.

The story of illionaires is the story of the wealthiest 1% of Americans as well

Wealth has grown and we have refused as a nation to tax that wealth so that we, as a nation, can have the resources needed to provide all with a respectful standard of living.  We have cut tax rates for the wealthiest among us. We have allowed the wealthiest of us to pass it down to their heirs without facing taxation on the wealth they have gained year by year. And so, we have starved our government, forcing it to reduce what it can provide and run massive deficits; deficits that provide a political weapon for those wanting to shrink the effectiveness of government even further.

The philanthropic reforms that are being asked for are worthy. They would make a difference. But their impact will be mitigated because they do not address these two systemic flaws.

I know that there are more practical areas to press. They are seen to be achievable because they do not make the needed basic changes. They are the wise thing to do.

But ignoring systemic problems will not make them go away. The wealthy will find ways to work around them so that their philanthropy will continue to be another tool in their retaining control of their wealth and of the power that it gives them.

Unless we push for wealth taxes and better collective control of the tax breaks we give, we will be just be looking for the next set of tweaks to fix the problems that we refuse to take on directly. Tough, impractical political fights are worth fighting.