Big philanthropy has been taking a beating, and the pain may have just begun.
As is often the case when public debate shifts, what starts as tentative or isolated criticism becomes a mainstream talking point with surprising, or even shocking, speed. And whether Anand Giridharadas’ breakthrough book “Winners Take All” or Bernie Sanders’ early promotion of a wealth tax or some other factor was the catalyst doesn’t really matter at this point. The reality is that large-scale philanthropy—or “philantocracy,” as some now dub it—has improbably, and suddenly, become a big, fat target.
“If we’re all in the business of changing people’s lives, what is the public good in providing tax breaks for the mega-rich who then turn around and offer a lesser, private version of public services through their philanthropy?” asks Abdul El-Sayed, the host of the popular Crooked Media podcast “America Dissected” and a former head of the Detroit Health Department who made a highly-publicized run for governor of Michigan in 2018.
El-Sayed’s critique of philanthropy as an inferior replacement for a more activist public sector is only one of the root-and-branch criticisms that have abruptly become near-ubiquitous on the progressive left. Philanthropy is scoffed at for allegedly reflecting some great volume of giving on the part of rich donors that is simply not borne out by the data. It is seen as unaccountable, nontransparent, corrosive to participatory democracy, predisposed to overcentralization, breeding of sycophancy and hubris, and by definition geared towards the desires and tastes of the rich, old and reactionary. And even at its most progressive it is not very progressive. “Going into the nonprofit world is a straight march to the center,” says Matt Bruenig, founder of the People’s Policy Project, a “crowdfunded” democratic socialist-leaning think tank, describing a common feeling on the left about what he calls the “nonprofit-industrial complex.”
And it’s not just progressives who have decided that big philanthropy is a big problem. In early October a panel of conservative magazine editors at the American Enterprise Institute was upended when R.R. Reno, the normally mild-mannered former theology professor who edits the monthly First Things, went on a tirade against “supersized” philanthropy that included both the “F-word” and an existential argument against the sector almost indistinguishable from that of El-Sayed and other progressives. “We outsource our educational policy to the Gates Foundation,” Reno said. “If you want billionaires to run your country, then you give them huge tax incentives to fund private forms of government, and I think this is a serious problem, and we need to address it with very specific targeted policies.” As an example of what such a specific policy would be, Reno suggested a lifetime individual cap of $1 billion in deductible charitable giving.
Perhaps the most striking indicator of change was a comment made by Reno’s target at another panel a few weeks later, when during a discussion of wealth taxes at the New York Times “DealBook” conference Bill Gates hinted that he could be open to taxing his foundation. While Gates’s seemingly offhand comment was overshadowed by the much spicier remarks he made about wealth taxes—and whether he would vote for or meet with one of their most visible promoters, leading Democratic presidential candidate Elizabeth Warren—it struck some in the philanthropic community as a bombshell.
Within the space of just a few months, a public move against big philanthropy had seemingly moved from inconceivable to inevitable without even pausing at improbable. If every billionaire is a policy failure, then so might be every billion-dollar philanthropy, too. It all brought to mind the convergence of disasters that buffeted the British royal family in 1992, which Queen Elizabeth archly dubbed her “annus horribilis,” and which ended in the crown’s surrender of its centuries-long immunity from taxes.
“It’s happening so fast we haven’t had time to come up with an institutional response,” says David Biemesderfer, president and CEO of United Philanthropy Forum, the Washington-based membership group, speaking a few days after Gates’s comment.
Not So Fast
Overall, experts in the field stress that any discussion of how philanthropy’s current “moment in the shade” could accelerate and change the sector in meaningful, concrete ways, will necessarily be highly speculative. To paraphrase former Defense Secretary Donald Rumsfeld’s famous line about the Iraq War, it involves a few knowns, many more known unknowns, and no doubt plenty of unknown unknowns as well. It is also important to differentiate between policies with first-order effects on the sector (e.g. Reno’s idea of a $1 billion lifetime cap on charitable deductions) and the second-order effect of policies not primarily designed with philanthropy in mind, like a wealth tax. And overall, it is crucial to note that none of the experts polled by Inside Philanthropy on the topic thought there was any chance that big philanthropy would or could be radically changed anytime soon.
Still, the sector is clearly experiencing a moment, and these same experts all said the unknowns raised by this moment are well worth exploring.
The first and biggest unknown is whether the political landscape will change in line with the emerging hostility to big philanthropy. For one thing, despite the current enthusiasm for progressive ideas and candidates, their continued ascendance on the federal or any other level is far from guaranteed. Nor are all the different “flavors” of modern American progressive alike, with some being card-carrying Socialists, while others—notably Elizabeth Warren—proclaiming themselves proud capitalists. (For the purpose of this piece “Democratic Socialism” simply refers to the commitment to an expansive, Continental European-style welfare state, and sharply higher taxes on the wealthy.)
And while there has clearly been a shift in at least elite perceptions and attitudes towards large-scale philanthropy, it has not at all been matched by in the realm of policy. “We haven’t seen any actual proposals from policymakers,” says Biemesderfer.
Indeed, if “philantocracy” is a new and juicy target, so far no one with the power to actually wound or kill it has indicated that they are preparing to do so. More than a dozen experts on the regulation and taxation of charitable giving contacted by Inside Philanthropy over the past month said they had seen no sign of any targeted policy initiatives being developed by lawmakers or candidates. The campaigns of all 10 Democratic presidential candidates who qualified for November’s debate—those of Senators Cory Booker, Kamala Harris, Amy Klobuchar, Bernie Sanders, Elizabeth Warren, former Vice President Joe Biden, South Bend, Indiana Mayor Pete Buttigieg, US Representative Tulsi Gabbard, and businessmen Tom Steyer and Andrew Yang—failed to respond to questions about the future regulation of philanthropy, as did spokespeople for the Democratic Caucus in the U.S. House of Representatives. Meanwhile, Emmanuel Saez and Gabriel Zucman, the two high-profile University of California economists who have been advising Sen. Warren on her tax proposals, and who have in the past advocated taxing foundation assets, both declined to be interviewed for this article.
The one major related proposal that has been put on the table—the wealth taxes on large fortunes outlined by Senators Warren and Sanders—is also both highly volatile and deeply speculative. Warren’s top rate, for example, quickly jumped from 2 percent to 6 percent when she was pressed to offer financing details for her campaign’s Medicare for All plan. And the certain headwinds a wealth tax would face in the legislative process are only one potential roadblock to them becoming law; many top legal experts doubt such a tax would survive a constitutional challenge, given the 16th Amendment’s explicit focus on income taxes. Likewise, many leading economists—most prominently former Treasury Secretary and Harvard University President Lawrence Summers—have scoffed at the workability and viability of such a tax.
And it is impossible to game out how a wealth tax or other major move to target the well-off will play with the public. Over the summer various polls found that over 60 percent of voters—including half of Republicans and a majority of millionaires—favored a wealth tax. But as the 2020 campaign has gathered steam and many in the business community have gotten cold feet about the Democratic field’s increasingly bold policy proposals, these numbers should not be expected to remain static. And again it pays to question whether the “every billionaire is a policy failure” moment will last; Biden remains the front-runner in most polls of Democratic presidential candidates, and in mid-November was quoted as telling a group of large donors that he didn’t want to “demonize anybody who has made money.”
At the same time, given the current legislative process in Washington, any proposals which deal narrowly with philanthropy or charitable giving are likely to be hostage to larger priorities and issues, however important they may seem on their own to those in and close to the sector. “Among the issues that really only impact what I call ‘the business of philanthropy’ none are likely to gain enough traction to move on their own,” says Aaron Dorfman, president and CEO of the National Committee for Responsive Philanthropy. “The question is whether you can build enough support so they can be attached to some other, bigger [legislative] train that is already moving.”
It’s also hard to game out how any emerging left-right populist consensus on limiting “philantocracy” might actually work, given that different parts of the philanthropic landscape are seen as being unequally hospitable or useful for different political constituencies. “I think it would be hard to get cross-group solidarity on this, because you can also just target the specific thing that disadvantages [your side],” says Bruenig of the People’s Policy Project. Others stressed that many of the progressive groups which most noisily oppose the influence that big money has over the philanthropic landscape are beneficiaries of the current system.
Even the reform of small areas of the philanthropy ecosystem could involve a complex array of variations and potential outcomes. For instance, regulation of donor-advised funds (a notable target of some progressives, given ongoing allegations that DAFs enable warehousing of donor wealth) might be changed to force annual payouts, to delay tax-deduction benefits until donations actually leave the fund, or to mandate public disclosure of assets, individual grants and operating budgets, as with most foundations—or any combination thereof.
Either way, the new avalanche of high-minded criticism and policy proposals that have suddenly pounded big philanthropy tends to be short on the political nitty-gritty that will necessarily govern any reform effort. “So much of this debate over taxes and public policies related to philanthropy reflects the calculation of economists and other [academic analyses] rather than trying to understand the political calculations,” says Leslie Lenkowsky, professor emeritus at Indiana University and a veteran scholar of philanthropy.
Adding to the legislative uncertainty is the fact that Washington, DC is only one of many political black boxes with power over the philanthropic sector. “We don’t spend as much time thinking about it, but every nonprofit in the United States begins as one or another type of state corporation,” Lenkowsky says. “I think that’s where you’re more likely to see changes and policies related to philanthropy.”
If it is impossible to forecast what kinds of “anti-philantocracy” measures might actually be enacted were the U.S. to actually take a much more economically populist turn, it’s only slightly less difficult to accurately predict what impact such policies might have on philanthropic giving, or the business of philanthropy.
For one thing, any significant tax or regulatory changes would likely have meaningful unforeseen—or at least unintended—consequences.
To name the most important and obvious example, the introduction of wealth taxes or a steep rise in income tax rates could actually create a sudden deluge of giving and distributions.
“If they were big new taxes such as those that some of the Democratic candidates are proposing, I think that if anything they’re likely to increase philanthropy,” says Lenkowsky. “Remember: Philanthropy is a kind of tax shelter.”
And such a windfall could, in turn, have knock-on effects, not all of which would be positive to philanthropy. In the short run, it would raise issues of capacity—the ability of foundations and other grantmakers to productively deploy the new funding—and down the road could cause problems if philanthropic institutions expand their capacity to handle what turns out to be a brief or one-time spurt in donations. And even if they could handle the sudden (but temporary) bonanza, it could lead to a building up of the very “machinery” of philanthropy that has caused so much resentment among progressives and conservatives alike.
There may be other, even more, insidious unintended consequences. Any move to cap or limit the tax deduction for charitable contributions would by definition give non-deductible political donations the same tax treatment, potentially encouraging the wealthy to redirect their giving to candidates and partisan causes. (The 2017 tax bill’s big raise in the standard deduction and subsequent drop in the number of taxpayers who itemize is believed to have encouraged some less-wealthy individuals to shift some of their giving away from 501(c)(3)s and other previously tax-friendly beneficiaries and into politics).
Meanwhile, it is far from clear what would happen to the overall level of giving if the very wealthy were suddenly put in the same position as “non-itemizers” via a cap or other limits on the deductibility of charitable contributions. Data show a decline in contributions by non-itemizers of roughly 4 percent following the 2017 tax bill, and while it’s hard to imagine the behavior of billionaires would exactly track that of middle-class givers, experts say it’s prudent to expect some impact if the very wealthy effectively joined the ranks of non-itemizers.
“If we said, ‘well, we’re not going to have a charitable deduction anymore because it’s only for rich people and we don’t like rich people’ I think that could have a huge impact on charitable giving,” says an executive at a top U.S. financial firm who advises wealthy clients on their philanthropic giving. “People might say, ‘well, the heck with it. I’m going to do something else with my money.’”
At the same time, the executive stresses that such an outcome is uncertain, and that the “conventional wisdom” also tends to overstate the role of the tax deduction in charitable giving. “People confuse tax motivation and tax efficiency. I don’t think any of my clients give money to charity to get a tax break.” He also says the reported decline in giving by non-itemizers may not adequately take into account the market decline in late 2018.
Rob Reich, the Stanford political scientist who last year published the widely-cited Just Giving: Why Philanthropy Is Failing Democracy and How It Can Do Better, proposes a donation tax credit that would greatly reduce the large relative subsidy that the biggest givers receive, while at the same time encouraging giving by the lower income. And he scoffs at the notion that reigning in the “plutocratic bias of tax deductibility” would radically curtail giving at the top. “If the complaint [about a proposed cap] is that people would no longer give money away I would point to the long history of American philanthropy that began with Carnegie and Rockefeller, in which they put money towards philanthropy without any tax incentive at any time,” says Reich.
But it is safe to say that any significant change to the taxing of income and wealth—not least the huge gap between taxes on wage and non-wage income—will change giving behavior at the top, at least at the margins.
“If you look at the data historically, tax rates seem to matter,” says Patrick Rooney, an economist at the Lilly Family School of Philanthropy at Indiana University. “And certainly for some individuals it matters a lot—they care more about not giving anything to the government than they do about which charity they’re giving it to instead.” Rooney stresses that an increase in the top marginal rates is generally good for giving as it reduces the after-tax cost of donations.
Others who work intimately with the wealthy also warn against underestimating how a wealth tax in particular may change well-heeled individuals’ propensity to give. David Bahnsen, the founder and chief investment officer of the Bahnsen Group, a bi-coastal team of wealth management advisors, highlights the difference between giving made from accumulated wealth as opposed to that from income, as in the case of most smaller donors. “A wealth tax is targeted very specifically at the balance sheet… It comes from the tree itself, not the fruit of the tree.”
Despite all this, there is one prediction that can be confidently made: That whatever tax or regulatory changes are made impacting the very wealthy and their giving, they will be the first to find the loopholes. “The rich and their advisors will adapt,” says Michael Moody, the Frey Foundation Chair for Family Philanthropy at the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University.
The Bear Case
Another, potentially more fraught set of uncertainties involves the second-order effects on the wealth that fuels big philanthropy were America’s current anti-plutocrat moment to actually result in significant heavier taxation of the very rich.
Studies of declines in recorded wealth in several countries with wealth taxes tend to show a muted effect, if based on real-world situations vastly different from America’s. Richard Steinberg, a colleague of Patrick Rooney’s at Indiana University’s Lilly Family School of Philanthropy, says one high-quality study revealed a drop of less than 1 percent in reported wealth resulting from a 1 percent wealth tax in Sweden, compared to a bigger drop in Colombia and a plunge of more than 20 percent in Switzerland, no doubt due to the latter’s status as a haven for bank secrecy.
But Bahnsen, who is currently writing a book on Warren’s economic platform, says an increase in taxes along the lines proposed by Warren would see wholesale destruction of the financial wealth that in the U.S. is the most common source of large-scale philanthropy: “If the whole package were passed into law… the markets would revolt.”
And if the data only point to links between certain tax changes and charitable giving, they are much clearer about the relationship between giving and the health of the larger economy, and that of financial markets and other key drivers of personal wealth. “If [higher taxes] kill off growth then obviously that would have a highly deleterious outcome on philanthropy, because giving is highly correlated with growth, and growth in wealth,” says Rooney, emphasizing that whether higher taxes would have a dramatic impact on growth remains a big “if.”
The bank wealth advisor also points out that since the 1950s the only years in which charitable giving has declined in absolute terms in the U.S. were during major market downturns, notably in the crash years of 1987 and 2008. (He adds that while giving reliably goes up in bull market years and down in bear markets, it goes up higher in good years than it goes down in the bad years.)
It should be stressed that even a worst-case (or best case) scenario of higher taxes and moribund markets would not destroy America’s status as the best place in the world to get rich, or deaden the desire of America’s wealthiest to give back some of its riches.
More to the point, such a scenario might not even make a meaningful dent in “influence giving,” where for $50 or $100 million a donor can be among the top givers in the country.
But over time a more democratic socialist environment would certainly make it harder to get as rich as today’s most high-profile philanthropists are. For example, an estimate recently published in the New York Times calculated that if Warren’s wealth tax had been law since 1982—four years before Microsoft’s initial public offering—Gates would be worth less than 15 percent of what he is now. But this estimate apparently didn’t attempt to factor in any second-order effects on the trajectory of the Gate’s holdings from the wealth tax or any other redistributionist or populist reforms, such as tougher anti-monopoly enforcement. If it did, Gates’s tens in billions in giving over the last two decades may have been just a few billion, or possibly only mere millions.
To Reich this is the whole point: “Even a mildly leftward turn would produce fewer people of extraordinary wealth. And that would, in turn, diminish the philanthropic power that they can build.”
To ask the question “how would democratic socialism change American philanthropy?” invariably leads to Europe. And while the continent’s philanthropic traditions and institutions are in many ways more diverse and vital than Americans sometimes assume, they are unquestionably more humble than their American counterparts. (And not only in terms of large-scale philanthropy; no country on the continent is in the top 10 nations on the World Giving Index, where the U.S. regularly leads all other industrialized countries.)
And if both elite philanthropy and overall giving could be expected to drop, the focus would change as well. “If you look at Europe, foundations give a much higher percentage to the arts and culture compared to education and healthcare,” says Moody of the Dorothy Johnson Center for Philanthropy. “So, the mix of causes would definitely change for elite philanthropy and for broader foundation giving as a whole.”
Meanwhile, some philanthropic practices common in Europe might begin to appear in the U.S. These might include giving taxpayers the ability to dedicate a small portion of their income taxes to specific private charities (such a proposal has actually been making the rounds in Washington in recent months) or a greater role for “QUANGOs” and other models of public-private cooperation. Maybe the U.S. will follow the example of Denmark—the perpetual exemplar for American social democrats—where the single biggest source of giving is an annual telethon for international aid organizations.
Yet it would be folly to pretend that a more social democratic or “democratic socialist” America would naturally move towards a model of philanthropy neatly tracking those of Europe, since the American philanthropic tradition is based on much more than the ethoses (or myths) of bootstrapping and rugged individualism, and the great concentrations in wealth and poverty that flow from them. To name just one obvious difference, even the most advanced, affluent and secular societies in Europe—Denmark included—have established churches financed through mandatory “contributions. And as the United States becomes more diverse and populated by individuals for whom Europe has no natural attraction, it might be expected to diverge further from the European way of doing things, including philanthropy. To borrow a phrase from China, the philanthropic sector of a democratic socialist America would necessarily be one with American characteristics.
Meanwhile, the philanthropy of an America that chooses a less growth- and wealth-friendly path would not exist in a vacuum. Earlier this month Forbes revealed that for the first time every position on its list of 400 richest Chinese was held by billionaires, while a report put out by Credit Suisse in October claimed that this year China overtook the United States to become the country with the largest number of people in the top 10 percent of global individual wealth, a group which owns 82 percent of the world’s wealth. It is at least conceivable that, within a few decades, global big-money philanthropy would be one with more Chinese characteristics than American ones.
Putting Second-Order First
Unsurprisingly, to those in and around big philanthropy the question of how the “business of philanthropy” would fare in an environment sharply less favorable to large benefactors is an awkward one, akin to the historic foundation-world taboo of discussing the origin of great philanthropic fortunes.
Indeed, many who have spent careers working in or studying the sector argue that philanthropy’s current “moment” isn’t really about the mechanics of philanthropy, which are instead best treated as a second-order matter.
“I find it incredibly frustrating when proposed tax policy changes get discussed in the nonprofit sector in a vacuum,” says Dorfman of the National Committee for Responsive Philanthropy. “We talk about how proposed changes will affect nonprofits, foundations and other parts of our sector. But that’s not really the point. The point is how do those proposed changes affect the common good? Philanthropy has a really important role to play in advancing the common good. But it’s not a role that is superior to government. It’s complementary to government. And if we analyze proposed changes without looking at the bigger picture, it can get pretty ridiculous.”
“A lot of what we’re talking about is just the problem of inequality,” adds Ray Madoff, director of the Boston College Law School Forum on Philanthropy and the Public Good. “And we don’t really have a good answer for what we want the wealthy to be doing with their wealth. If they don’t spend it for the betterment of the world, that seems problematic. And yet, if they spend it in ways to significantly change society, then that too is seen as problematic. So we don’t really have a good answer for what we want philanthropy to be doing.”
Indeed, despite the current sense of immediacy around the abuses and shortcomings of the current model of big philanthropy, there seems to be a consensus of sorts over the need for more discussion.
Several experts pointed to the example of the national conversation of sorts that led to the last big reforms of the sector, in 1969, while differing over the relative import and meaning of philanthropy’s last spell in the dock. (Lenkowsky points to the even more palpable fears at the time that philanthropy faced an existential threat, while Madoff counters that the debate was about something much narrower, namely the brazen misuse of private foundations as tax shelters by individuals and businesses.) Meanwhile, some suggest that a conversation over wealth taxes could lead to one over philanthropy, while others assumed the opposite.
Either way, such a dialogue would have to include not just the questions of inequality or of philanthropy’s ability to “shift power" but of the proper role of government in an increasingly uneasy world of globalized, “late stage” capitalism, with its tendency towards monopoly (or, as Warren Buffett lovingly calls it, “a wide and long-lasting moat”).
“The question is what’s the threshold at which you can guarantee a strong government, robust welfare state, and also have a thriving, pluralistic and diverse philanthropic sector,” says Benjamin Soskis of the Urban Institute’s Center on Nonprofits and Philanthropy.
And at least in the United States, this conversation has barely begun, or at least it has not yet resulted in a critical mass of voters deciding that big philanthropy constitutes a “lesser, private version of public services.”
“In order to politically justify confiscating [philanthropists’ wealth] through taxation, you have to believe the government can do something with it that’s better than what individual philanthropists or foundations are doing with it,” says Kristin Goss, a professor of public policy at Duke University who has focused on the question of philanthropy and political participation. “And to me, the basic problem is that we don’t have a consensus that government is a force for good.”
Because of this, even some strong critics of big philanthropy, and of America’s belief in small government, urge caution in attempting to dismantle the former without first addressing the latter. “There shouldn’t be an aim to make U.S. philanthropy more like Europe’s unless you have a concomitant reshuffling of social policy in the U.S.,” says Linsey McGoey, a sociologist at the UK’s University of Essex, and author of “No Such Thing as a Free Gift: The Gates Foundation and the Price of Philanthropy.”
At the same time, McGoey and others say that with philanthropy at center stage, the time is right to address some of the most egregious abuses and problems in the sector. Among them, McGoey highlights giving by philanthropic institutions to for-profit entities—such as grants Gates has made to MasterCard for “financial inclusion” in Africa—which she said would be seen anywhere in the world but America as unconscionable, tax-privileged “rich-to-rich giving.” And it is hardly certain that some of the other “first-order” reform proposals, including mandating more transparency from foundations and limiting 501(c)(3)s influence over America’s political life, cannot be passed absent a full reordering of the country’s political economy.
In the end, it seems certain that, like the British royal family, American philanthropy will endure its “annus horribilis,” for the foreseeable future, and largely intact. But it will also emerge humbled, less immune from the taxes that will inevitably fall heavier on an aging post-industrial society, and knowing that its long-term prospects are far from guaranteed.