And argues for charity reform.
A report released today by the Institute for Policy Studies (IPS), The True Cost of Billionaire Philanthropy, comprehensively details how the ultra-wealthy in America use charitable giving to take advantage of tax benefits while further enhancing their already-inordinate influence on society, which ordinary Americans help incentivize through the taxes they pay.
“Our report’s aim,” according to its introductory section, “is to encourage policymakers, the media, and the wider public to view the philanthropic pronouncements of billionaires and their philanthropic organizations with greater skepticism and scrutiny.”
The report’s authors are Helen Flannery, Chuck Collins, and Bella DeVaan. Flannery is an associate fellow at IPS and directs research at its Charity Reform Initiative. Collins directs the Charity Reform Initiative and edits IPS’s Inequality.org. He is also author of 2021’s The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions and participated in the Chronicle of Philanthropy webinar, in cross-ideological partnership with The Giving Review and IPS, earlier this year about various issues facing nonprofits and philanthropy. DeVaan is a member of the Charity Reform Initiative and a program associate for Inequality.org.
Advantages and expense
Most charitable donors in America do not even take advantage of the tax incentive that’s in place to encourage such charity, according to The True Cost of Billionaire Philanthropy. In fact, only less than 10% of households even claim the deduction, and these are among the wealthiest of households.
“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,” Flannery, Collins, and DeVaan write. “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,” they continue. “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.”
That’s a lot of tax-incentivization of charity, of which most is taken advantage by the wealthy—drawing on a pool of funds to which the less-wealthy non-voluntarily contributed through their taxes.
When these relatively less-wealthy give—mostly undeducted—to charity, it’s more likely to given to local nonprofits. When the billionaires who signed the Gates-Buffett Giving Pledge give—mostly using the tax incentive while doing so—it’s more likely given to their own private foundations and donor-advised funds (DAFs).
Giving Pledge signers promise to give away half of their wealth to charity, either during their lifetimes or in their wills. Of the $12 billion in identifiable grants of more than $1 million that Giving Pledgers donated to charity in 2022, 68% went either to private foundations or DAFs.
Private foundations and DAFs, the report notes, are “intermediaries” and not “working charities.” While contributions to private foundations and DAFs are deducted during the very tax year of the contribution, private foundations only have to give away five percent of their assets per year to retain their tax-exempt status, and DAFs don’t have to give away any money in them at all right away, or even anytime soon, to retain their tax-preferred status. The largest DAFs are provided by nonprofits affiliated with commercial investment-management companies, which charge fees to manage the DAF funds while they’re in there, for however long.
“Functionally, this allows Pledgers to reduce the size of their taxable income and assets without actually pushing donations out to working charities,” the report observes. “This raises concerns that what began as a civic-minded initiative to spur generosity is instead serving to concentrate private wealth and power at taxpayer expense.”
The True Cost of Billionaire Philanthropy shows “how the current system of tax-incentivized charitable giving is broken, benefiting a tiny sliver of the wealthy at the expense of both charities and taxpayers in our communities,” Collins said in an e-mail interview.
This affects all of us—and I think readers will be surprised by just how much we at Inequality.org agree with you and your Giving Review colleagues on the fundamentals in the webinar on which we co-partnered with The Chronicle of Philanthropy. We share a revulsion at the ways that the financial sector is playing shell games with private foundations and DAFs.
Meeting requirements, mulling reforms
Among other things, the report also includes information about and some analysis of that which private foundations can count as helping them meet the minimum-payout requirement, including seemingly excessive compensation for board members and executive staff, and the lack of transparency that those individuals or institutions with specific DAF accounts can enjoy.
As The True Cost of Billionaire Philanthropy covers, private foundations themselves can open DAFs and use contributions to them to meet the foundation’s distribution requirement and/or avoid the transparency requirements to which the private foundation would otherwise have been subject.
The report’s proposed charity reforms include raising the payout requirement for private foundations, creating a payout requirement for DAFs, preventing contributions to DAFs from counting towards private foundations’ payout requirement, making DAF providers report on their funds on an account-by-account basis, and starting a universal charitable tax credit for non-itemizers.
“We’ve found remarkably strong support across the entire political spectrum for the common-sense charity reforms we’re proposing,” Collins said in the e-mail interview. “To give just one example: in a 2022 Ipsos poll, 75% of liberals and 76% of conservatives thought DAFs should pay out grants within five years of receiving contributions into their accounts. It’s hard to find that level of agreement on just about anything these days!”