*An updated version of this post now appears on Care2 Causes where you can take a poll on whether the wealthy should pay more taxes or give more donations.
I am the Founder and Executive Director of a nonprofit organization called Exhale. As the leader, I spend the vast majority of my time raising money. Exhale receives no government funding and we earn our revenue primarily through foundation grants and the generous contributions of individual donors.
Because I am a professional fundraiser and nonprofit leader, you might assume that the idea of America’s most well-known billionaires – Bill Gates and Warren Buffett – hatching a well-marketed plan to get other members of their elite club to give away half of their money to charity would get me excited. You might think that I should spend all my time trying to figure out how to get my hands on it.
You would be wrong.
The truth is, for those of who have built our entire professional careers in the nonprofit sector, we know some secrets about philanthropy and giving that the rest of the world does not. We know, for example, that the vast majority of money that is contributed to nonprofit organizations in the United States doesn’t come from the rich. It comes from the poor. We also know that foundations are not the primary source of funding to our sector. People are. Poor people.
As Stacy Palmer from the Chronicle of Philanthropy said in the AP article by Donna Gordon Blankinship “the bulk of money raised by charities today comes from non-billionaires giving $5, $10 or $50 at a time.” Palmer followed up with a reality check about the giving patterns of rich people: “only 17 people on the Forbes list of the 400 wealthiest people in America are also on the Chronicle’s list of the most generous American donors.”
The main reason our sector (the great, big diverse sector of organizations that hold the tax-designation of 501(c)3) even exists is because several decades ago, a few wealthy Americans found a way to create tax shelters for their wealth within the domestic United States. They started private, philanthropic foundations. These foundations allowed the wealthy to keep their money out of the public domain where democratically elected representatives would decide how best to spend it. They found a way – and created the laws and tax codes to protect it – to keep for themselves what was legally owed to the rest of us.
Let’s get specific. This means, for example, that instead of paying a million dollars in taxes, a wealthy philanthropist puts his million into his own personal foundation, and by the very laws he helped to create, he is legally only required to “give” a very small percentage – about 5%- of his foundation’s assets to charity every year. Meanwhile, within the shelter of this foundation, he is allowed to forever grow his fortune without taxation.
The consequence of this is that what was supposed to be a million dollars contributed to the public domain through taxes is now just $50,000 only available through charitable contributions. What could have been a million dollars spent towards elementary education is now just $50,000 for a park bench at his alma-mater. What could have been a million dollars to help take care of our elderly is now $50,000 to sponsor a cocktail party at his favorite museum.
Just because wealthy philanthropists have starved the government of revenue doesn’t mean that the things governments have always paid for have gotten cheaper or are no longer needed. Like all of us, we need more than ever to be healthy, educated, and safe, and everything we need costs more than it did before. Except now the government has less money to fulfill its obligations.
And so the nonprofit sector grows in response.
But – surprise! – nonprofit organizations are not here to pick up the slack of governments or corporations. Despite what you may think, nonprofits are not a tool designed to meet the massive human and civil needs that don’t go away just because our government can no longer afford to pay for them. No amount of car washes, bake sales, Facebook Causes or charitable gifts from the rich can address the government’s revenue gap fueled by the wealthiest Americans sheltering their billions.
Nonprofits, as advocates for the public good (this is not flowery, self-congratulatory language, this is our actual tax status), we have a history of stepping in, filling the void and upholding the responsibility that was once the governments. Even worse, we compete with each other over the $50,000 chump change, wear our sacrifice like a badge-of-honor and accept that the public good is only worth the spare change others are willing to contribute when they feel like it.
We all pay the costs of a system which privileges billionaire elites. We pay the cost when parents and communities have to not only pay their own taxes, they also have to start their own nonprofits, donate their own money and spend their time raising money from others in order to fund their children’s schools. Or pay for their cousin’s cancer treatment. Or maintain a local park.
As leaders of nonprofit organizations we should not settle for a role as the stop-gap. Instead, we must lead our organizations to band together and demand the true costs of what we need to fulfill our missions and hold the government – and the wealthy – accountable to their responsibilities for the public good.
Through charitable giving, wealthy philanthropists starve the government of revenue. And then they expect us – nonprofit organizations – to beg and compete for their pennies. We must all say no.
Instead of a Giving-Pledge, I encourage Gates and Buffett to use their leadership and their wealth to start a Tax-Pledge. They should ask their fellow billionaires to pay their fair share.
While I agree with the sentiment in this piece generally, I think Buffett is a particularly poor scapegoat given his strong and vocal opposition to the repeal (or reduction) of the estate tax.
I’m not sure what you mean by scapegoat, but Buffett is an advocate and ambassador for the Giving Pledge, an initiative to get the wealthiest Americans to give the majority of their wealth to philanthropy. My post is in response to this and an argument for why the nonprofit sector should be against it. I propose that instead, Gates & Buffett should encourage the wealthiest Americans to pay their fair share through taxes.
Worth noting, too: Bill Gates, Sr., has come out for increased taxes on people in upper-income brackets and has taken some flack for it. He’s declined to say whether his son agrees with him. And – you’re right. (I think some people go as far as opposing tax free charitable deductions at all because of the foundation shell game that you mention.)
I agree with the general gist that people should pay their fair share of taxes (though what is “fair” is a whole other discussion), but I don’t understand the claim that foundations are a tax shelter. The money never truly returns to the donor, even if only 5% is spent. A $50K park bench or a $50K cocktail party generally are levels of giving that either support an institution (public UC Berkeley and private Harvard alike) with unrestricted funds, and/or help to raise more money from other people. To me, these seem like very good uses of funds that help leverage more giving.
I agree that we should all consider ourselves as givers and not fall into the trap of believing philanthropy is only for the very wealthy, but this post seems incredibly misguided.
On the facts, your tax math is off. Your hypothetical million dollar donation to a foundation would not magically become a million dollars in taxes under the U.S. tax system. The maximum tax rate is 35%, so if your billionaire didn’t give it to a foundation, the federal government would get $350,000. The real trade-off in your hypothetical scenario is between a one time tax payment of $350,000 vs. a minimum $50,000 given away philanthropically every year.
Your donor demographic math is also incorrect. You claim that the vast majority of money contributed to nonprofit organizations comes from the poor is not supported by studies of U.S. household giving. It is true that the poor give more as a percentage of their income than wealthier people do, but their income is much lower, so the actual amount of money given by the poor is significantly lower.
As for your targets, it seems misguided to attack an effort to convince anyone — especially the very wealthy — to give more. Fight for higher taxes if you want, but there’s no sense in throwing water on an effort to increase any kind of philanthropy.
In the case of Buffett and Gates, who have pushed for higher tax rates, and especially Buffett, who didn’t even startup his own foundation but just gave his money to an existing one, your criticism makes even less sense.
I appreciate your desire to have our goverment address more of the needs of the people, but this post doesn’t help move toward that goal.
Aspen,
Thanks for shedding some light on this. It seems like working to change that particular policy should be on the policy agenda of ALL non-profits.
H.
Umm, in regards to “the money never truly returns to the donor” yes, it doesn’t go back into their bank account, but when a millionaire, or billionaire, sets up a foundation so they can set aside money that will accrue interest and dispense money tax free, and then uses that money for personal causes, it’s pretty much the same thing.
Say for example, a wealthy individual wants to influence a local or national politician. They use their foundation to donate to the politician’s favorite causes, and it’s tax-free bribery, or influence-peddling, or lobbying, whatever you want to call it. It’s how a lot of people lobby Mayor Newsom in SF, and all the mayors before him, and Congress people, and former Presidents, etc. It’s extremely commonplace.
Or if you want to start a scholarship fund for people just like you, and normally would have to pay taxes on the money you were accruing/dispensing, set up a foundation so rich kids from certain backgrounds, geographic areas and religions can go to the same schools and intern at the same companies and hold the same jobs you did, thereby replicating the existing power structure, as opposed to say, paying taxes on your millions and billions that would fund a more equal education for all kids.
There are as many ways to use foundation dollars as there are millions in one person’s bank account. It’s great that Buffet and Gates are doing what they’re doing, but it’d be even better if all rich people, not to mention corporations, paid taxes that helped all of society with basic needs and infrastructure of advanced civilization.
And um, John, I don’t know if you’ve worked in non-profit fundraising, sounds like you might have, but it actually is poor people and middle class people (Aspen could have been more accurate by citing middle class donors in addition to the poor) who fund most non-profits. The big donors and big checks get the headlines, but it’s middle-class and low-income people in the burbs who crank out the annual gifts of $25, $50, $100 that keep most non-profits afloat. I couldn’t find the article from the Chronicle of Philanthropy from a few years ago, but they laid out just who gives and how much, and it ain’t the rich that sustain the non-profit industry. I’m not discounting their contributions, but their contributions are way over-hyped.
And also, Buffet did start his own foundation. He later renamed it after his wife passed. It’s now the Susan Thompson Buffett Foundation
“They use their foundation to donate to the politician’s favorite causes, and it’s tax-free bribery, or influence-peddling, or lobbying, whatever you want to call it. It’s how a lot of people lobby Mayor Newsom in SF, and all the mayors before him, and Congress people, and former Presidents, etc. It’s extremely commonplace.”
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Huh? A private grant-making foundation cannot legally give political campaigns. Perhaps you are confusing 501c4 advocacy orgs with private foundations? Gifts to 501c4 orgs are not tax deductible. Private foundations qualify as 501c3 in almost all cases and then abide by IRS substantial part test. IRS rules are: “Under the Internal Revenue Code, all section 501(c)(3) organizations, including private foundations, are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.” http://www.irs.gov/charities/foundations/article/0,,id=175256,00.html.
In addition, the IRS makes lobbying very expensive for private foundations (“A private foundation is subject to a twenty percent tax on all of its lobbying expenditures, regardless of whether they are substantial…” http://www.irs.gov/charities/foundations/article/0,,id=175255,00.html).
The scholarship fund rules are equally stringent (http://classic.cof.org/FAQDetail.cfm?ItemNumber=666).
Awesome. Thanks so much for putting the links in and clarifying all the rules governing donations. You are right. I think what Betsy was saying was if you want to get in good with a politician a donor can give money through their foundation to that politicians favorite nonprofit. I don’t think she was saying they donate to the political campaign. I think this overall discussion is highlighting the various ways that private foundations can be used to further the founders interests, including their political and business interests, through donations and contributions, while keeping this money out of the public domain through taxes.
Hey Betsy. Yep, I have worked in fundraising for small non-profits and I agree with your statement about the middle class as a group providing much more than rich people do as a group. I don’t want to discount the contribution of the middle class or poor and I wish we would all be more like the poor in some aspects of our giving. But as you note it’s not correct that the poor are the big drivers of giving in America.
I’m not in love with Gates or Buffett, but I do think they are doing some things right wrt giving and I am glad they are encouraging others to give.
Amie, I’m not confusing anything, and I should have been more clear. “A private grant-making foundation cannot legally give political campaigns. ” No doubt. The donor would go to jail and/or lose their assets and contacts. They don’t give to campaigns, they give to legal, non-profit entities with plausible and credible deny-ability. “I just agree with their mission, Mr. IRS officer. I swear.”
I’m well aware; I’ve worked for politicians and for non-profits, and it’s a common, how do you say, “agreement”?, often over dinner or drinks, sometimes a car ride from the airport, for a politician to mention how much they love, love, love this certain non-profit and then within the next 90 days, for that same dinner/drink/car date to write a huge check to the non-profit that the politician likes. No one ever says, “Give $100,000 to the Help Poor Folks Find Housing Foundation and I’ll meet with your staff to discuss your concerns about the property lines of the molehill that you want me to expand so you can build bigger houses there and turn a current 10% profit into 40% profit.”
Money, c3 or c4, buys you a lot nowadays. And c3 money, since it’s tax-deductible, is a great way to have a cheap but great lunch with a power broker and indicate to them how you’re going to probably donate a lot to some foundation/cause that they like, but you know, it’s just conjecture, because we’re just enjoying the salad and shrimp here and talking about the view from the deck, the state politicians, and our kids and their foibles. Gosh darn them.
It’s taken on a life of it’s own now, almost an unconscious ‘I’ll scratch/fund your back, you scratch/fund mine.” It’s not fair, it’s not clean, it is what it is. It’s America, eff yeah.
There’s IRS laws about c4s and c3s, and then there’s human schmoozing and ingenuity.
We’re/non-profits are currently losing and the money and schmoozing is winning. It’s not about legality at this point.
Hello, interesting arguments. . .one point I just wanted to share with Aspen was that a benefit not mentioned to foundations is that they can carry on in perpetuity. That means that over time they generally pay out more than the initial corpus ever was. True, not all are philanthropic in their establishment, but the purpose can be altruistic and provide a legacy for those who desire to share their wealth forever (or as long as our society remains). You may be upset that many of the wealthy evade their responsibilities but do not spread your venom against goodwill. Let them get as many people to give – let them feel the peer pressure.
Really interesting points, Aspen! First, I agree with the mathematical corrections made above (it’s not 1M in taxes vs 1M in donations, since an individual’s taxes would only be ~1/3 of the donation). Also, since funds in a foundation aren’t a bank account for the family that donated them, they’re a different type of ‘wealth’ than more pure tax shelters are – at a legitimate foundation, the original donation and its tax-free returns can’t be used to buy a yacht. (Paying for parties as a fundraiser on someone else’s yacht, though …)
Even though I don’t agree about the scope of your initial argument, I definitely agree that a number of foundations aren’t serving the needs that they were designed to meet. Family foundations (and even just major individual donors) don’t address the problems of concentrating policy-making power in the hands of a few; Betsy’s points about the “I’ll scratch your (pet cause’s) back, you scratch mine” approach towards politics are all too true. This doesn’t even go into the often well-meaning, but often terribly inefficient expenditures that are involved in administering small family foundations and their awards.
I wouldn’t want federal and state governments to be the distribution point for all donations, since politically divisive issues are often in dire need of funds. However, more tax revenues for philanthropy (not defense) would be a very good thing, as is re-examining the current system and its flaws.
This is old but it should be said, private foundations *are* a bank account for the donors, in many cases. They can simply loan back the money to the donors tax free ( loans that will never be repaid), they can write off the loans as debt, *and* the foundation can actually get a credit for underwriting bad debt. In fact, I expect that such a scheme is the primary motivation for the wealthy using private family foundations, not philanthropy.
I really appreciate everyone’s thoughtful comments. I want to add a couple links to contribute to this discussion.
Pablo Eisenberg has a great column in Blue Avocado today about how to how foundations more accountable: http://www.blueavocado.org/content/three-easy-ways-foundations-support-democracy#comment-2754
I thought this was especially poignant: “In fact, philanthropy as a whole appears to have widened the gap between the have and have-not communities, and in parallel, widened the gap between the have and have-not nonprofit organizations.”
CompassPoint nonprofit services is offering a workshop to help nonprofit organizations better understand tax policy and its affect on our organizations and communities. https://www.compasspoint.org/onevent/details.php?id=4010
Next time, I’ll look more closely at the math, but I don’t want to lose the point my example was attempting to make, which is that private foundations were established so that the wealthy could maintain control of their wealth and keep them out of the government coffers. Their contributions to their own foundations are tax-deductible and the amount they have to contribute of their overall wealth becomes negligible in comparison to what they would contribute through taxes.
I really appreciate the comment about the fact that foundations may contribute more over time then through taxes, but there is a major democratic difference between one wealthy person and their family making decisions about these sums of money for public good then there is in democratically-elected representatives. Foundations have no accountability to the public and the public’s needs, while the government certainly does.
Philanthropy and foundations certainly have a critical role to play in our sector, our economy and our democracy, but let us not confuse their well-marketed goodwill and the real consequences that philanthropy has in our government revenues…and what this system means for our sector.
[…] does it mean to democratize philanthropy?” is simply “taxes.” The idea, voiced here and here, is that billionaires setting aside the majority of their wealth for philanthropic […]
Enlightening post — thanks! I find this pretty depressing: “only 17 people on the Forbes list of the 400 wealthiest people in America are also on the Chronicle’s list of the most generous American donors.”
[…] = ''; } Billionaire Summit: Ron Baron (CNBC) – May 13, 2008Gates & Buffett: We Need Your Tax-Pledge, Not a Giving-One .wooslider .slider-container,.slider-container .slide { height: 292px!important } .wooslider […]