When Mega-Donors Dominate Charitable Giving, Democracy Pays the Price

In advance of the 10th anniversary of the Giving Pledge, founded by Bill Gates and Warren Buffett, a new report from the Institute for Policy Studies (IPS) documents a troubling trend of small donor declines with a parallel rise in wealthy mega-donors within the nation's philanthropic sector.

The report, "Gilded Giving 2020: How Wealth Inequality Distorts Philanthropy and Imperils Democracy," finds that this top-heavy philanthropy poses considerable risks to the independence of the nonprofit sector, the integrity of the tax system, and to democracy itself. It also suggests that the 2017 tax cut and the COVID-19 pandemic will worsen this drift toward inequality in philanthropy. The report can be found here.

"Philanthropy should not become an extension of private wealth and power for the richest 0.1 percent," said Chuck Collins, Co-author of report and Director of the Program on Inequality and the Common Good at IPS. "Congress needs to update the rules governing philanthropy to prevent abuses to the tax code and protect our democracy and nonprofit sector."

"The Giving Pledgers set out in 2010 to give away half their wealth and instead their assets have doubled," said Collins, citing one of the report's findings. "By giving $1.7 billion directly to 116 charities, MacKenzie Scott (Bezos) has modeled what Giving Pledge billionaires should be doing with their wealth. They should give it directly to working nonprofit charities and not to their own perpetual family foundations or donor-advised funds."

While overall giving to charity has grown over the last several decades, the report says that trend masks the growing inequality in charitable giving. Findings include:

• Small donor giving has been steadily declining for two decades. Between 2000 and 2016 (most recent data), the percentage of households giving to charity has dropped from 66 percent to 53 percent. Wage stagnation, unemployment, declining homeownership all contribute to economic insecurity and declines in giving.
• The increase in charitable giving has been driven by donations by wealthy donors and mega gifts over $300 million.
• In the early 2000s, households earning $200,000 or more made up only 30 percent of all charitable deductions. By 2017, the most recent year available, this group accounted for 52 percent.
• The percent of total charitable deductions claimed by households making over $1 million dollars grew from 12 percent in 1995 to 33 percent in 2017. The richest 1 percent of wage earners claimed one-eight of all charitable deductions, Today, they claim one-third.

The Giving Pledge, founded by Bill Gates and Warren Buffett, is a case study of top-heavy philanthropy. On August 4, 2010, 40 billionaires pledged to give away at least half their wealth before their death. But the growth in billionaire wealth has largely outstripped their capacity to give in a timely way. The "Gilded Giving 2020" report includes a preview of data from a forthcoming larger analysis about the impact of the Giving Pledge. Among these findings:

• Of the 62 living U.S. Pledgers who were billionaires in 2010, their combined wealth has increased from $376 billion in 2010 to $734 billion as of July 18, 2020, an increase of 95 percent, in 2020 dollars.
• Of these 62, 11 have seen their wealth go down either because of aggressive charitable giving or market changes. But the remaining 51 have seen significant increases in their net worth. Nine of the billionaires have seen their wealth increase over 200 percent over the decade, adjusted for inflation. These include Mark Zuckerberg (1783 percent), John Doerr (416 percent), Marc Benioff (400 percent), Bernie and Billie Marcus (311 percent), Ken Langone (288 percent), Ray Dalio (280 percent) Arthur Blank (277 percent) Stephen Schwarzman (245 percent), Scott Cook and Signe Ostby (221 percent).
• The 100 living U.S. Pledgers who were billionaires on March 18, 2020 had a combined wealth of $758.3 billion at that time. This is the date of both the beginning of the pandemic lockdowns in the U.S. and the publication of Forbes annual global billionaire survey. By July 17, 2020, their assets had surged to $971.9 billion. This means that over the four worst months of the pandemic in the United States to date, their collective wealth increased by $213.6 billion--an increase of 28 percent.
• If the 100 living U.S. Pledgers gave away half of their wealth-an estimated $485.8 billion--today, the loss of tax revenue to the U.S. Treasury would be as high as $360 billion in reduced income, estate, and capital gains taxes. This is based on a conservative assessment of the taxpayer subsidy for households in the top 0.1 percent.

The preliminary analysis in the report reveals two troubling concerns related to the Giving Pledge:

• The wealth of the U.S. billionaire class is growing so fast, even during the current pandemic, that it has outstripped Giving Pledger's capacity to give it away.
• Most of these funds will end up in family foundations and donor-advised funds that could exist in perpetuity.

The "Gilded Giving 2020" report also documents how ever-greater proportions of charitable dollars are being diverted into wealth-warehousing vehicles such as private foundations and donor-advised funds, rather than going to active nonprofits serving immediate needs.

• As charitable giving increasingly becomes the province of the wealthy, we have seen a dramatic growth in giving to private foundations and donor-advised funds (DAFs), giving intermediaries that give donors long-term control over funds and have significant tax advantages.
• Between 2005 and 2019, the number of private foundations grew from 71,097 to 119,791, an increase in 68 percent. Over the same period, their assets grew 118 percent, from $551 billion to $1.2 trillion. The proportion of all charitable dollars going into foundations has tripled over the past 30 years.
• Donations to DAFs have increased even more rapidly, from $20 billion in 2014 to more than $37 billion in 2018--86 percent growth over just five years. DAFs have seen their share of the giving pie triple between 2010 and 2018, rising from 4.4 percent of all individual giving to 12.7 percent. The single biggest recipient of charitable funds is the Fidelity Charitable Gift Fund. And over the past three years, six of the top 10 charity recipients have been DAFs.

"The original proposition was in exchange for a tax reduction, the donor gives up dominion over their money and it flows to a charitable purpose," said Helen Flannery, report co-author. "Why should taxpayers subsidize perpetual private foundations that give away the mandated minimum each year and chew up millions in overhead? Why should donors get substantial tax reductions for giving to donor-advised funds (DAF) with no mandate that funds flow to working charities?"

Report authors point to the Conrad Hilton Foundation as an example of a perpetual foundation that is an inefficient use of taxpayer subsidies. The Hilton Foundation has $2.8 billion in assets and spent $51 million in overhead to give away $101 million in grants in 2018. Over $18 million went to staff compensation and fees to six family-member trustees, who received $35,000 a year to serve on the board.

The report points out that risks to the public include:

• the warehousing of wealth in the face of urgent needs
• an increasingly unaccountable and undemocratic philanthropic sector
• the rise of tax avoidance philanthropy
• self-dealing philanthropy
• the increasing use of philanthropy as an extension of power and privilege protection.

Risks to charitable independent sector organizations include:

• increased volatility and unpredictability in funding, making it more difficult to budget and forecast income into the future
• an increased need to shift toward major donor cultivation
• an increased bias toward funding heavily major-donor-directed boutique organizations and projects
• increased potential for mission distortion.

The report recommends a number of solutions.

Immediate Action: Congress must implement an Emergency Charity Stimulus, a three-year emergency mandate to require private foundations to double their payout from 5 percent to 10 percent; establish a temporary 10 percent payout requirement for donor-advised funds that have no mandate. This would move an estimated $200 billion off the sidelines and into front-line working charities without increasing taxes or adding to the deficit.

Charity Reform Agenda: Rules governing the giving sector have not been meaningfully modified since 1969, a period of relative equality in the U.S. The modernization reforms should aim to:

• Protect the independent sector from undue influence of wealthy donors.
• Protect democracy and civil society, of which philanthropy is one aspect, from the undue influence of private power.
• Prevent abuse of the tax system from charitable-giving vehicles primarily used for aggressive tax avoidance or to maintain indefinite control over donated dollars.

To further these larger goals, the rules governing philanthropy should be overhauled to maximize the public good in these ways:

• Preserve a vibrant, independent charitable sector outside of private, state, and corporate control.
• Modernize incentives to encourage broad-based giving across all segments of society, particularly the non-wealthy.
• Ensure the timely flow of funds out of charitable giving instruments to the public benefit, thereby discouraging the warehousing of wealth.
• Reform tax deductibility rules to align them with the public interest and to protect the integrity of our tax system.

Proposed reforms include:

• Protect society from concentrated wealth in private philanthropy by levying a wealth tax on closely held private foundation assets and donor-advised funds and establishing a lifetime cap on charitable deductions.
• Make private foundation payout requirements meaningful and increase the flow of funds to working charities. Eliminate the perpetual private foundation, as it is currently constituted.
• Require donor-advised funds to have a payout, reduce abuses from gifts of non-cash assets, and increase transparency and reporting.
• Implement a universal giving credit to broaden giving by the non-wealthy.
• Prevent abuses and encourage transparency with reforms requiring board independence, banning compensation of family members, and donor disclosures.
• Create a new federal oversight agency for foundations and charities, funded by foundation excise taxes.

The final report Gilded Giving 2020 can be found here.