How Philanthropy (Strangely Enough) Can Widen the Wealth Divide

With the growing concern about the wealth gap, most of us can at least assume that charitable giving helps in some way to redistribute the wealth from the rich to the poor. After all, a central tenet of charitable giving is that those with financial resources donate to organizations that help those with fewer assets.

Unfortunately, we shouldn’t assume that that’s the case. I just read Immortality and the Law: The Rising Power of the American Dead  by Boston College Law School professor Ray D. Madoff, and the book pretty much blew me away. Don’t let the academic credentials of the author and the fact that it’s published by a university press scare you off: the book is wonderfully accessible, it’s not very long, and it’s worth every second you devote to it.

Part of what I read was news to me: how evolving copyright laws, for example, increasingly stifle artistic creativity by requiring permission from and/or payment to corporations that hold the rights to the images, art, and even personalities of their dead creators.

Part of what I read confirmed what I’d been observing from afar: that more and more family wealth can be sheltered indefinitely from taxation. The most troubling of the new methods is the Dynasty Trust, which allows enormous wealth to be passed on to generations not yet born with virtually no taxation. This is a new phenomenon. Multi-generational wealth transfers used to be prohibited by the Rule Against Perpetuities, which served as a check on permanently sheltered family wealth. The Rule Against Perpetuities is now in retreat, and Dynasty Trusts are the new reality. A wealthy couple can pretty well take care of a great-great-great-grandchild whose parents are yet to be born. If that does not help create an economic aristocracy, I don’t know what does.

And much of what Professor Madoff discusses confirms and amplifies my concerns about the inefficiencies and distortions created by charitable giving – particularly by the establishment of perpetual charitable foundations.

There are lots of ways the philanthropic rules help the rich financially. First, Madoff points out that charitable deductions are only available to the minority of the population that has enough income and wealth to itemize its deductions on federal income tax returns – or, in the case of estate taxes, only the one out of 200 estates (worth more than $3.5 million) that are now taxed at death. The charitable tax deduction is essentially a subsidy by the federal government, and for the most part it’s available only to the well-off, particularly to the very rich.

Second, Madoff notes how so much of charitable giving goes to elite institutions. For example, she quotes legal scholar Miranda Perry, who calculates that in a recently studied year 23% of all educational bequests went to twenty-five private colleges and universities and ten socially prestigious private schools, out of more than 27,000 such institutions. That is, only 1/10 of 1% of the schools in the country receive nearly a quarter of the charitable bequests to education. So clearly, the big money is going to Phillips Andover and Princeton, not to the local community college.

Third, Professor Madoff takes aim at the effectiveness of perpetual charitable foundations. She asserts that when you take into account the ever-shrinking present value of future distributions, the foundation will never distribute as much to charity in real dollars over the course of its existence as it would if the money were simply distributed at the time of the foundation’s creation. Meanwhile there are the costs involved in staffing the foundation and paying for the management of its assets and the ongoing legal and accounting services.

Taking these factors together, you see how philanthropy often does very little, if anything, to narrow the wealth divide in the United States. The very wealthy get more of a tax break from charitable deductions than middle- and lower-income families. They tend to make major donations to the “haves” of the nonprofit world, rather than to small, community-based nonprofits that serve the needy. (That is, they contribute to the schools their children attend and the opera houses their families patronize, rather than to the soup kitchen or the Boys and Girls Club.) And while the instrument they often choose to use – the charitable foundation –  provides the donors with significant tax benefits, its impact on society is less clear. Foundations are inefficient at best, and their benefits to the community are neither robust nor immediate.

We have to remind ourselves that we as a society subsidize these actions through hefty tax deductions. Since 1980 or so it has become commonplace to denigrate the efficiency and effectiveness of government spending. But that doesn’t mean that private charitable gifts are automatically more efficient, effective, or directed to the areas of the greatest need. The fact is that the charitable deduction takes away money from the government and lessens its ability to help the needy in a way that meets with the approval of the body politic. There has been a transfer of authority from the government to wealthy private individuals. The wealthy may do wise things with the money – but not necessarily.

Don’t get me wrong. I’m a big believer in the charitable deduction. It’s a cornerstone of our charitable sector. But has the pendulum swung too far?

Do donors have too much say, in their lifetimes and after their deaths? Can’t we do something to curtail charitable giving’s inefficiencies? Can we create a “Give Now” movement that encourages charitable contributions to operating nonprofits that are meeting the needs we face today?

Perpetual charitable foundations glorify the donors, enrich the investment managers, but do far too little to solve the problems of society in 2012. At the very least, can we help donors think about the problems surrounding perpetual foundations before they routinely create more of these entities?

Copyright Alan Cantor 2012. All rights reserved.

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1 Comment. Leave new

  • vicky stein
    May 1, 2012 9:43 pm

    Al – even at the end of a long day, I manage to read, learn from, and enjoy your blog. What a wonderful gift. Many thanks, Vicky Stein

    Reply

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