When billionaires donate to private foundations or donor-advised funds, critics argue, the money is still under control of the donor.
Microsoft co-founder Bill Gates last month said he plans to give away “virtually all” of his wealth to his and his ex-wife’s philanthropic organization, the Bill and Melinda Gates Foundation. The pledge, he said, will knock him off the world’s wealthiest list.
The biggest givers in the nation donated more than $33.4 billion in 2021, according to the Chronicle of Philanthropy, and Forbes estimates that the country’s 25 largest donors have given $169 billion over the course of their lives. But when the ultra wealthy give, where do those billions go?
Most of the gifts from large donors last year went to private foundations, according to the Institute for Policy Studies’ analysis of the 50 largest donors in 2021. And the second-largest chunk went to donor-advised funds.
Private foundations are required to give away 5% of their endowment a year, while donor-advised funds have no mandated payout. One criticism of donor-advised funds is that the money can sit there for years before being used, though that’s not typically the case, said David Campbell, a professor of public administration at Binghamton University.
Gates pledged to give $20 billion to his foundation’s endowment last month, with the goal to allow the organization to be positioned to spend $9 billion per year by 2026.
“The funds will enable the foundation to deepen and accelerate existing programs and provide operational flexibility,” the foundation said in an email. “The pandemic has proven that progress is fragile, and our ability to commit additional resources will increase the reach and impact of our programs.”
But Chuck Collins, director of the Charity Reform Project at the Institute for Policy Studies, said donations to private foundations and donor-advised funds stay under the control of the donor and come with generous tax benefits.
“Bill Gates is saying he’s gonna give $20 billion, but his intention is to pay down quickly, not have it sit forever in his foundation,” Collins said. “But typically, people think of foundations as a sort of multi-generational affair… Essentially, wealthy people opt out of paying their taxes, reduce their taxes, and create an intermediary that they continue to control.”
Philanthropist and author MacKenzie Scott has distinguished herself from her peers by granting money directly to charities with no strings attached. Since pledging to give away most of her wealth in 2019, she has donated an estimated $12 billion to more than 1,200 nonprofit organizations.
Scott is among the billionaires who have signed on to the Giving Pledge, an initiative created by Gates, French Gates and Warren Buffett to encourage ultra-wealthy people to donate most of their wealth to charity. As of December, 231 philanthropists from 28 countries have signed the pledge.
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Tax benefits for the ultra wealthy
Critics of billionaires’ preferred method of giving argue that the tax system subsidizes ultra-wealthy donors compared to the rest of the population, Campbell said.
“Wealthy individuals of all types receive a considerable tax advantage for their giving, and it’s a tax advantage that most Americans don’t get,” Campbell said. “You only get that tax benefit if you itemize your taxes and you can deduct every contribution you make if you have giving that’s above the minimum, the standard deduction and so, essentially, billionaires that are taxed at the highest level in the in the tax code will be able to to deduct their contributions sort of at that level.”
But Phil Buchanan, president of the Center for Effective Philanthropy, said many conflate critiques of the tax system with critiques of philanthropy.
Buffett, a business magnate and philanthropist, for instance, once commented he pays a lower tax rate than his secretary. The issues with the tax system, however, are a governmental failure separate from philanthropy, Buchanan said.
“The question then becomes, ‘Okay, what do we want people who are ultra wealthy to do?’” Buchanan said. “They can spend yet more money on yachts and houses, they can just pass along their wealth to their, to their children and grandchildren, or they can try to do something, to make an impact on society and make this a more just and equitable world.”
Buchanan said establishing a foundation can be a prudent way for multibillionaires to give because of the large amounts of money they donate.
“I don’t think sort of everybody should be establishing a foundation,” said Buchanan, author of Giving Done Right: Effective Philanthropy and Making Every Dollar Count. “But if you’ve got that kind of wealth, it makes good sense to establish a foundation and to recognize it’s gonna take some time to give to give away, you know, your resources to grow it in a way that’s effective.”
Since 1994, the Bill and Melinda Gates Foundation and previous foundations of the Gates family have granted $65.6 billion, supporting various causes that include combating malaria and coronavirus, according to the organization’s website.
“We believe people in positions of great wealth and privilege have an obligation to return their resources to society in ways that have the greatest impact for reducing suffering and improving lives,” the foundation said. “We hope that others will step up in this moment too and accelerate their giving.”
The foundation said it will spend all its resources within 20 years after Gates’ and Melinda French Gates’ deaths.
Buchanan noted ultra-wealthy donors and foundations have played a big role in making change, from supporting vaccine development to funding organizations that are pillars in their communities.
But one of the biggest mistakes big donors and foundations make, he said, “is to think they know more than they do about how to solve some of the toughest problems.”
“The problems that philanthropy is often seeking to address are sort of by definition, the toughest problems,” Buchanan said. “But sometimes donors come in and they say, ‘Well, I made a zillion dollars with this app or this technological innovation, and I’m going to disrupt poverty just like I disrupted the taxi industry or something like that. It’s not so simple.”
Decline in American households giving
Buchanan worries that “overly general” critiques that don’t differentiate between specific mistakes from philanthropy as a whole could be a contributing factor in the decline of American households giving.
Over the last few decades, donations from U.S. households have steadily decreased, according to a report by the Institute for Policy Studies. From 2000 to 2018, the proportion of households giving to charity dropped from 66% to under 50%.
One consequence of the decrease in low and middle income givers is that the nonprofit sector becomes more dependent of large donors, Collins said.
“If this trend continues, essentially, philanthropy becomes a taxpayer subsidized form of private power and influence for the ultra wealthy,” Collins said.
For Campbell, the debate surrounding billionaire giving takes away from the conversation around the importance of giving regardless of income.
“What I really care about, in the end, is that, regardless of what billionaires do, I think the rest of us have to really value just giving,” Campbell said. “Giving matters. And so I don’t want cynicism about billionaires to get the rest of us to think that giving is not a good thing, because we can really make change if we are generous in our donations.”
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