‘Ooooh! You are as wealthy as you look!” says the auctioneer, who is dressed in a full Scottish kilt. He is stunned by the bids that have just been made. The first auction item at the Weston, Massachusetts, school charity event is a two-night stay at a Vermont country inn. The auctioneer opens the bidding at $200. A few minutes later, the winning bid closes at $5,000 just as I’m about to sample my plate full of “Mediterranean treats.” My mouth drops open.
I flash back to fundraisers I’ve helped organize at my daughter’s public elementary school in Boston. Our entire annual fundraiser—with silent auction, raffles, and games—raised about $4,000, less money than the first auction item here at the event of the Weston Educational Enrichment Fund Committee.
I’m an undercover observer at this fancy charity event where, despite the early-April chill in the air, some of the wealthiest citizens of Weston wear sleeveless dresses, reenacting the staggering inequalities of the Gilded Age.
Mary and I purchased our tickets to this “Step into the Roaring Twenties” fundraising gala for the minimum entrance fee, $185 each. Other participants are at the $2,500 Diamond supporters and $1,000 Sapphire donors.
Weston is the most affluent community in Massachusetts, with a median income of $177,000 and median home value of $1.34 million. This gala will raise money for the Weston public school system, already one of the best in the state.
In Roaring Twenties spirit many of the men have dressed as characters from The Great Gatsby—with summer suits and straw hats—and the women have dressed with feather boa scarves and flapper headbands and hats. As we entered, a woman in classic cigarette-girl garb—with a box fastened to her waist—offered us the opportunity to buy a raffle ticket, the prize a bejeweled necklace worth $3,000.
“How much?” I asked.
“Twenty-five dollars and the lady gets to wear one of these.” She pointed to the large diamond rings—plastic, with flashing lights embedded in them—in her box. Mary declined. But around the room dozens of women wear large blinking bling.
Most parents, moved to do something for their kids, don’t connect the dots to understand how they are essentially diverting tax dollars back to their own families.
The third auction item concludes: A week in Umbria, Italy (airfare not included), goes for $8,000. I get up and wander down the rows of tables where silent-auction offerings are displayed. Two of them catch my eye. First is “Graduation without the Stress,” four reserved front-row seats at the high school’s June graduation. Second, a “Ride to School with Weston’s Finest.” The blurb entices, “Your child and a friend can arrive at school in a police cruiser driven by one of Weston’s police officers.”
Two women dressed as 1920s flappers with large feathery hats debate whether to bid on the front-row seats. “You won’t have to wait for hours to see the graduation,” one advises the other.
I wonder if the planners of this gala in the state’s richest town paused to consider whether it was poor taste to celebrate the last period of extreme and ostentatious wealth inequality in the United States. The Roaring Twenties were not so great in Jim Crow black America. But apparently 1920s style is back in vogue, a sort of nostalgia for Gilded Age chic. Or maybe it was fueled by the over-the-top cinematic remake of The Great Gatsby.
My intention is not to parody these partygoers. Weston is very much like the affluent Michigan town I grew up in. And the participants are supporting a public school system. The super-rich of Weston send their children to private schools, bypassing the public system entirely.
But I am here to experience firsthand a troubling trend—the use of charitable funds to compound the existing advantages of the wealthy. Tax-deductible charitable giving, as designed by our tax system, should not worsen existing inequalities; rather it should reduce them.
The co-chair of the evening’s events, Allyson Jaffe, thanks all those attending and reminds them, “Every dollar we raise tonight directly benefits your kids.”
The pattern is this: Affluent school districts are setting up charitable educational foundations to receive tax-deductible donations. The Weston Fund even allows donors to designate which specific school in the town their donation will go to.
It’s probably a biological impulse to help one’s children. As Rob Reich, professor of political science at Stanford, writes, “Who could fault wealthy parents and townspeople for wanting to do best by their children and local institutions? That their efforts may widen the gap between their own children and children growing up in more disadvantaged districts is an unfortunate, yet unintended, side effect of their generosity.”
At the state level, Massachusetts has worked to reduce the alarming disparities of education funding rooted in an antiquated system of paying for education entirely through municipal property taxes. That rusty old funding mechanism has meant that areas with high property values have traditionally had higher educational budgets than those with low property values, which struggle to provide adequate educational opportunities. But now these charitable education foundations are popping up all around. And they effectively bypass the state’s attempt to foster educational parity. By reducing their state and federal tax bills with donations to their children’s schools, these partygoers are worsening the gap.
I’m aware that most parents, moved to do something for their kids, don’t connect the dots to understand how they are essentially diverting tax dollars back to their own families. Nor do they dress up like a flapper thinking, “Tonight I’ll celebrate inequality!” The danger lies in the fact that all these undercurrents and dollar diversions go unnoticed—even by the donors and celebrants themselves.
In Hillsborough, California, one of the wealthiest communities in the United States, parents are asked to make a $2,300 annual charitable contribution to the Hillsborough Schools Foundation. In 2012, contributions of $3.45 million were deployed to reduce class size, add librarians and art and music teachers, and install smart technology in every classroom.
Stanford’s Reich, who studies school foundations, writes, “Private giving to public schools widens the gap between rich and poor. It exacerbates inequalities in financing. It is philanthropy in the service of conferring advantage on the already well-off.”
Tax policy effectively subsidizes wealthy parents who donate to their own children’s schools. Donors to school foundations decrease their taxes, reducing what the state and federal government would have collected—and distributed to all schools. Most state charitable donation laws track the federal rules, with both deductions diminishing funds for education, infrastructure, and other public goods. As Reich observes, “Tax policy makes federal and state governments complicit in the deepening of existing inequalities that they are ostensibly responsible for diminishing in the first place.”
My money, our money
On a frigid winter day, I rent a Zipcar and take a ride out to the Boston College Law School to talk to Ray Madoff, a law professor who has written a lot about charitable giving and tax policy. I’m curious what she thinks. Are these trends in philanthropy any of our business? Does it really matter what wealthy people are doing with their private money?
In Madoff’s view, tax breaks for charitable giving are effectively government subsidies for individuals and corporations that make donations and create foundations. For this reason, society has a legitimate responsibility to supervise these donations and ensure they serve charitable purposes. “The actual tax subsidy is much larger,” she explains, with evident passion. “If you include lost estate tax revenue, it is closer to 50 percent.” In other words, for every dollar donated by the wealthiest households, taxpayers contribute half in lost revenue.
In her research, and in books like Immortality and the Law, Madoff explores how the dead dictate to the living through trusts and charitable entities. The charitable deduction and the perpetual charitable trust are two mechanisms that require, in Madoff’s words, “American taxpayers to subsidize the whims of the rich and fulfill their fantasies of immortality.”
The wealthier you are, the higher your matching subsidy. And when very wealthy people create foundations, they also reduce their taxable estates over time. Affluent households are also more likely to itemize and deduct charitable contributions. Only about half of taxpayers earning between $50,000 and $75,000 claim itemized deductions, but nearly 100 percent of taxpayers earning above $200,000 itemize. Middle- and working-class people give a higher percentage of their income to charities, including religious congregations, but are less likely to get a tax benefit.
There are two reasons why the philanthropic choices of the super-wealthy are everyone’s business. The first reason is a generic concern about concentrated power—when a small number of people have disproportionate power to shape our culture, our democracy, and civic life. Over the last several decades, many government services have been privatized and shifted to the charitable sector, so there is a greater public interest in how these funds are allocated and used.
Second, most philanthropic activity, especially among the wealthy, is subsidized by everyone else. In 2014, a congressional panel estimated that individual charitable deductions would cost the Department of the Treasury $43.6 billion in forgone revenue. This doesn’t include lost state revenue and the cost over time of reduced estate taxes from the creation of foundations.
Some people will complain this isn’t the government’s money. I understand—it is private money. And in a free society, people should be able to donate their money wherever they like. But if they want a government tax subsidy, then there is a public interest. If anyone feels that this public interest is government encroachment, the answer is simple: Don’t itemize your deductions, don’t take the resulting tax break, and spend the resulting post-tax dollars however you’d like.
If I donate $100,000 to a conservation land trust so the nonprofit can purchase the open space next to my house—and my income is over $450,000—then my donation will reduce my taxes by almost $40,000. In other words, the government kicks in a matching subsidy of $2 for every $3 I contribute. All to protect my private view.
Or what if my daughter attended an elite private high school and I gave $500,000 to create a state-of-the-art computer lab there? U.S. taxpayers would effectively be chipping in $200,000 of that donation. Is this the most appropriate use of taxpayer funds? And if I’m making donations instead of paying taxes, doesn’t that shift the tax obligations onto others? Someone else is picking up the bill for military defense, highway construction, national park protection, and other services.
I think of a conversation I had with a billionaire. “I’d rather give my money to charity than pay Uncle Sam, who will just waste the money,” he explained to me. “I’ll make better decisions and be more efficient.”
It’s a common view among the wealthy. But should we subsidize the pet charities of the very wealthy in the face of tremendous unmet needs? Probably not. Nor should we provide matching funds to charities that worsen the economic divide.
What charity can and can’t do
Since most people are dubious about taxation and government solutions, there are high hopes that philanthropy and the independent nonprofit sector will solve our problems. But can charity address our most pressing problems of extreme inequality and ecological degradation?
I appreciate the “research and development” function of good philanthropy. It allows us to explore new territory, incubate ideas, and pilot test programs that might eventually be brought to scale. But there is a dangerous delusion that somehow philanthropy is going to be a replacement for effective government at the local, state, regional, national, and global level.
As I walk from Boston’s Longwood Medical area toward the Mission Hill neighborhood, the reason becomes startlingly clear. Here one can see the dizzying gulf between charity-funded projects and public-infrastructure investment in my city. Cranes reach toward the sky, fueled by charitable gifts to hospitals, universities, and museums. The Museum of Fine Arts is adding a new wing, and four major hospitals are each having a construction renaissance.
I wander through the campus of the Harvard School of Public Health, where sleek glass buildings form a quiet buffer from the bustle of city traffic. An underground sprinkler soaks a lush green lawn. Wooden benches adorn the walkways; researchers and medical students in scrubs sit in conversation.
There are no charitable foundations funding infrastructure projects. No foundation has the resources to rebuild the water system in Flint, Michigan. Only government, with its taxing authority, can make such deep and long-term investments.
I arrive at the corner of Huntington Avenue and Worthington Street, the dividing line between institutional properties and a low-income neighborhood. A Green Line train, part of Boston’s antiquated subway system (the T), screeches to a stop, metal on metal. The light turns green and the rusting train lurches on, clanging its bell and looking more like a nineteenth-century streetcar than a modern transit system. During the many winter storms of 2015, the T effectively shut down, the result of decades of infrastructure disinvestment.
As I cross into the Mission Hill neighborhood, I’m in a different world. What grass there is has become parched and patchy. Block after treeless block is filled with low-rise cinderblock public housing. Farther up the hill are several potholed streets with yardless brick tenements and sagging wooden triple-deckers, badly in need of repair.
Down Route 95 from Boston, in the city of New Haven, Connecticut, the disparity between charity-funded building projects and disinvested infrastructure is equally striking. The New York Times’s Louis Uchitelle chronicled how billions in charitable donations to Yale University are fueling a building boom with over seventy construction projects. Meanwhile, the city’s public infrastructure is in deep distress. Near the campus, aging bridges are closed to traffic.
Uchitelle’s exposé, “Private Cash Sets Agenda for Urban Infrastructure,” described the way that “private spending, supported handsomely by a growing number of very wealthy families, is gaining ground on traditional public investment.”
New Haven used to be the largest per-capita recipient of federal urban redevelopment funds, but public investment has been surpassed by private investment. This is mirrored in national trends. Government spending on transportation infrastructure has declined to 1.6 percent of the gross domestic product, from 3 percent in 1962. Philanthropic giving jumped from 1.5 percent of gross domestic product in 1995 to 2.5 percent today. Most of this money is coming from wealthy individuals.
From a policy point of view, we cannot substitute charitable dollars for tax dollars. The priorities are different and they pay for different things. Uchitelle writes:
Philanthropic spending adds mainly to the nation’s stock of hospitals, libraries, museums, parks, university buildings, theaters and concert halls. Public infrastructure—highways, bridges, rail systems, water works, public schools, port facilities, sewers, airports, energy grids, tunnels, dams and levees—depends mostly on tax dollars.
This shift from public money to private wealth is reshaping our cities. The American Society of Civil Engineers gave the United States a “D+” grade for the state of our national infrastructure, arguing we need to invest $3.6 trillion by 2020 just to maintain the infrastructure we have. There are no charitable foundations funding infrastructure projects. No foundation has the resources to rebuild the water system in Flint, Michigan. Only government, with its taxing authority, can make such deep and long-term investments.
To address the growing inequality in our midst, we have to address deficits in both our public infrastructure and our civic infrastructure, also known as opportunity. The reason the American Dream is more attainable in Canada than the United States is because of public investments in early childhood education, early interventions in health care, and a greater commitment to debt-free education, from K–12 through college. This level of investment will not happen through charity—and certainly not charity with its current priorities.
Government spending to alleviate poverty—through Medicare, the food stamp program, emergency shelter, and so on—is at too large a scale for charity. The Supplemental Nutrition Assistance Program, popularly known as “food stamps,” provided food for 45 million people in 2015 at an estimated cost of over $75 billion. The total amount donated by foundations to everything in that same year was just under $49 billion.
Within the current system of virtually unregulated tax deductions, donations will change little and, despite the fact that many are given with good intentions, they will serve to sustain wealth status.
Periodically, someone in Congress wakes up to these philanthropic abuses and tries to reform the system. In 2000, Congress introduced foundation reform legislation that included a provision to exclude administrative and overhead costs from the disbursements that foundations are legally required to make each year. That mandatory annual payout is just 5 percent of the foundation’s assets. This would have removed one incentive for overhead abuse. More important, this wave of the wand would have put an estimated $20 billion more out onto the street in grants to nonprofit organizations. The Council on Foundations and other “charity industry” lobbyists vigorously fought the proposal and defeated it.
In 2013, the Senate Finance Committee released a comprehensive white paper [PDF] on suggested reforms. Other organizations, such as the National Committee for Responsive Philanthropy, have pressed for change, too.
Here is a sampling of my favorite ways to reform the philanthropic sector to reduce some of these abuses and steer more resources toward reducing inequality. Those of us in the 1 percent—and our charitable entities—should take the lead in pressing for these reforms. (I describe them in more detail in my book, Born on Third Base.)
Link excise tax to payout distribution. “The 5 percent rule was enacted to provide a floor for charitable giving,” writes Ray Madoff, “but most private foundations use it as a ceiling as well.” When foundations simply meet this requirement, they pay the standard 2 percent federal excise tax on any income their investments earn in a year. When they give more than their historical average, they pay just 1 percent. Madoff proposes restructuring the excise tax to encourage larger annual disbursements—reducing it to 1 percent for foundations that pay out between 6 and 8 percent, and outright eliminating it for those that pay out more than 8 percent in grants.
Increase distribution payout percentage. Foundation assets have grown substantially over the last thirty years, paralleling the wealth expansion at the top. But foundations have resisted policy proposals aimed at raising the minimum payout rate. Foundations have complained that this would lead to an erosion of capital and the ability of foundations to exist in perpetuity. But a number of studies have shown foundation assets would not decline, even with a payout of 7 or 8 percent.
Exempt foundation overhead. The foundation payout requirement should exempt foundation overhead, reducing the incentive for lavish internal spending on salaries and other administrative costs.
Eliminate compensation for trustees and board members. There is no research indicating that public performance of foundations improves with paid trustees. Charities can hire outside experts, but hired experts shouldn’t vote on organizational matters.
Require independent boards. If these are truly public interest organizations, they should not have boards composed entirely of family members and paid staff. Many states require 51 percent of corporation boards to be independent.
Two-tier tax benefits. Congress should establish two types of charitable entities and give them different tax benefits. Donations to qualified charities that alleviate poverty, reduce inequality, and address urgent social problems such as environmental degradation should receive the full deductibility under existing charitable tax laws. But donations to other types of nonprofits and associations should have their tax benefits reduced.
Sunset foundations and donor-advised funds. Foundations and charitable trusts should not live forever. Donor-advised funds should require distribution within five years. Foundation charters should have limited life spans, let’s say ten to twenty years. This means big endowments, like the Ford Foundation and the MacArthur Foundation, should be spent down, directing them to focus on solving problems in the immediate term rather than focusing on long-term self-preservation.
Those of us with wealth to donate should support such reforms and lead by example. If you are a trustee of a family foundation, press for more rapid distribution and higher payouts. Suggest that the foundation spend down its assets over a decade, as the Atlantic Philanthropies recently did. Chuck Feeney, who created it from wealth made from the Duty Free Shop franchise, never wanted to create a permanent philanthropic infrastructure. He also didn’t want to burden his children.
As philanthropic advisors Amy Markham and Susan Wolf Ditkoff write, “When you’ve fixed a date to turn out the lights, every grant is an attempt to make a lasting difference now—before the money runs out.”
Pay your taxes. To those in the wealthiest 1 percent: Pay your taxes. Charity is not a substitute for taxes. Charity will not address fundamental needs for public infrastructure and economic opportunity.
We can all quibble about government waste or things we wish our tax dollars did or didn’t do. That’s an invitation for civic engagement, not a justification for tax avoidance. When we wealthy, who have historically paid substantial taxes, opt out of taxes by using massive charitable deductions, we disinvest from the public investments that created social mobility for past generations and the infrastructure we all depend on.
No one is discouraging anyone’s generous impulse to share. But if you must give to a suburban land conservancy or art museum or private school, don’t deduct it. Don’t ask the rest of us to pay for your priorities when we have other, more urgent priorities in our midst.
Adapted with permission from Born on Third Base: A One-Percenter Makes the Case for Tackling Inequality, Bringing Wealth Home, and Committing to the Common Good, © 2016 by Chuck Collins (Chelsea Green).
Due to a typesetting error, Ray Madoff’s name was misspelled in the print edition of this article.