Gravity Exists

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How Inequality Undermines Philanthropy

July 03, 2022


Chuck Collins is the Director of the Program on Inequality and the Common Good at the Institute for Policy Studies, where he co-edits Inequality.org. He is also the author of Born on Third Base: A One Percenter Makes the Case for Tackling Inequality, Bringing Wealth Home, and Committing to the Common Good, Wealth Hoarders: How Billionaires Spend Millions to Hide Trillions, and other books.

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Gravity Exists Hello, everyone. Thanks for joining us today. We’re going to be speaking with Chuck Collins. Chuck is the Director of the Program on Inequality and the Common Good at the Institute for Policy Studies where he also co-edits Inequality.org. Chuck is the author of Born on Third Base and The Wealth Hoarders, as well as several other books. We’re going to be talking with Chuck about the distortive impact that the increasing concentration of wealth in the US is having on the independence of the nonprofit sector and, by extension, on the integrity of the tax system and potentially the integrity of our democratic institutions. Chuck, thanks so much for taking the time to speak with us.

Chuck Collins Thank you, Andrew, for having me, I look forward to our conversation.

GE Okay, well, part of the reason that we’re having this conversation is that you are preparing to release your annual Gilded Giving report in the coming weeks. In the past reports that you’ve published, you’ve noticed that the proportion of US households that give to charity has been declining significantly in recent decades. And I guess my first question would be, did this pattern continue last year? And was there any noticeable impact in that trend as a result of the pandemic?

CC Well I think we’re still getting the picture for 2021. Giving USA just released their report, showing that people dug deep in 2020 and 2021, but that overall, giving as a percentage of income has been sort of going down. And the thing that we look at in Gilded Giving is what we call top-heavy philanthropy, which is the decline of small donors — low- and middle-income donors — which has steadily been going down for almost 30 years. So at this point, I think it was in 2000, 66% of the population gave to charity. Now we’ve gone under 50%. But that’s offset by… almost all the growth in giving has come from giving by the ultra-wealthy. So, from the perspective the independent sector, the nonprofit charity sector, we’re walking on fewer legs. More and more of the giving dollars are coming from the ultra-wealthy and fewer and fewer from small and medium-sized donors. And because of changes in the 2017 tax law, that’s become more so. And at this point only 9% of households take the charitable deduction because of the raising of the personal exemption. So, more and more philanthropy is in fewer hands.

GE Right. I know that in your report last year, you noted between ’95 and 2015, the top 11% of income earners went from claiming an eighth to a third of all charitable deductions. And I’m interested in… you mentioned the 2017 tax overhaul. How big an impact did that have as far as changing the trajectory of that trend?

CC I think it’s having a pretty big impact. I mean, if you think about it, there’s just fewer households that itemize, and fewer households then will take that deduction. So that’s the biggest consequence. And I would just play that out to say I think it has implications for the nonprofit charitable sector view. You can say it poses some perils. And if you think about it from if you’re a fundraiser… I remember 30 years ago somebody saying to me…do you know, the 80-20 rule? Eighty percent of your donations come from 20% of your donors, which means you should properly pay attention to your major donors, but, of course, you still are going to have a small-donor program. You’re still going to reach out to get broad support from a wide number of donors. But now think about it. What if we’re at the 99 to one or the 99.5? Meaning almost 99% of your donations come from 1% of your donors. Then you really have to ask yourself, is it really worth having a broad funding base? A broad donor base? So, we think that it affects programs. It affects mission. It affects what gets funded and what the priorities are. So that’s why we should be concerned about top-heavy philanthropy.

GE So the, the more concentrated the giving, the larger voice that a handful of individuals do in guiding whatever that nonprofit’s mission is.

CC Exactly. So the risk of mission drift, you know, if you’re a college president, and you basically have four or five mega-donors who make up a substantial amount of your budget or requests, you’re going to bend to meet their interests, whatever they are. You want to be able to say “Yes” to those donors, right? Whatever they’re asking.

GE Right. And as this concentration has become more pronounced, has there been any shift in the makeup of what philanthropies were receiving funding? In other words, has this concentration altered the nature of how money flows have gone into nonprofits? Has it been directed towards fewer groups or fewer segments in the space?

CC Yeah, I mean, giving by the wealthy is different than giving overall. So, there’s less money that goes to human services and local social services and more money that goes to the arts. One of the biggest differences though is how much money goes to intermediaries. And you and I will talk more about this, but, you know the wealthy… well, I should say most people when they give to charity will give directly to the recipient of charity. They’ll give to the food bank. They’ll give to the Boys and Girls Club. They’ll give to the organization that’s doing the work. A huge percent. And it’s almost a third now of the money flowing to charity goes now to intermediaries. Goes to private foundations and donor-advised funds. And, you know, some of that money that revolves out the door. You know, maybe it goes into, I put $10,000 into a donor-advised fund and next year, $10,000 goes out. That’s kind of the ideal.

But what we are seeing is that that money is not just a stopover and changing planes, sometimes it’s going into the intermediary and staying there. So, what we would call a warehousing. That there’s more and more — an estimated $140 billion and if you add private foundations, say, $1.2 trillion of wealth that’s warehoused in intermediaries. So that’s a concern because even during the pandemic, and I think people really stepped up during the pandemic, but even in the year after the pandemic we went back to that pattern. More and more money going to intermediaries, less flowing outward to recipient charity groups.

GE Right. And, and at what point as we see this imbalance between the realization of the tax benefit and the deployment of the money for charitable works, at what point are we going to see political pushback on that?

CC One interesting thing is we’re going to release the results of a poll next week that looks at public attitudes about charitable giving. And what’s fascinating is the broader public. And for the most part, the broader public has no idea what you and I are talking about. This is kind of a rarefied topic, you know. What’s a donor-advised fund? How does foundations work? But when people learn about sort of the basic tenets, they’re kind of amazed that you can set up a private foundation or DAF, you can get a tax break the immediate year that you put funds into it. But there’s very little requirement to move that money in a timely way.

So, in the private foundation space, you do have an obligation. You have to pay out 5% every year toward qualified distributions, but you can count compensation of financial staff. You can count overhead. You can even count donations to DAFs. And then the challenge with DAFs is there is no payout requirements. So, if I wanted to really slow the flow of money down, I might count my donations to the DAFs that I control toward my 5% payout. So again, the money isn’t really moving. That’s, that’s the concern.

GE Right. And where does the financial advisor, where does the wealth management community come in as far as playing a part in this bottleneck? This inefficiency?

CC I think the impact of the financial advisors sector is indirect in kind of the culture around philanthropy. I think that the culture is… let’s say a donor-advised fund. If I were to open a donor-advised fund. If you look at the advertising. They’re encouraging you to almost think of it like a mini foundation, a legacy institution. Think about what your children and grandchildren can do with your donor-advised fund. So, there’s that bias toward multi-generational accumulation and wealth preservation. And I would say that that’s a perfectly logical framework to bring to family wealth management, but I don’t think it should be applied to principles of charity. The whole point of charity is to move the money in a timely way to meet urgent social problems. So, that’s where I think the conversation it would be good to say is. Look, let’s say you represent a family office and you both represent and help a family manage their assets for long-term accumulation and preservation.

But their charity should have a different sort of lodestar, if you will. It should be less about perpetuity and more about giving with meaning and giving in a timely way and responding to urgent social problems. So even during an extraordinary pandemic, we proposed a temporary increase in payout. Foundations should have a 10% payout for three years. And donor-advised funds should have a temporary payout for three years. We proposed that as part of this pandemic. You would think the sky was falling because it crossed the sort of perpetuity assumption that these charitable institutions should exist in perpetuity.

And that’s where there’s a big disalignment with the public. So, our polling shows 82% of the public thinks that we, as taxpayers, shouldn’t subsidize perpetual family foundations. Move the money in two years or in five years. But the whole idea that you’re going to create some kind of multi-generational private institution where the decision-making is going to remain very closed within a small family unit. That doesn’t sit well with the larger public.

GE And in terms of public opinion, is there a partisan split in how the issue is viewed?

CC You know, support for charity is pretty broad across the political spectrum, and our polling shows support for reforming the laws governing charity. What you and I are talking about right now is also broadly supported. We looked at it through the political prism. Conservative Republicans to liberal Democrats all believe we should turn the dials and improve the charity giving system to increase the flow and discourage warehousing and have greater transparency. And I think what we forget in the larger discussion is charitable giving is a carve-out of the tax system. I mean, it really is. It exists in the US as part of this 1969 law, where you give money to my charity, you get a tax reduction. And that’s the social contract.

And in this system, the wealthier you are, the bigger the tax reduction you get. So, for every dollar a billionaire gives to their own private foundation, they’re reducing their taxes 74 cents. The rest of us basically are chipping in to cover the reduction, the 74-cent subsidy going to the donor. And that’s because you’re not only reducing your income tax, you’re reducing your estate, gift, and capital gains tax in the mix. So, the more affluent, the wealthier you are, the bigger that tax subsidy. And I think when people start to understand that that’s what it is. We have a system that subsidizes private power, private decision-making. That maybe there is a public interest to protect A: the integrity of the tax system and B: to ensure that those funds reach the qualified charities. That’s the deal, you know. You’re getting the tax break. You need to move the money to the food bank or to the qualified charity at the end of the pipeline and not waylay it so much.

GE Right. Well, Chuck, thank you so much for taking the time to speak with us. And just a reminder to everyone who’s listening, that you can take a look at the work that chuck and his team are doing at Inequality.org. Chuck, thanks so much for talking to me today.

CC Thanks, Andrew.