Why Philanthropy Should be Pro-Tax

My early career was noteworthy more for its prestige than its salary. But because of its visibility, I was quite frequently included in settings where the opposite was true.?It was in one of those settings when I first heard an argument about taxes among very wealthy people.?

In those days, there were not a lot of mainstream anti-taxers.?Shocking though it may seem today, most people assumed that paying taxes was what one does.?Not surprisingly, of course, some were bothered by how much tax they paid and looked for ways of lowering what they paid – remember that the highest tax rate in those days was far higher than it is today.??One of the wealthiest of the group was quite articulate on the pro-tax side.?I remember him saying that paying taxes demonstrated how successful he has been.?Whatever taxes he paid, he said, he still had more than enough money than he could ever need, and more than enough to give a lot away.?He didn’t see any conflict between paying taxes and being philanthropic.

Another anecdote, about 35 years later. By that time, ?I ?was professionally fully ensconced in the philanthropy world.?I used to have breakfast every month at a series sponsored by a prominent think tank. Even though my own financial situation was more than fine, the ?group of people with whom I sat at those breakfasts were most assuredly deeper pocketed than I.??When Occupy Wall Street took place, there were rigorous discussions among the attendees.?Interestingly all but one of these very wealthy people explicitly said that the Occupy folks were right.?One said “I could easily double my taxes and wouldn’t even notice” to which everyone else but one agreed.?The one outlier said [and I remember these words verbatim]:?“why should I care? What is wrong with acting in my own self-interest?”??He was roundly rebutted by others at the table although I doubt he changed his mind.

Final anecdote:??Over the last couple of decades, I have been a somewhat frequent speaker at philanthropy, impact, and wealth management conferences. Especially at the wealth management and family office conferences, it is quite common that speakers address the tax tradeoffs of certain philanthropic vehicles.?Some few of them go further, ?advocating?philanthropic investments for the sole purpose of reducing or eliminating taxes.

Let me be clear on this: the first group sees tax considerations as one of many in making choices with philanthropic or impact investments.?The latter see that reducing or eliminating taxes is THE goal, with philanthropic benefit being an incidental good.?Indeed there is one wealth advisor whom I have heard speak on a few occasions who unabashedly promises that his method can eliminate taxes altogether.?He must touch a responsive chord since he is active on the circuit.

I want to say unequivocally that I find that latter position morally and ethically repugnant.?Why should any citizen take pride in avoiding their societal responsibility??And it demeans philanthropy’s legitimacy if it is used solely to avoid that responsibility.?Fortunately, though, I am happy to say that every study of which I am aware shows that taxes are rarely the primary reason people choose to be charitable or philanthropic. [They may influence how one gives, but rarely if one gives.]

Back to the title of this article:?why should the philanthropy world be pro-tax??Let me count some of the ways:

1.?????We exist as beneficiaries of public policy that says that private beneficence should be rewarded.?It is rewarded by allowing a reduction of tax liability. ?

2.????For certain entities such as public charities, foundations, DAF’s and the like, there is a further benefit that any further accrual of funds are largely nontaxable.?For the experts among the readers, I am well aware that there are certain investments and income sources that are taxable and that private foundations in the USA do have an annual excise tax.?Nevertheless, the general policy point is accurate.?Money gained and raised by nonprofit entities is generally not taxable.

3.????If money collected for public good via taxes is reduced, it implies that private giving is never independent of public policy. ?This statement does not define what an individual should or should not support, only that one should always be aware that those choices of where one chooses to put one’s philanthropic dollars imply public policy priorities.

??4.????The US system, [and that of many other countries but not all] allows pretty unfettered choices as long as there can be fiscal accountability.?In the US, the 501(C)3 status provides a shorthand for that accountability but giving is not restricted to those organizations.?But once there is fiscal accountability the range of what is acceptable is massive:?from human service to education to arts to community to libraries, and more.?The US law is agnostic as it is in many other countries:?giving to elite universities with massive endowments has the same exemption as giving to your local soup kitchen. [This essay is not about whether that is right or wrong, only that from a tax perspective they are the same.]

5.????If we grant that our own subjective preferences are as legitimate as objective need, it stands to reason that we have an equal responsibility to determine how objective need should be addressed.?There are two choices: trust that someone else’s subjective interest will cover what yours doesn’t OR we [should] expect that the public coffers will.?And the public coffers means taxes.?

6.????Since the Reagan era, a mantra of many running for office in the USA has been a promise to reduce taxes as if taxes are inherently bad.??And let us be clear:?we have paid the price for that.?Our educational results have slipped from world class to also-ran.?Our health care is demonstrably more expensive and less efficient than far too many other places.?Our public services and infrastructure have deteriorated to the point that they are embarrassing.?And that is all because we as a country have underinvested in all of those.?Underinvesting means that we haven’t raised enough in taxes.?[Again, for the purposes of this essay, I am not addressing the destructive presence of unfettered lobbying that distorts budgeting for public good.]

7.????In the last couple of decades, public policy makers have implicitly acknowledged there is a problem.?Thus, many have looked to private philanthropy to make up the short fall.?Let generous private donors do what our public funds don’t.?Why fund FEMA if we can get compassionate citizens to give directly??Why fund arts and music in El-Hi schools if generous parents will do it instead? ??And if one adds food insecurity, housing affordability, museums, minimum wages to the mix, one realizes that the bill for private giving becomes quite steep.?

There are two conceptual and practical problems with the argument that private philanthropy will cover what government won’t:?as much money as there may be in foundations, DAF’s and the pockets of generous donors, it is simply insufficient to meet all public needs.??And even if it did, there is no guarantee that it would go to where all the real needs are as long as individuals have full autonomy over our priorities.

8.????For philanthropy to do its work – as the venture or risk capital of a society – it requires a well-funded public sector.?Private philanthropy is not only the financial beneficiary of public policy but to do so it is fully dependent on the public sector to provide for its citizenry.?Without that we cannot do what we do best.??And that means that we, as individuals and as a sector, must be on record as rejecting the destructive myth that taxes are bad, or that the private sector can replace government, or that individual choice can guarantee equity.

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This has also been published as #428 on the Institute for Wise Philanthropy blog. https://wpi.one/ZNQbh Many other essays can be found on the INSIGHTS section of that website.