Nonprofit Chronicles

Most PTAs hold bake sales and car washes to help out their local schools. But in some well-to-do communities, PTAs have turned themselves  into “local education foundations,” the biggest of which raise millions of dollars a year.

Stanford professor Rob Reich learned about these super-sized PTAs when his son went off to kindergarten in Hillsborough, CA, a Silicon Valley community where the median income tops $250k. The local school foundation asked parents for an “expected but voluntary” contribution of $2,300.

As a political scientist, philosopher and scholar of education, Reich was troubled. This was tax-advantaged charity by and for the wealthy. “It’s rich people giving money to help rich children, with tax subsidies from everyone else, and then feeling noble about it,” he says.

Intrigued, Reich embarked on a systematic study of philanthropy and democracy that, eventually, led him to write Just Giving: Why Philanthropy is Failing Democracy and How It Can Do Better (Princeton University Press, 2018).  Reich, who is 49 and the co-director of the Stanford Center on Philanthropy and Civil Society, visited Washington last week to discuss the book at the Chronicle of Philanthropy and at the Politics and Prose bookstore.

Just Giving is the latest in a small flurry of books critical of philanthropy. It is neither a polemic (like Anand Giridharadas’s Winners Take All) nor a work of journalism (like David Callahan’s The Givers), but a sober attempt to explore the ways public policy and social norms shape charitable giving.

Reich challenges his readers to rethink policies and practices that are mostly taken for granted — the tax deduction for charitable giving, the desire of endowed foundations to live forever and the way in which the rich use philanthropy to expand their already outsized influence.

An exercise of power

Most importantly, Reich argues that we need to reconsider the way we think and talk  about philanthropy.

“Philanthropy, especially big philanthropy, is an exercise of power,” Reich says. “Any exercise of power deserves our scrutiny, not our gratitude. It deserves rigorous attention.”

This is especially so because foundations, for the most part, lack accountability. They have no customers to satisfy. They have no shareholders who insist on a return. They have no voters to whom they must explain themselves.

Yet the list of philanthropists who use their tax-subsidized giving to influence politics and policy is long. Bill Gates, Michael Bloomberg, the Buffett family, the Koch brothers, the Mercers, the Waltons, John and Laura Arnold, Mark Zuckerberg, Dustin Moskovitz and Cari Tuna, as well as endowed foundations like Ford and Hewlett, want to reshape governments around hot-button issues including climate change, abortion rights,  business regulation and public education,

By pouring billions of dollars into education reform, for example, The Gates Foundation exercises considerable influence over America’s schools. “There’s no mechanism to unelect Bill and Melinda Gates,” Reich writes. True enough, although it’s worth noting that influence isn’t power; school districts, whose leaders are elected, have no obligation to accept philanthropic dollars.

What’s to be done? Reich has ideas:

Replace the tax deduction for charitable giving with a tax credit. Tax subsidies for philanthropy cost the federal government roughly $50bn a year; most of the benefits flow to the rich, in part because they give more  but also because they take advantage of tax benefits that middle-class and poor people cannot. This bias will grow as fewer Americans itemize their tax deductions.

Here’s how it works: If, like most Americans, you don’t itemize, a $100 gift to your favorite charity costs you $100. If you do itemize, and you’re in a top tax bracket, it’ll cost you about $60.

“The wealthier you are,” Reich says, “the cheaper it is for you to be virtuous.”

Interestingly, rich donors as a group are less likely than most Americans to direct their giving to the poor; they give more to colleges and cultural institutions.

Reich writes:

The plutocratic bias in the subsidy and the lack of redistribution could be altered by by both changing the mechanism of the subsidy (change to a capped tax credit, for instance) and limiting the kinds of organizations that are permitted to receive tax deductible donations (eliminating churches and elite culture institutions, for instance).

A tax credit capped at, say, $1,000 a year would reward big and medium-sized donors alike. Hollywood mogul David Geffen would still be free to give $100m for the naming rights to a symphony hall at Lincoln Center, but he’d no longer be rewarded with a big tax deduction for doing so.

Don’t let foundations live forever. This isn’t a new idea, as Reich explains. When John D. Rockefeller sought a federal charter from Congress to establish what became the Rockefeller Foundation — permission that was denied — his attorneys promised that the foundation would spend down its principal in 50 years, unless Congress allowed it to live longer. The pledge was dropped when the foundation incorporated under New York state law.

Earlier, philosophers including Immanuel Kant and John Stuart Mill argued that there’s no good reason for foundations to be endowed forever. A permanent foundation transforms “a dead man’s intentions for a single day” into a “rule for subsequent centuries,” Mill wrote.

Yet most big American foundations (though not the Gates Foundation) are designed to last in perpetuity. This hamstrings their ability to provide for nonprofits, even when their donations are urgently needed, because they are saving for the future. It also affects the way they invest their endowments; most big endowments try to maximize their returns, at any cost, instead of aligning their investments with their mission.

Says Reich: “I would get rid of perpetuity if I were a philosopher-king asked to rewrite the policy structure.”

What are foundations for?

Near the end of Just Giving, Reich wonders:

With few or new formal accountability measures, practically no transparency obligations, a legal framework designed to honor donor intent in perpetuity and generous tax breaks to subsidize the creation of a foundation, what gives foundations their legitimacy in a democratic society? Why have this institution form?

He answers his own question by saying that foundations — precisely because they are free to experiment and can operate over long time horizons — can serve valuable roles in democracy, by, among other things, discovering and supporting new ideas and by providing a variety of public goods that may not be favored by the governing majority:

Powered by the idiosyncratic preferences of their donors and free from the accountability logic of the market and democratic state, foundations can help to provide, in the aggregate, a welcome pluralism of public goods that, over time, helps to create an ever evolving, contestatory and diverse arena of civil society. Such decentralization tempers government orthodoxy in a democracy.

How many foundations live up to that standard? Not many, I daresay. But that’s a question for another day, or another book.