December 04, 2015

Trust Chan and Zuckerberg to Decide How to Spend Their Money for the Public Good

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There is no shortage of good questions to be asked about the announced plans of Mark Zuckerberg and Priscilla Chan to invest some $45 billion in Facebook stock toward social purposes, such as improving education and seeking medical cures — or, as they put it, "advancing human potential and promoting equality."

It is not surprising that questions would arise, for instance, about their choice of a limited-liability corporation to serve as the investment vehicle for both for-profit and nonprofit organizations that they decide share their goals.

Some have questioned whether this is simply a means to avoid the legal requirement, imposed on traditional foundations, to spend at least 5 percent of their assets each year. Others, myself included, wonder whether giving the Zuckerberg/Chan blessing for "impact investing" — where both social and financial goals are at stake — might serve to undermine the useful traditional divide between business and charity.

But one question that has surfaced is a less subtle and more surprising one: Do Dr. Chan and Mr. Zuckerberg fundamentally have the right to direct their fortune as they see fit?

Internet sites from Gawker to Buzzfeed have been alive with skeptical comments in that regard — but none was more pointed than that of Jesse Eisinger. who wrote for Pro Publica and The New York Times:

"Instead of lavishing praise on Mr. Zuckerberg for having issued a news release with a promise, this should be an occasion to mull what kind of society we want to live in. Who should fund our general societal needs and how? Charities rarely fund quotidian yet vital needs. What would $40 billion mean for job creation or infrastructure spending? The Centers for Disease Control and Prevention has a budget of about $7 billion. Maybe more should go to that. Society, through its elected members, taxes its citizens. Then the elected officials decide what to do with sums of money.

In this case, it is different. One person will be making these decisions."

This is much more than a critique of the capital-gains tax implications of the Chan Zuckerberg Initiative (although Mr. Eisinger is concerned about those, as well). Rather, it amounts to a full-on attack on the idea of individual philanthropy on a grand scale as directed by those of the greatest means.

And that’s what’s important to rebut.

First is the matter of whose money is it. The charitable tax deduction — and one presumes, the Chan Zuckerberg LLC — is widely viewed as a taxpayer subsidy for individual giving because it reduce its costs.

This view, however, presumes that the federal government has the first call on one’s earnings and ignores the fact that the social goals of charitable giving are fundamentally not self-interested.

Washington lawyer Alexander Reid, who chairs the Tax Exempt Organizations Committee of the District of Columbia Bar, put it well:

"When you give $100 to charity and deduct $35 from your taxes, is the government giving you an extra $35 to spend? Is the government in effect making a $35 matching contribution to the charity? Or is the government returning the $35 to you because the money is not the government’s money in the first place?

Although these answers are arithmetically equivalent, they involve very different relationships between the citizen and the state. Under one paradigm, the state sponsors and subsidizes civil society using tax revenue; under the other, individuals create civil society using their own funds, without state interference. This distinction makes all the difference."

But even if there were no tax advantage to philanthropic giving, it would, from Ms. Eisinger’s perspective, be less desirable than high tax rates on the wealthy — providing a democratically accountable government with more funds for common social goals.

As seductive as that reasoning is, don’t buy it.

Simply put, we cannot rule out — and should not risk discouraging — the philanthropy of extremely successful individuals who have distinguished themselves by a demonstrated capacity for enterprise and original thinking.

The best known example, of course, is that of Andrew Carnegie, who not only revolutionized industrial steel-making but brought public libraries to scale across America through his philanthropy.

Other examples abound. Julius Rosenwald, through his expansion of Sears, Roebuck, revolutionized American retail and went on to support high-quality schools for poor African-Americans throughout the South at a time when government was averse to that goal.

As Matthew Bishop, co-author of Philanthropcapitalism, has written about big donors:

"Unlike politicians, they do not face elections every few years; and unlike the CEOs of most public companies, they do not suffer the tyranny of shareholders’ demands for ever-increasing quarterly profits. Nor do they have to devote vast amounts of time and resources to raising money, as most heads of nonprofits do. That frees them to think long-term, to go against conventional wisdom, to take up ideas too risky for government, to deploy substantial resources quickly when the situation demands it, and, above all, to try something new."

Put another way, government inevitably is drawn to direct much of its resources to meet present needs. So it is that we have seen such a sharp decline in federal discretionary spending, as Social Security, Medicare, and Medicaid entitlements have grown in magnitude.

Philanthropy, by its nature, looks to the future — to disease cures rather than health insurance, to new ways to deliver education rather than funding for existing schools, even to what may seem exotic but potentially important goals that would lack interest-group support. Ask yourself this: Would we inevitably be better off were the full Chan-Zuckerberg $45 billion donated to the federal government? It would hardly make a dent in the national debt. Moreover, the prospect of requiring the superrich to hand over so much money would inevitably discourage the accumulation of wealth in the first place.

Critics of Chan-Zuckerberg have also raised the question of what is a lack of accountability ("one person will be making all the decisions").

If anything, however, there is greater accountability inherent in an initiative named for oneself than in traditional foundations with self-perpetuating boards and limited requirements to distribute assets — institutions separated by generations from their founders. (The MacArthur Foundation’s original deed, in keeping with the wishes of its conservative founder, John D. MacArthur, included a focus on "ways to discover and promulgate avoidance of waste in government expenditures.")

It’s worth noting as well the reputational risk faced by individual donors. Mark Zuckerberg’s famous $100 million gift to the Newark public-school system is effectively shown to have been wasted money in Dale Russakoff’s powerful book The Prize: Who’s In Charge of America’s Schools?

Rather than stigmatize the wealthy for concerns beyond their own luxuries, we should think of philanthropy on a grand scale as a sort of national social-venture fund — one that involves a modest percentage of national wealth. To be sure, some may be directed to foolishness or status aggrandizement. But examples abound of philanthropy by those of the greatest means leading to great good.

It’s hard to understand why so many have chosen to characterize philanthropists — Mark Zuckerberg, John Paulson (for his gift to Harvard), Barry Diller (for his support for a new Hudson River park), and David Koch (a supporter of cancer research as well as political candidates) — as villainous rather than virtuous. Give new parents Mark Zuckerberg and Priscilla Chan a break.

Howard Husock, a regular Chronicle contributor, is vice president for policy research at the Manhattan Institute, where he also directs its Social Entrepreneurship Initiative.