The genius of American philanthropy, it is often said, is that nearly all Americans, of every income level, give. But the tax exemptions and deductions in the Internal Revenue Code are not for all Americans, the overwhelming majority of whom don’t itemize their federal income taxes or claim the charitable deduction. Few will ever start their own foundation or open a donor-advised fund. Most don’t have a tax accountant, philanthropic adviser, or private bank account.
Instead, the formidable body of tax-exempt law, policy, and regulation created during the past 100 years provides the framework for Big Philanthropy. This is not solely about America’s wealthiest philanthropists and largest foundations. It is, rather, the system of charitable giving that bestows tax privileges upon donors in exchange for their charitable contributions. And it is a system powered by the conflict of interest inherent in those tax laws.
With most surveys showing public trust in nonprofit institutions in historic retreat and the number of households that give in decline, it seems reasonable to ask: What is the future of tax-incentivized Big Philanthropy?
Modest attempts at change have so far faced formidable resistance. Consider philanthropists Laura and John Arnold’s Initiative to Accelerate Charitable Giving, which would increase giving by promoting greater accountability and fixing inefficiencies in the tax laws.
The proposal was announced in November 2020 at the height of the pandemic when many felt foundations should be distributing more of their nearly $1.5 trillion in tax-advantaged assets. Among other changes, the plan would prohibit foundation family members from counting their salaries and travel expenses toward their foundation’s annual charitable-distribution obligations. Contributions to donor-advised funds could also no longer go toward annual foundation payout requirements, and DAF holders would be compelled to distribute the funds within 15 years to receive an up-front tax benefit.
But the Arnolds’ initiative has gone exactly nowhere. Legislation influenced by the proposal — the Accelerating Charitable Efforts Act — languishes in Congress. And to Big Philanthropy, the plan was dead on arrival. Of the 85,000 private, family, and community foundations in America, the Initiative to Accelerate Charitable Giving website lists fewer than 20 foundation members. Foundations from both liberal and conservative viewpoints have come out against it. The Council on Foundations opposes the legislation based on the Arnolds’ proposal because it adds “complexity and costs for foundations and donors.” The Philanthropy Roundtable warned that “this proposal would severely hamper Americans’ ability to give to causes they care about.”
The Arnolds’ proposal has run into the same Big Philanthropy buzz saw as the cap on deductions included in the Trump administration’s 2017 tax cuts. A flurry of reports, press releases, and op-eds foretold the collapse of charitable giving if the proposal became law. That did not happen. In 2019, Americans contributed $450 billion to charity, the second-highest amount ever at the time in inflation-adjusted dollars. “People donate when they have more after-tax income and when the economy is strong,” the Tax Foundation reported in 2020, “not when they are induced to do so by the tax rate.”
Why such bipartisan opposition among America’s elites to relatively minor changes in the tax code? Why is it that nonprofit organizations funded by George Soros, the Gates Foundation, and Charles Koch walk in lockstep when it comes to opposing changes to tax-incentivized Big Philanthropy?
The fundamental reason is the conflict of interest baked into the tax code’s charitable exemption. Under this system, the very nonprofits that philanthropies are required to fund may in turn use their tax-exempt dollars to advocate, educate, and even lobby in support of tax-exempt charitable laws that, in turn, benefit the nonprofits’ major donors. In other words, philanthropists can use their tax-advantaged funds to advocate for greater tax-incentivized charitable laws through the tax-exempt nonprofits they support. And they do.
This circle of self-serving charitable giving has helped to spawn a permanent, parasitic, and professional philanthropic class that knows who butters its bread: Big Philanthropy. America’s professional philanthropic class includes employees of universities, think tanks, philanthropies, investment banks, financial and philanthropic advisers, charitable foundations, and thousands of nonprofit organizations. All drink from the same government-regulated trough of tax-advantaged charitable funding. This renders Big Philanthropy apologists as suspect as Big Tobacco advocates in the 1970s.
The professional philanthropic class has so far prevented legislative changes averse to Big Philanthropy’s interests. But institutions impervious to adaptation inevitably decline, even when they appear strong. In a diverse and economically stratified society, Big Philanthropy stands ossified, out of place and outside of time, like the towering Tyrannosaurus Rex in the concourse of Chicago’s Field Museum.
At the very moment when its size and influence seem greatest, Big Philanthropy is weak. America’s nonprofit sector is stagnant and dysfunctional. Philanthropic giving has remained about 2 percent of gross domestic product since the 1970s. Year-to-year giving fluctuates, but changes in monetary policy, fiscal policy, tax policy, charitable tax exemptions, the general health of the economy, generational-giving spikes, or innovations in charitable-giving vehicles have not moved charitable giving beyond the roughly 2 percent threshold since Gerald Ford was president.
Even as the Federal Reserve’s balance sheet grew from $870 billion in August 2007 before the Great Recession to $8.9 trillion in August 2022, giving as a portion of GDP declined — from 2.2 percent in 2008 to 2.1 percent in 2021. Likewise, the largest intergenerational transfer of wealth in U.S. history — $68 trillion from aging baby boomers to younger generations beginning in 2007 — has not led to an increase in giving as a portion of GDP. Despite DAF accounts swelling in number from 181,000 in 2008 to more than 1 million today, DAFs have had exactly zero effect on charitable giving as a portion of GDP.
While the nonprofit field languishes in this 2 percent purgatory, the past 15 years were boom times for the wealthy. For the first time in U.S. history, the top 1 percent of households owns more assets than the country’s entire middle class. The burgeoning fortunes of America’s wealthy are insulated in part by the efforts of the philanthropic professional class. By design, Big Philanthropy gives away as much as — but not more than — the law requires to maximize tax advantages. This condemns charitable giving to 2 percent of GDP by effectively putting a cap on contributions. In protecting the underlying logic of tax-incentivized Big Philanthropy, the philanthropic professional class has served its patrons well, but not most Americans.
The prospect for meaningful self-reform seems remote given the inherent conflict of interest in charitable tax-exemption laws. Whenever the specter of an overhaul materializes, such as with the Arnolds’ proposal, the professional philanthropic class mobilizes, resists, and conjures hollow counterproposals. An example is the charitable deduction included in the 2020 Cares Act, which allows taxpayers who don’t itemize to deduct donations. It expired at the end of the 2021 tax year, but efforts are afoot to make it permanent.
Following passage of the Cares Act, charitable giving in 2021 declined by 0.7 percent after adjusting for inflation. In a year when the S&P 500 gained nearly 27 percent and home prices increased by almost 17 percent , an expanded charitable deduction had zero effect on giving. This was predictable, of course, because for the overwhelming majority of Americans, the charitable deduction is meaningless. An above-the-line charitable deduction is a cynical strategy to protect Big Philanthropy by redirecting the reform conversation away from meaningful change.
When the world is viewed through the inherent conflict-of-interest prism of tax-incentivized charitable giving, it’s difficult to see, much less acknowledge, that 100 years of charitable tax exemptions have arrested the development of the independent sector. It’s difficult to see that Big Philanthropy has little relevance for most Americans, who are unmoved by tributes to wealthy donors served up at awards ceremonies by the professional philanthropic class. When you’re living in the bubble, you simply don’t see what’s readily apparent: Big Philanthropy is a racket.
This is why a meaningful overhaul of the field will be driven by populists outside of Big Philanthropy. These changes will be of the hatchet, not the scalpel, variety, embodying the spirit of the 2017 cap on deductions, not the Arnolds’ modest proposal. And the push for change will come from disrupters on the left and right — Democratic socialists. Tea Partiers. Wall Street Occupiers. MAGA Republicans.
Policy makers and the professional philanthropic class should stop playing cat-and-mouse games and instead embark on a bold new project: remove the conflict of interest inherent in tax-incentivized Big Philanthropy by ending charitable tax exemptions and deductions of every kind. This change would lead wealthy Americans to emulate the giving habits of the 90 percent of Americans whose charitable giving is made with after-tax dollars. Removing the charitable-exemption lid will inaugurate a new era of greater giving — and it will allow the independent sector to finally live up to its name.