When we first entered the field of fundraising, we were taught the “80-20 rule” — which says 80 percent of donations come from 20 percent of donors. It was a reminder to balance cultivation of major contributors with a program of outreach to smaller donors.
But what happens to nonprofits as we drift to a time when 98 percent of funds will come from 2 percent of donors?
There has been understandable celebration as overall charitable giving has risen to new heights over the past two years. According to this year’s “Giving USA” report, total donations rose to $373 billion in 2015, a 4 percent jump over 2014 and a 10 percent increase since 2013.
But these record levels of giving mask a troubling trend. Nonprofits are increasingly relying on larger donations from a smaller number of high-wealth donors. Meanwhile, the revenue from the vast population of lower- and middle-income people is shrinking.
“Gilded Giving: Top-Heavy Philanthropy in an Age of Extreme Inequality,” a new Institute for Policy Studies report that we wrote with Josh Hoxie, points to warning signs that we are moving toward a philanthropic world dominated and directed by wealthy megadonors, their foundations, and donor-advised funds.
Echoing Inequality
These trends mirror several decades of growing wealth and income inequality. The top one-tenth of 1 percent of the U.S. population — an estimated 115,000 households with a net worth that starts at $20 million — now holds more than 20 percent of the country’s household wealth, up from 7 percent in the 1970s. This elite subgroup is worth as much financially as the bottom 90 percent of Americans.
An increasing reliance on a very small group of very wealthy donors carries significant risks for nonprofits, fundraising, and the health of our civil society.
Charitable contributions from donors at the top of the income and wealth ladders have increased significantly over the past decade. From 2003 to 2013, itemized charitable contributions from people making $500,000 or more — roughly the top 1 percent of U.S. earners — increased by 57 percent. Itemized contributions from people making $10 million or more grew by almost double that rate — 104 percent.
The number of private foundations has shown similarly strong growth, as wealthy individuals and families shift assets to charitable vehicles. The number of grant-making foundations in the United States doubled over the past 20 years, from 43,956 in 1993 to 86,726 in 2014. Over the most recent decade for which figures are available, from 2004 to 2014, the number of foundations increased 28 percent and the amount of assets they held swelled by 35 percent.
Meanwhile, charitable giving by low- and middle-income donors has declined significantly. From 2003 to 2013, while itemized charitable deductions increased by 40 percent from donors making $100,000, they dropped by 34 percent among those earning less.
According to Target Analytics, the number of people giving at typical donation levels has been steadily declining for a decade. In Target’s sample, low-dollar and midrange donors to national public charities declined by 25 percent from 2005 to 2015. These are the people who have traditionally made up the vast majority of donor ranks for most national nonprofits since their inception.
There are many possible explanations, but we believe the plunge in low- and middle-income giving is largely the result of greater economic insecurity. The drop in donations correlates closely with declines in indicators such as wages, homeownership, and employment rates.
Dangers for Civil Society
If these trends continue, we are headed for an increasingly top-heavy structure in which wealthy donors remake the philanthropic landscape while also shifting billions of dollars away from taxation.
Top-heavy philanthropy would mean increased volatility and unpredictability in funding, making it more difficult for nonprofits to do long-term budgeting. Organizations will need to shift toward cultivating and retaining major donors at the expense of a more diverse set of supporters. Top-heavy giving will likely benefit larger institutions with advanced development offices and the ability to offer donor perks like naming rights — but that would increase the risk of mission distortion as a smaller number of donors would wield greater clout.
There are perils for the wider civil society as well. Concentrating philanthropy in fewer and wealthier hands could create blocks of private, unaccountable power — essentially serving as an extension of the personal power, privilege, and influence of a handful of wealthy families. Foundations and donor-advised funds would choose from a menu of tax-avoidance instruments, alongside accounts in off-shore tax havens and complicated intergenerational trusts.
When tax avoidance is a significant driver of giving, the urgency of moving funds directly to charities on the ground becomes a secondary consideration. By creating and contributing to private foundations, donors receive immediate tax deductions for the full amount they give but are required to make only minimal grant payouts over time.
And there is no timetable at all for shifting assets from donor-advised funds to public charities. The result is warehousing of charitable assets that may sit for years or decades after the tax deduction has been taken. CharityWatch estimates that the growth of donor-advised funds has delayed up to $15 billion in donations to public charities. With the Fidelity Charitable Gift Fund surpassing United Way as the U.S. charity that raises the most from private sources, this should raise considerable red flags.
In a troubling number of cases, private foundations and high-profile charitable gifts have also become tools for the defense of personal power and privilege. Through strategic use of charitable giving, wealthy families of all political persuasions have been able to deploy private assets to advance a narrow set of interests under the guise of philanthropy. For example:
Education access. Donors can use large donations to private schools and universities to secure admissions for their progeny. Daniel Golden, a Wall Street Journal reporter and author of The Price of Admission: How America’s Ruling Class Buys Its Way Into Elite Colleges — and Who Gets Left Outside the Gates, chronicles the “wealth effect” on college admissions and how donations to elite institutions open doors for affluent family members to enroll.
Affluent public-school districts. Foundations in well-to-do communities allow parents to make tax-deductible contributions to support their children’s schools, compounding inequalities between districts.
Promoting personal policy agendas. Rich donors can fund think tanks and advocacy groups that further a wealth-protection agenda in the political arena. As journalist Jane Mayer documented in her book Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right, a segment of billionaire donors has “weaponized philanthropy” to advance policies that serve their interests.
‘An Oligarchy of Wealth’
It’s time to modernize the framework of rules governing philanthropy to encourage broader giving, protect the health of nonprofits, discourage the warehousing of wealth in private foundations and donor-advised funds, and increase accountability to protect the public interest and the integrity of our tax system.
Changes could include increasing incentives for low- and middle-income donors, capping the charitable deduction, and bolstering the independence of nonprofit boards. Rules governing donor-advised funds should require timely distributions. We could also explore a lifetime cap on tax-deductible charitable giving to ensure that those who possess some of America’s largest fortunes cannot use such deductions to entirely circumvent tax obligations through donations and bequests.
To fully address the risks of top-heavy philanthropy, however, policy makers must establish policies to reduce, over time, concentrations of wealth and power in society at large. This could include closing tax loopholes and restoring steeply progressive income and wealth taxation. And under a Trump administration, we must again defend the federal estate tax from threats of repeal.
Without intervention, we could drift further toward a new era of gilded giving — an oligarchy of wealth with charitable entities becoming an extension of private power. We have an opportunity now to address the negative aspects of top-heavy philanthropy while rewarding the natural positive impulse of individuals and families to share the wealth.
Chuck Collins is a senior scholar at the Institute for Policy Studies and the author of the new book “Born on Third Base: A One-Percenter Makes the Case for Tackling Inequality, Bringing Wealth Home, and Committing to the Common Good.” Helen Flannery is an associate fellow at the institute and a longtime researcher and data analyst for nonprofits.
