Taming the Donors by Linsey McGoey

Is there any way for civil society organizations to put a halt to the Gates Foundation efforts to increase Coca-Cola and Monsanto’s presence in Africa? The answer is: not really. The foundation is mostly free to spend its endowment however it likes, as long as it’s not breaching domestic laws or regulations in the US or in countries where it operates. Even then, when the foundation underwrites projects which appear to breach domestic laws, as India’s parliament found in the case of the PATH HPV trials, it’s difficult to hold the funding organization to account.

For years, critical observers have proposed different measures for increasing the transparency and public accountability of philanthropic foundations. At the forefront of this struggle are US-based philanthropy experts such as Ray Madoff, Michael Edwards, Mark Dowie, Rob Reich, based at Stanford University, Robert B. Reich, based at the University of California, Berkeley, and Pablo Eisenberg, to name just a few key figures.  There is also no shortage of outspoken voices in developing and middle-income countries most affected by the Gate’s Foundation’s grants in areas of global health and agriculture, including Arundhati Roy and Vandana Shiva, both of whom have criticized the lack of transparency, tax allowances and lack of accountability at large foundations such as the Gates Foundation, calling for radical reform of the philanthropic sector.

In a recent article, Eisenberg, a senior fellow at Georgetown University and a founder of the National Committee for Responsive Philanthropy, offers a list of specific proposals – all of which are worth heeding by policy-makers. US foundations currently have to spend 5 per cent of their endowments each year. Eisenberg has suggested that the figure should be increased to at least 8 percent, and that restrictions  to invest in areas of the greatest need should be implemented forcing foundations to invest in areas of the greatest social need. More investment in family or youth shelters for the homeless, for example, may do more good than funding another named chair at Harvard.

[ Emphasis on polio vaccinations at the expense of other inoculations is not lost on local villagers. Time and time again, they question the emphasis on a disease that places a less burdensome toll on them than other scourges. A number of villagers say “What is polio? We’ve never seen it – why are we worried about it?.. our children are dying of measles. “When you are doing polio, you’re not doing other things such as DPT and measles vaccines” or establishing permanent, general practice clinics in areas where there are none.  Another example is that although the Gates Foundation spend millions on HIV/AIDS prevention, it resisted efforts at treating the disease, despite its prevention effects, because of the challenge such efforts presented to the current system of patent protection by which Gates made his billions in the first place.]

Eisenberg’s second proposal is the reduce the tax incentives for setting up philanthropic foundations, something that would increase the amount of federal money for social programs. His third  suggestion is to limit the size of large foundations, as well as rethink board representation. In his view, there is no reason why some of the largest and most powerful foundations in the world, including the Gates Foundation and the Walton Family Trust, should be composed of a tight nucleus of family members. “At family foundations over a certain size,’ he suggests, ‘at least two-thirds of board members should be non-family representatives of the public.” Dowie has reiterated this point as well: a portion of each ‘foundation’s endowment really belongs to the public, whose state and federal treasuries would hold that portion of any large estate not left to a foundation,’ he notes. ‘It would seem fair, therefore, for 45 per cent of a foundation’s trustees to represent ordinary citizens.”

Reich, now a professor of public policy after serving as labor secretary under Bill Clinton, has pointed out that in 2007 alone, charitable deductions came to a total f $40 billion. “I see why a contribution to, say, the Salvation Army should be eligible for a charity deduction. It helps the poor,’ he writes. ‘But why, exactly, should a contribution to the already extraordinarily wealthy Guggenheim Museum or to Harvard University (which already has an endowment of more than $30 billion)?

Rob Reich, co-director of Stanford’s Center on Philanthropy and Civil Society, suggests that we need to think  more deeply about what the tax incentive is for. ‘If you think that charitable giving should be for redistributive purposes [which is] the usual understanding of the word charity .  .  . then the evidence  . . . is not going to provide you much support for the tax subsidies that now exist because so relatively little charitable money goes to support the disadvantaged or the poor. If you thought that that was the justification for the tax subsidy, you’re going to wind up very disappointed.”

So far there is little evidence that US philanthropy helps much to alleviate the harms caused by inequality. Worse, public policy currently rewards some  philanthropic behavior –in the form of tax concessions – that worsens and causes harm.

Madoff, an expert on trust and estate law based at Boston College Law School, has suggested we need to question whether the current law is doing enough to ensure that charitable dollars reach those organizations that are doing charitable work in a timely fashion.  She is particularly concerned with the failure of the US Congress to address the surge in donor-advised funds, a vehicle where cash or other assets such a stocks are set aside in accounts that are to be dispersed to public charities over time. Contributions to donor-advised funds are given all of the same tax benefits as contributions to a food bank or other operating charity. Yet, there is no time period during which funds must be distributed since donor-advised funds aren’t subject to minimum pay-out requirements imposed on private foundations. Madoff suggests that the growth of donor-advised funds in the US (they now account for about 7 per cent of individual charitable donations) might have actually reduced the amount of funds available to operating charities. While aggregated donations have stayed at about 2 per cent of the GDP since the 1970s, the surge in new organizational vehicles that stash money rather than distributing suggests  that the effect on the rate of overall giving is negative. Donor-advised have become financial holing pens for the assets of people who want to grab a tax deduction but have no immediate plan for any actual charitable giving.

Madoff writes that “in the United States, the tendency is for the public to respond to a large charitable gift by saying: “Oh, that’s great – isn’t that rich person nice for giving to charity.” She stressed that while there’s no doubt charitable gifts can create public value, it’s also  important to recognize public investment that these charitable gifts entail:

When an individual commits $100 million of their business or other appreciated property to charity, the foregone taxes from the government are often far greater than the after-tax cost to the donor. Had the donor not given that $100 million, donor would have had an additional tax liability of up to $66 million just based on the foregone capital gains tax and savings from the income tax charitable deduction. If one adds in estate taxes, the tax savings may be as much as $75 million. Given the size of the tax subsidy, it is important to ask what society is getting in return.

Another concern is that the 1969 Tax Reform Act- the last major overhaul of US charity law – is out of step with the proliferation of new charitable vehicles that work in practice to circumvent the principles that underpinned the Tax Reform Act in the first place. Madoff pointed out that  at the heart of the 1969 Act was an attempt to draw distinctions between grant-making institutions funded by a small number of individuals, called private foundations, and  organizations directly engaged in charitable work called public charities. The Act was established to strengthen public oversight over private foundations, subjecting them to limitations on self-dealing and the introduction of the 5 per cent payout rule.  ‘Our whole edifice is that we are going to treat private foundations differently from public charities.’ Madoff said – yet today the distinction is easily breached. First, though public charities are supposed to represent organizations tat have broad public support, due  the niceties of the tax rules, a single individual can create a public charity simply by funneling the funding through a donor-advised fund. The distinction is also less meaningful because the 5% pay-out rule can be met by administrative expenses (including salaries for the donor and donor’s family) and by making contributions to a donor-advised fund, from which there is no payout requirement! What is the point of having a complex statutory structure tat draws essentially meaningless  distinctions?

Philanthropic donors don’t like to be told how to spend their money, and to some extent they have robust grounds for defensiveness, freedom from political intervention is what makes philanthropy
a check on rather than a handmaiden of political power. But when philanthropy is used as a loot bag for well-financed hedge funders and private equity buccaneers, as is the case of US education, then more restrictions are warranted. If the donors kick up a fuss, one could easily repeat back to them what they often stipulate to their own grantees : a close watch on how dollars are spent is essential to ensuring the creation of ‘social value.’ And if you don’t like the rule, then don’t give the money. Pay the taxes instead.

The proposals above might seem restrictive. And yet,  they pose fewer constraints than the atmosphere in Congress over a century ago, when those across the political spectrum questioned the value of permitting philanthropic foundations at all.

Esienberg is a respected doyen of US philanthropy, something of a folk hero for grassroots non-profit groups. His scrappy admonishments of the concentration of philanthropic resources in the hands of a few elite figures are almost identical to the public concerns that compelled Wilson to establish the Walsh Commission. But today, in the post-Citizens United era of unlimited political campaign financing, suggestions from pro-grassroots activists such as Eisenberg are increasingly non grata in DC power circles.

On the one hand, articulate criticisms of the ‘new’ philanthropy are growing louder, a pushback that, as Benjamin Soskis suggests, ‘can be traced to the nation’s mounting uneasiness with income inequality and to the spread of an economic populism that refuses to regard the concentration of wealth charitably.

On the other hand, legislators don’t seem to have yet taken enough notice. ‘If I was a betting man,’ Aaron Dorfman of the National Committee for Responsive Philanthropy said to me, ‘I would not be putting money on the idea that there would be any major legislative changes implemented soon.’

Ralph Waldo Emerson spurned the infantilizing effect of charity, the tendency for giving to entrench a relation of inequality between individuals. In a stunning denunciation of Christian morality, Emerson scorned Samaritan notions of one’s duty to strangers, to one’s immediate brethren, to fellow countrymen. “Are they poor?” he when asked, recalling a time when a ‘foolish philanthropist’ insisted that he owes a duty to the less affluent. No, he asserts, they are not: he owes them nothing and they owe him nothing. When people  give, it’s as if they are offering an apology, as if they must expiate themselves for the sin of living. The act of expiation is the true sin, an immoral renunciation of the gift of life, false penance for living and breathing to the fullest. “I do not wish to expiate,” he wrote, “but to live. My life is for itself and not for a spectacle.” And Oscar Wilde seconded that opinion : “Why should the poor be grateful for the crumbs that fall from a rich man’s table? They should be seated at the board, and are beginning to know it.”

While Emerson’s scorn for philanthropy was marked by unnerving elitism, there is something enduringly relevant about his suggestion that a dollar given in charity is a ‘wicked dollar’, one that places its recipients under  a boot rather than recognizing their equal right to foster their own independence, to realize their individuality. Against the egotism of Thiel, Balsillie,or the Gateses, individuals who eponymously stamp their mark on their endowments, the best donations are those that extend as far as possible the courtesy of indifference. By indifference I mean, quite literally, gifts offered with a lack of self-involvement. Because if it is a gift actually to be give- that is, if it’s actually meant to be surrendered by a donor, preventing her or him from further claims on that gift – then a donor has no right to involvement [ nor to profit from it]. Recipients deserve their own independence. They don’t deserve sympathy, which suggests a sort of false rapport with the recipients, which crushes grantees under the taxing weight of a donor’s goodwill. They don’t deserve pity, which demeans as much as it empowers. If the real motivation is to avoid embroiling others in chains of enduring dependency or obligation, then true gifts should offer the respite of autonomy.