The following interview appeared in the March 2010 issue of Reason magazine.
Americans love to give away money. In 2008, as the economy flailed and the government bailed, we still donated $300 billion to charity, or about $1,000 per person. That figure includes everything from the Bill Gates/Warren Buffett charitable colossus to a bus driver at church dropping a $5 bill in the collection plate.
One reason for the ongoing frenzy of giving is the fact that Americans do not have to pay federal income taxes on money they hand over to philanthropic organizations. But as budgets get ever tighter, state and federal governments have started scrounging for change in the sofa cushions. In March 2009, spitballing about ways to pay for his health care overhaul, President Barack Obama suggested reducing rich people’s tax deduction for charitable giving.
The response from the nation’s schools, churches, museums, soup kitchens, and thrift shops was swift and angry. A coalition of charities and other groups concerned with giving—including the Philanthropy Roundtable, an association of foundations and other charitable organizations—sent a strongly worded letter to Senate Finance Committee Chairman Max Baucus (D-Mont.) declaring that “with so many Americans relying on the charitable sector, now is simply not the time to jeopardize the charitable gifts that are so important to its strength.”
Obama defended his proposal, arguing that if a donation is “really a charitable contribution, I’m assuming [the tax rate] shouldn’t be a determining factor as to whether you’re giving that $100 to the homeless shelter down the street.” The president also pulled out one of his favorite lines, noting that the tax hike would affect “only 1 percent of the American people,” but then he revealed perhaps more than he intended: “I think it is a realistic way for us to raise some revenue from people who’ve benefited enormously over the last several years. And, you know, ultimately, if we’re going to tackle the serious problems that we’ve got, then, in some cases, those who are more fortunate are going to have to pay a little bit more.”
If you think that’s just ordinary political boilerplate, remember that Obama wasn’t talking about an income tax or a capital gains tax. He was talking about a tax on money going to charities. The people he wanted to hit with a bigger tax bill are already “paying a little bit more.” They just don’t happen to be sending their money via the White House and Congress.
The proposal died, but the attitude behind the remarks continues to hover over American philanthropy. Comprehensive tax legislation is expected in 2010, and the revised rules may include new requirements for organizations with tax-exempt status. The Internal Revenue Service has already been gaining greater oversight of nonprofits in recent years, both by collecting more information about the groups and by increasing application fees.
At the state level, activists are agitating for laws mandating more diversity on foundation boards and more government control over how and where private philanthropic dollars are spent. Even when the bills don’t pass, they often scare charities into making accommodations. In California, for example, the Greenlining Institute persuaded the State Assembly to consider the Foundation Diversity and Transparency Act, which would have mandated disclosure about the number of ethnic, sexual, and other minorities on the boards of large foundations and their grant recipients—an explicit step toward mandating quotas. After intense negotiations, the bill was withdrawn, and the state’s 10 largest foundations not coincidentally agreed to spend $20 million through minority-led groups serving minority communities, $10 million on leadership training and technical assistance to minority-led organizations, and additional cash for ongoing research and analysis about the role of minority organizations in the Golden State.
Adam Meyerson, president of the Philanthropy Roundtable since 2001, writes and speaks frequently about philanthropic freedom, donor intent, and the role of charitable giving in a free society. Senior Editor Katherine Mangu-Ward interviewed Meyerson at the Philanthropy Roundtable’s Washington, D.C., offices in November.
Reason: What do you say to people who object to the fact that tax-exempt donations are going to the opera or to Harvard when there are genuinely needy people in the world?
Adam Meyerson: We’ve had a long tradition where, so long as they make contributions to genuinely charitable causes, Americans can decide where and how to give away their money voluntarily. We’re talking about voluntary action here. They could spend it on their yachts, but they want to give their money to other institutions.
Philanthropy and charitable giving are central to American life and have been since the beginning of the republic. Philanthropy supports our churches and synagogues, medical research, health care, the arts, the environment. Our colleges and universities are the best in the world thanks to philanthropy. If you look at almost every major controversial issue, whether that be abortion or gay marriage or stem cell research or marijuana legalization, the philanthropists are on both sides of those issues helping to promote and advance a really robust debate.
Reason: Let me put it more bluntly. How would you reply to someone who says, “There are lots of poor black people in America. Why are white people giving money to each other to put on ballets?”
Meyerson: Let me give you two arguments. One illustrates the importance of freedom and the other is to look at what the philanthropist is actually giving to.
One of our great philanthropic heroes was Julius Rosenwald. He was one of the builders of Sears Roebuck. In the 1920s and ’30s, on a matching basis, he funded 5,000 schools for African-American children in the rural South. At one time, one-third of all African Americans owed their education to Rosenwald schools. That could not have been done without the freedom and independence of a donor to make decisions about where to spend his money. It wasn’t being done by the state. It couldn’t really be done by business. That’s a great strength of philanthropy that we see over and over again: the willingness to support an unpopular idea, something before its time.
Another way of looking at the question is, What is it that philanthropists actually support? One-third of charitable giving is in religion. If you want to take away people’s freedom to support religion, that’s very serious. Colleges and universities don’t just exist for rich people. Colleges and universities provide opportunity for everybody. Much of the money goes in to support scholarships for those who can’t afford the tuition. The research that’s done at colleges and universities, whether that’s medical research or environmental research, it has benefits for the entire society. When you support a hospital or medical research, that helps everybody. That’s not just supporting privilege. It would be disastrous for our country to take away the freedom to support religion, education, medical research.
Reason: Charities in America get preferential tax status, under the 501(c)3 provision of the Internal Revenue Code. Various players argue that this tax status means charitable organizations are, in some sense, funded with public money.
Once you accept that premise, strange things begin to happen. Some politicians want “their” money back, to spend on other things. And activist groups argue that private charities should be more heavily regulated.
Meyerson: We have been hearing more and more of that, both from legislators and from people within the charitable sector itself. Among big nonprofits there can be an impulse for a kind of cartelization, as often happens within industries. People often want to regulate their competitors.
All the legal precedents, including an opinion by Justice William Brennan, show that foundations do not lose their freedom, their independence, or their rights when they take advantage of tax preferences. Nonetheless, some prominent legislators have been saying that tax preferences amount to an earmark, a gift from the government. And more dangerously, I think, politicians put extra-legislative pressure on foundations and other donors to give to their favorite causes. It’s almost a kind of blackmail where political leaders threaten harmful legislation unless their favorite causes are funded.
Reason: You’re referring to things like the Foundation Diversity and Transparency Act in California.
Meyerson: There’s wonderful diversity within the philanthropic sector. That diversity mostly takes place between or among organizations, not necessarily within organizations. Many organizations freely choose to have a diverse racial makeup of their boards and staff. If that’s what they want, we have no problem with those decisions, but we think that the issue of diversity is being lionized without much justification.
When the Greenlining Institute began back in the early 1990s, it focused on banking and financial lending institutions that allegedly practiced “redlining” and was very involved in passage of the Community Reinvestment Act. It turned its attention to private philanthropy four years ago with a plan to “democratize philanthropy” [by stocking the boards of private charities with minority members]. Its targets are large foundations, and its mission is to redirect private foundation assets to advance its own goals through its preferred organizations. These actions are conducted without regard for the mission of the private foundation or its right to direct its assets to causes consistent with donor intent.
Even with something like intellectual diversity, you don’t necessarily want widely different theories in one charity of what the mission of the organization is supposed to be. It’s a nightmare recipe. And yet that would be the consequence of some of the calls for diversity—a kind of paralysis within organizations.
Let me give a couple of examples of how mandating diversity may be inappropriate: It would be inappropriate to require, let’s say, a Jewish or a Catholic or a Mormon foundation to have members from another faith on its board. It would be inappropriate to require that family foundations have non–family members on their board. If there’s a Latino family foundation, does it have to have Anglos on its board in order to make wise decisions, let’s say, about Arizona? That’s both false and insulting. Should a liberal foundation be required to put conservatives on its board? It can if it wants, but it doesn’t make any sense. It defeats the whole purpose of philanthropy to require that kind of decision.
Reason: You mentioned concerns about cartelization, and the possibility that larger charities might want to use the tax code to regulate their competitors. Talk a little bit about the relationship between the big guys and the little guys.
Meyerson: A few years ago there was a disturbing set of proposals to actually abolish the little guys. Eliot Spitzer, who was then attorney general in New York, actually proposed that foundations with less than $20 million in assets should not be allowed to exist. One argument he made was that there were too many foundations, and it was hard for the IRS and state attorneys general to monitor and keep track of all of them. And Spitzer was not alone in this. In 2005 the then-chairman of a large philanthropic association made a similar proposal in an article in the Chronicle of Philanthropy, saying that we shouldn’t have foundations with less than $1 million in assets.
Just as in business, you often start small in philanthropy and you do a lot of learning by doing. It would be devastating to charitable giving and to philanthropic learning to close off the opportunity to begin one’s foundation on a small scale, quite apart from the outrageous assault on freedom that’s involved.
Small players are trying to enter the space and just figure out what works. Several years ago, there was a white paper proposed by the Senate Finance Committee staff proposing that tax-exempt status be contingent upon accreditation. Having seen the dangers of accreditation in higher education—for instance, in the Thomas Aquinas College case, where the regional monopoly sought to deny accreditation to a college because it didn’t approve of its Great Books curriculum—we resisted this very strongly and argued that that was a very serious threat to philanthropic freedom. We haven’t seen that proposal emerge in recent years, but there’s new attention to a similarly damaging proposal: The IRS is proposing to get involved in assessing the governance of foundations and even their effectiveness, something that it has no statutory authority to do. There’s a serious proposal to create a self-regulatory agency under the control of the IRS, and we fear that that would be an open invitation for the kind of cartelization impulses that we sometimes see in this industry.
Reason: For-profit charity sounds like an oxymoron, but it’s become increasingly common. I’m thinking here not only of online microlenders like Kiva or Prosper but also charities that aim to make investments that eventually turn a profit, like the X Prize or Google.org. How are they changing the landscape?
Meyerson: We’re seeing an entrepreneurial explosion in philanthropic services and in new kinds of giving. Some of these are for-profit. Some of these are nonprofit. Probably the most important new feature we’re seeing is that business minds, really exceptional business minds, are coming into philanthropy now. Some of them are coming in directly as philanthropists, as living donors, but others are applying business models to philanthropy.
One of the most exciting features that we’re seeing is the growth of intermediary organizations. They receive money from donors and then give it out themselves. Kiva might be a good example of this. We see a great market development across many fields. We’re seeing specialized services in the arts, in international giving. There are left-wing intermediaries. There are libertarian intermediaries. You’re also beginning to see foundations seek money from other donors themselves. In part, this is a reaction to Warren Buffett giving money to Bill Gates.
We’re seeing more information, more giving opportunities, more analytical structures for giving. That’s one reason we’re frightened about efforts to cartelize the industry. We think it’s very important to protect this kind of entrepreneurial creativity.
Reason: In many cases, government and philanthropy can be seen as substitutes for each other. They’re often competing to service the same needs, be that the public provision of arts or charity to the poor or a service helping immigrants assimilate. Do you think that rivalry intensifies as government steps into an ever-larger role in these intermediate spaces? Is there a sense that government is pushing charity from some places where it has traditionally been?
Meyerson: We do frequently see a kind of crowding out phenomenon in which donors or philanthropists decide to withdraw from a particular field if government is taking care of it. But we frequently see a contrary development as well, which is that government is not always very good at what it does and so the problems aren’t always solved. For instance, in the field of K–12 education there’s $500 billion of government spending. And yet we’re seeing more and more new philanthropists come into that field pushing ideas of choices and competition and high standards and new models of recruiting and compensating teachers and principals. Even in a field that’s tremendously dominated by government, you see philanthropists coming in to find solutions for problems, such as the education of low-income children, that were not being solved by government.
We see this in the field of medical research as well, which is overwhelmingly dominated by government. Smart philanthropists are finding that they can have an enormous contribution by pursuing alternative hypotheses or doing things that government is not doing.
The arts are an interesting space. We have seen a growth of government funding in the arts in recent decades, but even so one of the distinguishing features of the arts in America is that it’s mostly funded by the market and by private contributions, much more by comparison with Europe. It has probably led to there being greater cultural vitality in the United States now than in many European countries.
Reason: Obama made service and volunteerism a centerpiece of his campaign. He has tried to facilitate charitable activity and has spoken of putting public money into charities that work. What do you make of that?
Meyerson: He’s following in a tradition of some of his predecessors, including his immediate predecessor. The rhetoric, at least so far, has been larger than the amount of dollars that they’ve committed. We think there’s a danger in trying to bring the private charitable sector under the control of government. It can be very self-defeating and even suicidal to become too dependent on government money. I think it’s important for philanthropists to develop alternative ways besides government funding of expanding successful private-sector programs. That’s a failure within the philanthropic sector right now: It’s very hard to take a really good program and scale it up. But government funding is not the answer to that.
Reason: Why is it so hard to find a successful model and then duplicate it?
Meyerson: It could be that with taxation so high they can’t take it to the next level. Philanthropy has a good track record of providing seed capital for innovative organizations and seeing which ones work. It’s less successful in taking them to scale and providing the serious growth capital for them. It’s a serious problem within philanthropy. You’ve got good capital markets in the for-profit sector. You don’t have the greatest nonprofit capital markets.
Reason: What’s on the horizon?
Meyerson: The Philanthropy Roundtable was part of a fairly large coalition that fought off a proposal to cap the charitable tax deduction. There’s not much harmful legislation at the moment, but because of the grandiose spending plans that Congress is considering and because of the fiscal crises in the United States, we have to be constantly vigilant. The possibility of legislation seeking new sources of revenue is always there. They can be slipped into 2,000-page bills in the dead of night. Often there’s just a few days, if that, to read what the conference report has to say. The danger to philanthropy is ever-present in an age of grandiose spending plans that have to be paid for.