Summer 2015 – Policing Philanthropy?

Why a new federal bureau for investigating charity is a terrible idea

Every few years, a charity scandal in the news provides the opportunity for critics to argue that the federal and state bureaus responsible for monitoring the charitable sector are not doing their jobs, and to call for deeper government oversight of all private philanthropy. The irony is that these arguments grow loudest when bad actors are exposed by existing rules and mechanisms of oversight.

The latest loud example is a May New York Times op-ed by Inside Philanthropy founder David Callahan. He offers a long list of proposals for tighter oversight of charities by regulators, riddled with inaccuracies and dangerous ideas. The piece was timed in response to recent charges brought against four cancer charities, and also to ongoing reports on fundraising and record-keeping at the Clinton Foundation. Callahan’s proposed restrictions on giving and his calls for a greatly expanded role for government are nothing new, but should be answered by philanthropists, because they would both jeopardize the independence of American civil society and undercut the generosity that supports so many vibrant free institutions.

While every undertaking will always have its share of miscreants, to suggest America’s nonprofit sector is “like the Wild West,” as Callahan does, is laughable. The IRS and state charity officials demand both accountability and transparency when it comes to matters like compensation, fundraising, grantmaking, institutional structures, and a host of other nonprofit management concerns. National organizations like the Association of Fundraising Professionals, the Council on Foundations, and the National Council of Nonprofits promote codes of conduct and examples of best practices. State and regional associations of funders and nonprofits provide guidance. There are numerous ombudsman organizations like GuideStar, GiveWell, CharityWatch, and Charity Navigator. The press observes and reports heavily on nonprofit activity. This model hardly resembles the O.K. Corral.

Callahan’s calls for more government intrusion stem from an essential presumption of public authority over private giving. He labels the donations of generous Americans (totaling over $358 billion in 2014) as “public money.” He mischaracterizes the tax exemption and the charitable deduction as government “subsidies” for giving.

This is exactly backwards. The tax exemption protects the independence of private institutions of civil society from government manipulation and interference. The charitable deduction recognizes that donations given away for the public good provide no tangible return benefit to the donor, and must be excluded from the donor’s income. The charitable deduction is unique among all other deductions in this regard, and its presence in the tax code reflects the central importance to our free society, since the nation’s earliest years, of voluntary donations of time and money. (See “It’s About Freedom, Not Finances” in our Summer 2013 issue.)

Scholars Evelyn Brody and John Tyler note in their Philanthropy Roundtable guidebook How Public is Private Philanthropy? that “foundations and other charities are not inherently public bodies, and their assets are not ‘public money.’” These organizations are obligated by the tax code and judicial rulings to provide social benefit and to follow rules which guard against private gain. But legal precedents make clear that “the inherent private character of these organizations” entitles them to “autonomy and independence.”

Callahan calls for measures to eliminate privacy in voluntary giving. He says donor disclosure should be mandatory for groups that work in the policy arena or are led by former public officials, though he appears comfortable allowing anonymous gifts to hospitals and arts organizations. But there are many hospitals and arts organizations that have policy interests, and the category of “former public officials” is both vague and broad. Does that apply to a small-town community center whose director is a former county legislator?

Readers who see anonymous giving as a virtuous act might well wonder when it became a vice. Many faiths praise the quiet giver who seeks no recognition. Individual donors choose anonymity for many reasons, humility among them.

There are also strong historical reasons for protecting donor privacy. When President Andrew Jackson was inflamed by abolitionist successes he tried to use postmasters to expose abolitionist donors to public ridicule, pressure, and threats. Maintaining the privacy of donations to public charities guarantees that our most controversial civil society institutions—precisely those that are working “to sway public policy”—can exist in a safe space where their donors are free from harassment.

This priority has been affirmed by the Supreme Court in its 1958 ruling in NAACP v. Alabama, holding that the Fourteenth Amendment protected the group’s right to keep its membership list confidential. Revealing that information, the majority wrote, “is likely to affect adversely the ability of [the NAACP] and its members to pursue their collective effort to foster beliefs which they admittedly have the right to advocate.” Undermining this constitutional right to privacy and free association would erode essential freedoms and cultural vibrancy.

Callahan also complains that too much giving is defined as charity. Some “independent” measure of public benefit should be used to narrow what is accepted as legitimate giving. It doesn’t take much imagination to see how that could lead to a narrowing of civic freedom, and even pressure on independent organizations that annoy established authorities.

Our tax code provides a liberal official definition: “The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

The broad discretion provided by the tax code reflects the variety of charitable choices Americans have traditionally made. To advocate for a hierarchical treatment of nonprofits, and gatekeepers who will decide what is allowed in civil society, is an alarming break with our long history in this crucial area. Providing differing levels of tax exemption and deductibility depending on an organization’s perceived value to a distant bureaucrat is to radically shrink civil society and expand government control. Exactly who will be making those judgments, and how will the “public” in “public benefit” be defined? If government chooses the winners and losers, how can we ensure a place for causes deemed politically or socially unpopular?

Ironically, Callahan’s next criticism is that there is not enough charity. He recommends that the mandatory payout rate for private foundations be increased from 5 to 10 percent, complains that donor-advised funds have no payout requirements, and casts doubt on the value of building endowments. Nowhere does he mention that donor-advised funds had an average aggregate payout rate of 22 percent in 2013, nor does he note that such funds are now the country’s fastest growing philanthropic vehicle precisely because they make it so easy and convenient to be generous.

A mandatory distribution payout rate of 5 percent for private foundations has been part of the tax code since 1981. Recent studies by Foundation Source and Foundation Center confirm that many foundations substantially exceed the minimum requirement. Indeed, there are many good arguments for foundations to spend themselves out of existence roughly within the lifetime of the donor to safeguard charitable intent and to maximize impact on social problems. But there is also a place in American society for institutions that exist to support their chosen causes in perpetuity. This is not a choice that should be enforced on foundations by the government.

Callahan argues that there should be “a better accounting of whether philanthropic dollars are effectively spent.” The implication is that such assessments are not being done. That is emphatically false. When giving money to things as various as encouraging math, reducing family disintegration, preserving classical music, or reducing the isolation of the elderly, assessment does not lend itself to a one-size-fits-all solution. In any particular year, givers experience a broad spectrum of great successes, acceptable outcomes, and disappointing failures. Most donors care a lot about efficacy and look closely for evidence that they are making a difference. Is it likely that Callahan’s “threat of regulation clearly in the background” will stimulate a higher quality of giving? More likely, demands for clear, quick, concrete results will discourage philanthropists from funding new ventures, from taking chances on unknown individuals, from tackling difficult problems. More risk-averse grants to safe, established organizations are hardly what we need.

The current role of federal and state charity oversight officials is to ensure compliance with the existing regulations that have been very successful in making fraud and self-enrichment rare in a huge sector that supports more than one out of every ten workers in the U.S. Managing existing rules is a big job, and one that demands ideological neutrality and professionalism. Adding tasks like assessment of the social value and effectiveness of charities would guarantee that subjectivity, favoritism, and corruption would work their way into charitable regulation. Recall that Steven Miller resigned as acting IRS commissioner in 2013 following the revelation that the agency was selectively targeting certain groups. With the much wider licenses to meddle that Callahan calls for, controversy and a constriction of civil society would almost be guaranteed.

Callahan calls for “a new federal bureau to police this sector.” This is an old and dangerous idea. With some notable exceptions, including during the current administration, the Internal Revenue Service has for most of its history been guided by a culture of professionalism, philosophical impartiality and respect for privacy in its administration of tax laws for exempt organizations. A seemingly independent regulatory agency would be more likely to be subject to political pressure and manipulation from interest groups within the nonprofit sector itself.

We depend on those who regulate our institutions of civil society to apply the laws in ways that promote citizen engagement, not discourage it. We rely on them to allow free discussion and free action with minimal intrusion, because anything more would be fraught with politicization and favoritism. Do we want a citizen-driven civil society—messy but rich and inventive—or one which must constantly be approved by official overseers?

Any essay on charity regulation which opens by describing charitable assets as “public money” and ends by begging for a new policing agency will give many Americans shivers. The right to choose how and where we make our gifts, even unpopular ones, is fundamental to our exceptional philanthropic freedom. Attempts to subject charity to a wide range of official processes and approvals can only go awry in the ugliest of ways.

Joanne Florino is vice president for public policy at The Philanthropy Roundtable.