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Economics

Should taxpayers subsidize philanthropists?

David Morris has an excellent piece in the Huffington Post decrying the increasing influence of private charitable players in public policy. In a system that is often bereft of any self-critique and usually celebrates the rise of philanthrocapitalism as an unequivocally good thing, the article raises two very important points.

First, it decrys the increasing influence of philanthropic institutions backed by private individuals in public policy. Two examples:

In 2008 Koch, or rather the Charles G. Koch Charitable Foundation, entered into an agreement with Florida State University to support the school’s economics department. The catch, according to the St. Petersburg Times was that Koch would have the authority to approve who ultimately filled the positions.

Gates (The Bill and Melinda Gates Foundation) financed the New Teacher Project to issue an influential report detailing the flaws in existing evaluation systems. The National Governors Association and Council of Chief State School Officers developed the standards and Achieve, Inc., a non-profit organization, coordinated the writing of tests aligned with the standards, each with millions of dollars from the Gates Foundation. The Alliance for Excellent Education received half a million dollars “to grow support for the common core standards initiative.

Concerns have been raised previously, including by the NYTimes and BMJ, that philanthropists may today have undue influence over public priorities and spending in ways not previously imaginable. A recent study found that giving by UK foundations for international development was just under half that of the DFID. Relying on philanthropy to solve public good challenges is simply a delegation of public responsibility but increasingly philanthropy is seeking to not just complement but change public financing, and this is not without consequence.

Morris, however, adds another critical argument. That such big ticket philanthropy is actually being subsidized by the state – and by extension the taxpayer.

We should bear in mind that what is reported as charitable giving by the 1% significantly overstates the actual private sacrifice, as economist Uwe E. Reinhardt points out. If the wealthy donate $10,000 and are in a combined 50% federal, state and local tax bracket their effective sacrifice is $5,000 and society as a whole, without its advice and consent, subsidizes the rest.

In the last few years a growing number of billionaires have established their own private foundations. They receive an immediate tax deduction for the full value of their contribution even though the foundation is only required to give away 5% of that endowment each year. Which means that for every $1 million contributed, which can mean a $500,000 loss to the public sector, the foundation must give away only $50,000.

This has long been the elephant in the room that no philanthropist will acknowledge. Most large foundations do not operate as charities – which spend all of their money each year. Rather, they operate as investment funds with large grantmaking teams, that spend only modest amounts on actually charitable causes. The rest goes to preserve the institution.

Charity enthusiasts also claim that philanthropy supports the public good and in many cases that is indeed the case – responding to humanitarian disaster, feeding the hungry, and supporting the local community. But the largest philanthropists are not content with those modest goals and are targeting more challenging issues – reforming public education, improving health systems, addressing the global AIDS epidemic, encouraging entrepreneurship.

These more ambitious objectives often tread on the public space. This would be good, if it led to a debate on how these challenges should be addressed. In reality, however, the wealth of these groups mean they not only advocate a particular viewpoint but also can finance its implementation. And the general popularity of philanthropy implies organizations, and viewpoints, not affiliated with them get short shrift in public opinion. The net result is not to increase, but decrease, debate.

This may well be unavoidable until philanthropists become more self-critical but does the taxpayer have to subsidize Bill Gates’ view on how education should be offered to people? Particularly when people are not even motivated by the tax incentive?

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