Let's Dismantle Toxic Tax Policies That Feed Big Philanthropy
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by Lucy Bernholz
This is the third article in a five-part series exploring what's next for foundations and nonprofits. Bernholz and several experts will join us for two live briefings in the fall to discuss the ideas in these columns and take questions. Watch your email to get information on how to join us for the first on October 1.
In her new book, Civic Gifts, sociologist Elisabeth Clemens analyzes the relationship between nonprofit organizations and American government and, in the process, forces us to set aside a powerful myth about the philanthropic world: the myth of independence. Focusing on nonprofits and philanthropy without talking about the public systems that surround them and the public-policy choices that shape them is the equivalent of a young farmer polishing the apples she submits to judges at a county fair while ignoring the health of the soil in which those apples were grown.
In the United States today, a toxic tax code permeates our soil and prevents us from growing into a more equitable society. Our current tax laws starve our schools, hospitals, transit, and elder-care systems. They allow individuals to become trillionaires and corporations to pay nothing. They enable the amassing of philanthropic fortunes so large that people turn to them when government efforts fail.
For decades, these policies have concentrated financial benefits on the white ruling class while extracting wealth from low-income Black and brown people. The pandemic is the "big reveal" of the truly shared nature of these systemic inequities.
The political agendas of nonprofit and philanthropic advocacy organizations have focused for too long on the wrong end of tax policy. This includes deduction rates for charitable giving, payout rates for endowments, exemption rates for nonprofits, prevention of municipalities from taxing endowed or nonprofit property, and postage rates for certain charitable materials. Proposals of this type are fine, but they circumvent the most important issue: how our existing tax structure enables unjust accumulation by the already wealthy.
All but ignored in trade-association agendas for the philanthropic world are the larger issues of estate taxes, carried interest rates, corporate tax shelters, and personal exemptions that have contributed to the highest rates of wealth inequality in the world's history. Why? Because those same rules produce, theoretically, more big philanthropy.
A Feature or a Bug?
The question we must ask is whether a system that enables such massive concentration of wealth at the expense of an equitable society and functioning government programs should be sustained. Are the massive philanthropic legacies produced as a byproduct of this system a feature or a bug? Celebrity culture, the cult of the big, and tech boosterism have argued for the former. But perhaps, in the face of systemic failures so deep they can't be ignored, we will see it as the bug it really is.
Philanthropic fortunes, created at the expense of shared investment in government programs, will not and cannot address issues such as structural racism, inequitable public support for health care, housing, insufficient efforts to halt climate change, and so much more. Those failures are ours collectively. Only together can we solve them. It isn't simply that the funding doesn't add up — it's that relying on philanthropy and nonprofits to do the public's work is a form of lower cost outsourcing with less accountability. It's not democratic. And it's not working.
Abrogating Our Responsibilities
Moving in a new direction will require philanthropy and nonprofits to actively support public policies that dig deep into soil-level issues, including advocating for a just and fair tax code. That means, for example, challenging laws that minimize taxes on carried interest rates. Such laws benefit hedge funds, private-equity firms, and their owners. And these investment companies, in turn, contribute to the devastation of main streets, the decimation of local journalism, and the decline in the quality of services for the elderly.
By failing to organize and support advocacy for equitable tax policies, philanthropy reveals that its devotion to fueling its own growth is greater than its allegiance to its stated missions.
Most foundations and their advocacy associations would never admit this, of course. Instead, they simply focus their limited advocacy elsewhere. But failing to fix our tax policies destroys the soil in which public policies, such as our social safety net, grow. To ask philanthropy to step up and provide an alternative source of funding is to abrogate our responsibility to govern ourselves.
Philanthropic leaders themselves are quick to remind us that they don't have the money to fix massive public systems like education or health care. In other words, we need to stop underfunding government programs and start recognizing that philanthropy cannot fill in the gaps. We need to stop ignoring the reality of tax and wealth inequality and acknowledge that the status quo, no matter how much it benefits philanthropy, isn't working.
Lucy Bernholz is senior research scholar and director of the Digital Civil Society Lab at Stanford University's Center on Philanthropy and Civil Society.