Chronicle of Philanthropy Op-Ed: End the Charitable Tax Exemption and Remove the Conflict of Interest Baked Into Big Philanthropy, by Jeffrey Cain:
The genius of American philanthropy, it is often said, is that nearly all Americans, of every income level, give. But the tax exemptions and deductions in the Internal Revenue Code are not for all Americans, the overwhelming majority of whom don’t itemize their federal income taxes or claim the charitable deduction. Few will ever start their own foundation or open a donor-advised fund. Most don’t have a tax accountant, philanthropic adviser, or private bank account.
Instead, the formidable body of tax-exempt law, policy, and regulation created during the past 100 years provides the framework for Big Philanthropy. This is not solely about America’s wealthiest philanthropists and largest foundations. It is, rather, the system of charitable giving that bestows tax privileges upon donors in exchange for their charitable contributions. And it is a system powered by the conflict of interest inherent in those tax laws.
With most surveys showing public trust in nonprofit institutions in historic retreat and the number of households that give in decline, it seems reasonable to ask: What is the future of tax-incentivized Big Philanthropy?
Modest attempts at change have so far faced formidable resistance. Consider philanthropists Laura and John Arnold’s Initiative to Accelerate Charitable Giving [more here, here, here, and here], which would increase giving by promoting greater accountability and fixing inefficiencies in the tax laws. ...
[T]he Arnolds’ initiative has gone exactly nowhere. Legislation influenced by the proposal — the Accelerating Charitable Efforts Act — languishes in Congress. And to Big Philanthropy, the plan was dead on arrival. Of the 85,000 private, family, and community foundations in America, the Initiative to Accelerate Charitable Giving website lists fewer than 20 foundation members. Foundations from both liberal and conservative viewpoints have come out against it. The Council on Foundations opposes the legislation based on the Arnolds’ proposal because it adds “complexity and costs for foundations and donors.” The Philanthropy Roundtable warned that “this proposal would severely hamper Americans’ ability to give to causes they care about.”
The Arnolds’ proposal has run into the same Big Philanthropy buzz saw as the cap on deductions included in the Trump administration’s 2017 tax cuts. A flurry of reports, press releases, and op-eds foretold the collapse of charitable giving if the proposal became law. That did not happen. In 2019, Americans contributed $450 billion to charity, the second-highest amount ever at the time in inflation-adjusted dollars. “People donate when they have more after-tax income and when the economy is strong,” the Tax Foundation reported in 2020, “not when they are induced to do so by the tax rate.”
Why such bipartisan opposition among America’s elites to relatively minor changes in the tax code? Why is it that nonprofit organizations funded by George Soros, the Gates Foundation, and Charles Koch walk in lockstep when it comes to opposing changes to tax-incentivized Big Philanthropy?
The fundamental reason is the conflict of interest baked into the tax code’s charitable exemption. Under this system, the very nonprofits that philanthropies are required to fund may in turn use their tax-exempt dollars to advocate, educate, and even lobby in support of tax-exempt charitable laws that, in turn, benefit the nonprofits’ major donors. In other words, philanthropists can use their tax-advantaged funds to advocate for greater tax-incentivized charitable laws through the tax-exempt nonprofits they support. And they do. ...
Policy makers and the professional philanthropic class should stop playing cat-and-mouse games and instead embark on a bold new project: remove the conflict of interest inherent in tax-incentivized Big Philanthropy by ending charitable tax exemptions and deductions of every kind. This change would lead wealthy Americans to emulate the giving habits of the 90 percent of Americans whose charitable giving is made with after-tax dollars. Removing the charitable-exemption lid will inaugurate a new era of greater giving — and it will allow the independent sector to finally live up to its name.