[R-G] [BillTottenWeblog] Philanthropy and its Uneasy Relation to Equality

[Bill Totten]

by Rob Reich

Department of Political Science, Stanford University


Philanthropy is tightly connected to liberty. This is so for two
reasons. First, philanthropy is voluntary. Whereas the state can mandate
and coerce behavior, activity within the philanthropic sector is not
compelled. Indeed, philanthropic or charitable actions that are coerced
are often thought not to be instances of philanthropy or charity at all.
It is no coincidence that philanthropic organizations are part of what
is typically called "the voluntary sector". Second, the exercise of
liberty includes freedom to associate, which, famously in the American
context, has resulted in a strong inclination for people to join
together to address and solve social problems. Philanthropy is not only
an activity of free persons, but when the state protects the freedoms of
individuals, it becomes a group activity. To illustrate this latter
point, any number of Tocqueville citations can be produced {1}.

Philanthropy is also tightly connected to equality. This is so because
the quintessentially philanthropic act - and the virtue in the
philanthropic act - is generally thought to consist in providing for the
poor or disadvantaged, or attacking the root causes of poverty or
disadvantage. Certainly this is historically true of the world's various
traditions of charity - think of alms-giving in various religious
traditions and the famous 1601 Elizabethan Charity Law. And many believe
it is true today: that the philanthropic sector in modern society is
justified at least in part because of its redistributive or eleemosynary
aims. Philanthropy results in the lessening of inequality between rich
and poor, either through direct transfers from the rich to the poor or
through efforts to improve structural conditions so that the poor will
no longer need to rely on charity for
basic sustenance.

This story, linking philanthropy to both liberty and equality, is an
attractive one. And it contains some truth. My aim in this essay,
however, is to complicate this rosy story. I hope to show how the rosy
story holds less than we ordinarily think it does, and that philanthropy
has an especially rocky relationship with equality. Befitting the theme
of this book - showing how philanthropy is capable of good as well as
harm - I shall argue that philanthropy is not always a friend of
equality, can be indifferent to equality and sometimes even a cause of
inequality. When philanthropy causes or worsens inequality, it can be
harmful and at odds with social justice. This is no decisive objection
to the existence of a nonprofit and philanthropic sector in society in
general, for there are a variety of justifications for philanthropic
endeavors, some of which depend not at all on philanthropy being
redistributive or eleemosynary. But when philanthropic activity actually
worsens inequality, any justification for the state's provision of
special tax treatment to philanthropic organizations is considerably
weakened, and perhaps entirely eroded.

In some sense I hope to make a familiar point about liberty and equality
and apply it to philanthropy. The conventional account about liberty and
equality sets these two ideals in tension with one another. On the one
hand, protecting the liberty of individuals will result in social
inequalities. When people are free to lead their lives as they please,
the cumulative impact of the choices they make will leave them in
unequal positions. On the other hand, promoting social equality will
require wide scale interference with the liberty of individuals. To make
people equal with respect to some opportunity or outcome, the state
needs either to redistribute goods from some people to others (for
example, through taxation) or to curtail the liberty of some for the
benefit of others. (Many believe that the former is tantamount to the
latter; philosopher Robert Nozick infamously described taxation as "on a
par with forced labor" {2}.) If the tension between liberty and equality
is unavoidable, then philanthropy cannot unproblematically embrace both
liberty and equality. The familiar story about philanthropy I began with
must be more complicated.

I write as a political theorist and therefore my focus is on the
political institutions in which philanthropy takes place rather than on
the actions and motives of individual philanthropists. I am inclined to
think that the actions and motives of individuals cannot be properly
understood or evaluated outside the political institutions that
currently structure philanthropy. (Can the motive of the philanthropist
be understood apart from the tax incentives that reward philanthropic
behavior?) But such a claim is not necessary for my argument here. I
want simply to recognize that, though philanthropy may be as old as
humanity itself, its setting in modern society embeds it firmly with the
political institutions of the state. Laws govern the creation of
foundations and nonprofit organizations, and they spell out the rules
under which these organizations may operate. Laws set up special tax
treatment for philanthropic and nonprofit organizations, and they permit
tax concessions for individual and corporate donations to qualifying
nonprofits. In this sense, philanthropy is not exactly an invention of
the state but can be viewed as an artifact of the state; we can be
certain that philanthropy would not have the form it currently does in
the absence of the various laws that structure it and tax incentives
that encourage it {3}. The goods and harms of philanthropy can be
products of, or at least can be promoted or diminished by, the policies
of the state that are designed to encourage or reward philanthropic
behavior. The basic argument I shall advance is that public policy does
not do enough, I believe, to encourage philanthropic behavior that aims
at greater equality. Worse, public policy currently rewards some
philanthropic behavior - in the form of tax concessions - that worsens
social inequalities and causes harm. The state is therefore complicit in
these philanthropic harms, and unjustifiably so.

The chapter proceeds as follows. The first section offers a short
consideration of the potential harms of philanthropy, distinguishing
between individual and institutional harms. A brief treatment of the
complex interplay between philanthropy and the tax code follows. I then
turn to the variety of institutional harms that public policies
governing philanthropy can inflict, focusing special attention on the
ways in which philanthropy is indifferent to equality. I then provide an
illustration of how philanthropy can be causally implicated in the
worsening of inequality: the case of private donations to public
schools. I conclude with a few gestures at policy recommendations aimed
at making the outcome of philanthropic endeavors more egalitarian.

One terminological note merits a comment. Though many people seek to
distinguish philanthropy from charity, usually on the ground that
philanthropy seeks to attack the root causes of social problems and
charity is the provision of direct assistance, or on the ground that
philanthropy refers to foundation activity and charity refers to
individual donations, I shall use the two here relatively
interchangeably. The reason for doing so is not because I think the
putative distinctions between the two are faulty. The reason is that,
however distinguished, both philanthropy and charity are activities
regulated and governed by a common institutional framework of laws and
public policies. When distinctions between philanthropy and charity are
necessary to make in order to account for differences in institutional
treatment, I indicate so below. Otherwise readers can assume that when I
write about philanthropy I am also including activities that more
typically go under the name of charity.


Philanthropic Harms

Philanthropists seek to intervene in the lives of others, or in the
institutions that structure the lives of others, in order to improve
their lives, create innovative solutions to problems, to create public
goods. Philanthropy is therefore capable of harm as well as good. The
notion that philanthropy can cause harm is perhaps at odds with popular
conceptions about what philanthropy is and does, but even philanthropic
practitioners recognize the potential for harm. Writing about the array
of private philanthropic foundations in the United States, for instance,
former foundation executive and current Duke University scholar Joel
Fleishman opines, "I believe deeply that foundations do far more good
than harm, and that such harm as they do can be attributed mostly to
operating inefficiencies and the consequent waste of assets, assets
which they are morally obligated to steward wisely" (Fleishman 2004, 112).

Fleishman's statement is not incorrect but it is pollyanna-ish.
Philanthropic acts can cause harms in a number of ways that go far
beyond the failure to steward assets wisely. We can divide these harms
into two broad categories: individual harms and institutional harms.
Individual harms are the product of the actions, motives, and behavior
of individual philanthropists; philanthropic endeavors sometimes harm
the people they were meant to benefit. Institutional harms are the
product of public policies and incentives that set the framework within
which philanthropy takes place; public policy can cause and exacerbate
harms itself, apart from the motives or actions of individuals.
Obviously individuals and institutions interact with and effect one
another. Institutional structures are set up by individuals and these
structures in turn have effects on the behavior of individuals. So the
two categories cannot be completely walled off from one another.
Nevertheless, the division between individual and institutional harms is
a helpful way to demarcate the kinds of harms worth worrying about.

This book concerns itself primarily with individual harms: the dangers
of philanthropic behavior that stem from moral dogmatism (for example,
imposing one's values on others), the perils of poor planning and
execution in philanthropy (for example, worsening problems that one
intended to ameliorate), the damage that arrogance, hubris, and vanity
can inflict (for example, being patronizing or paternalistic). My
concern is with the institutional harms of philanthropy, how the public
policies that guide philanthropy or the very structure of philanthropy
itself can be harmful.

In some respect, this is an old criticism. Left-wing critics, especially
those of a Gramscian bent, have long suggested that philanthropy is but
another self-interested means of the powerful to continue their
domination of the poor and to entrench the ideological interests of the
wealthy in all of society {4}. To the extent that the state is involved
in supporting philanthropy, the state would merely be abetting the
philanthropic actions of the powerful and reinforcing their already
dominant position. But one needn't be a foe of capitalism to see how
philanthropy can be harmful. Contemporary political philosopher Will
Kymlicka argues, for instance, that justice supercedes charity in
importance, and that our obligations as citizens to fulfill and realize
social justice through political institutions effectively subsume any
reasons we might have to perform acts of charity (Kymlicka 2001) {5}.
Kymlicka's argument raises the basic question of why the state should be
involved in any way whatsoever in subsidizing, through tax incentives,
philanthropic activity. Philanthropy existed long before the state
decided to become involved, so it is surely not true that philanthropy
would disappear absent the state's involvement. These are important
critiques that cut to the heart of the very legitimacy in a democratic
society of philanthropic and charitable activities and organizations.
But for purposes of this essay I shall sidestep the important issue of
justifying the "intervention" of the state in legitimizing, regulating,
and providing incentives for philanthropy and instead simply assume,
with the weight of longstanding practice as a provisional warrant, that
such state involvement can be justified. The relevant question here is
to ask, if the state will be involved, what are better rather than worse
public policies for philanthropy, policies that will encourage goods
rather than harms.

Leaving aside, then, radical broadsides against philanthropy and worries
about whether the state should be involved at all in philanthropy, what
are the institutional harms about which we should be concerned? To
answer this question we first need a better understanding of the
particular manner in which modern philanthropy is not the sum total of
individual philanthropic decisions but must be seen as resting in a web
of public policies, mainly in the tax code.


Philanthropy and Tax Policy

Nonprofit organizations and philanthropic foundations enjoy an array of
substantial tax benefits at the federal level. The details and levels of
these benefits have changed from time to time, either when Congress
passed legislation directly affecting nonprofits and foundations or when
Congress passed legislation making changes in the rates of taxation for
individuals, estates, and corporations. The rules are often very
complicated, but the underlying mechanisms that supply the tax advantage
are simple {6}. First, nonprofit organizations, including philanthropic
foundations, which are a specific kind of nonprofit organization, are
tax-exempt entities. They are not subject to tax on income (for example,
donations or grants made to the organization or fees collected in the
performance of their function, such as tuition payments to
universities). Second, for a specific and large class of nonprofit
organizations (those called 501(c)(3)s after the section of the tax code
that defines them), contributions of cash or property to the nonprofit
organization are tax-deductible for the individual or corporation making
the contribution. This latter provision is perhaps the most well-known
institutional incentive for charitable activity, and some version or
another of this incentive has existed since the creation by the US
Congress in 1917 of a federal income tax. In addition to these two basic
mechanisms, nonprofit organizations are exempt from tax on investment
income; private foundations pay a small two percent excise tax on net
investment income, generally coming from endowments. Finally, nonprofit
organizations of all kinds are generally exempt from property taxation
at the state and local level.

Expressed in the abstract language of the tax code, it is hard to
appreciate just how significant an intervention into charitable and
philanthropic behavior these tax laws are. To get a better picture,
consider what the tax laws mean in concrete terms for a would-be donor.
The mechanism of a tax deduction for a donation creates a subsidy by the
government at the rate at which the donor is taxed. So a person who
occupies the top tax bracket - currently 35% - would find that a $1,000
donation actually "cost" her only $650. The government effectively pays
$350 of her donation, subtracting this amount from her tax burden.
Similar incentives exist for the creation of private and family
foundations, and for contributions to community foundations, where
donations and bequests to a foundation are deducted from estate and gift
taxation.

In permitting these tax incentives, federal and state treasuries forego
tax revenue. Had there been no tax deduction on the $1000 contribution,
the state would have collected $350 in tax revenue. Or to put it
differently, tax incentives for philanthropy constitute a kind of
spending program or "tax expenditure". {7} Just as a direct spending
program has an effect on the annual budget of the United States -
Congress allocating funds for defense spending, for example - so too
does a tax deduction affect the national budget. In fact, the fiscal
effect of a direct spending program and a tax expenditure is exactly the
same. Seen in this light, tax incentives for philanthropy amount to
massive federal and state subsidies, or tax expenditures, for the
operation of philanthropic and charitable organizations and to the
individuals and corporations who make charitable donations. These tax
policies have been described as "the world's most generous tax
concessions" (Clotfelter 1988/1989, page 663). One economist observes
that "no other nation grants subsidies at such a high level or across so
many types of activities" (Weisbrod 2004, page 45).

Just how large are these subsidies? It is surprisingly difficult to put
a precise dollar figure on the total. Evelyn Brody estimates that the
charitable contribution deduction in the federal income tax code alone
cost the US Treasury nearly $26 billion in 2000, and the charitable
contribution deduction in the estate and gift tax code more than $6
billion (Brody 1999, page 695). These already large figures omit tax
concessions on income earned by nonprofit organizations and property
taxes that would be paid by nonprofits and foundations, so they
considerably understate the total subsidy. But focus just on the
charitable contributions deduction in the income tax code. According to
the fiscal year 2008 US Federal Budget, estimated tax expenditures in
2008 on charitable contributions total more than $56 billion, a sharp
rise (100+%) from Brody's calculation in 2000. Measured against other
tax expenditures given to individuals in the federal tax code, the
charitable contributions deduction is the second largest of more than
130 such tax expenditures, ranking only behind the mortgage interest
deduction (Analytical Perspectives, Budget of the United States 2008,
pages 285-327).

This short overview of tax policy and philanthropic activity does not do
justice to the complexity of the rules that divide up kinds of nonprofit
organizations, nor to the different tax treatment and regulation of
these entities, nor even to the intricate debates about how to specify
the total cost of the tax expenditures to the federal and state
treasuries. Moreover, as I mentioned earlier, whether the state should
provide these tax concessions is not a question I will take up here.
Presumably when the state extends advantageous tax treatment to
charitable and philanthropic behavior, it rewards or provides incentives
for such behavior {8}. It will suffice for my purposes here merely to
have shown how significant and wide ranging these tax policies are for
nonprofit organizations and philanthropic foundations. I wish now to
turn to questions about the potential harms that these tax policies -
the political institution that channels and shapes
philanthropic behavior - can inflict.


Public Policy and Institutional Harm

Let us note first a range of arguable harms, or at the very least
unfairnesses, that inhere in the current structure of the preferential
tax treatment of nonprofits and philanthropies. First, the charitable
contributions deduction is available only to those individuals who
itemize their deductions, people who opt not to take the so-called
"standard deduction" on their income tax. This effectively penalizes, or
fails to reward and provide an incentive for, all people who do not
itemize their deductions, a group that constitutes roughly seventy
percent of all taxpayers {9}. Thus the low-income renter who does not
itemize her deductions but makes a $500 donation to her church receives
no tax concession while the high-income house owner who makes the same
$500 donation to the same church can claim a deduction. One might think
that it is predominantly high-income earners, and therefore itemizers,
who make charitable contributions, but this is false. A remarkable 89%
of American households made a charitable contribution in 2000 {10}. The
consequence is that a great many people are capriciously excluded from
enjoying the tax deduction simply because they do not itemize deductions
on their return. Why should the benefit of the charitable contributions
deduction turn on this contingency?

Second, the tax subsidy given to those who do deduct their charitable
contribution possesses what is known as an "upside-down effect". The
deduction functions as an increasingly greater subsidy and incentive
with every higher step in the income tax bracket. Those at the highest
tax bracket (35% in 2006) receive the largest deduction, those in the
lowest tax bracket (ten percent in 2006) receive the lowest deduction.
As two scholars wryly note, in such a system "the opportunity cost of
virtue falls as one moves up the income scale" (Musgrave and Musgrave
1984, page 348). Table 1 illustrates how the progressivity of the tax
code translates, perversely, into a regressive system of tax deductions:
the wealthiest garner the largest tax advantages. Compounding this
oddity is a variant of the objection offered above. Identical donations
to identical recipients are treated differently by the state depending
on the donor's income; a $500 donation by the person in the 35% bracket
costs the person less than the same donation by the person in the ten
percent bracket. Since the same social good is ostensibly produced in
both cases, the differential treatment appears totally arbitrary. If
anything, lower-income earners would seem to warrant the larger subsidy
and incentive. The upside-down phenomenon is not specific to the tax
deduction for charitable donations, of course. Deductions in general
massively favor the wealthy. In 1999, fifty percent of all tax
deductions were claimed by the wealthiest decile of earners.

Table 1 is at http://www.law.ucla.edu/docs/reich__philanthropy_equality.pdf

Both of these features of the tax code arbitrarily and unfairly benefit
the well-off. In the process, the structure of the tax code's treatment
of philanthropy, it could be argued, harms low-income earners, who are
either excluded from the benefit of a deduction or who receive a smaller
subsidy for the same charitable contribution. This is so because the tax
code, as applied to charitable and philanthropic donors, arbitrarily
discriminates between individuals on the basis of a characteristic -
status as itemizers or tax bracket position - that is unrelated to the
purpose of the preferential tax treatment in the first place. It would
be quite simple to remedy this unfairness and remove the harm. Congress
could allow non-itemizers to deduct their charitable contributions from
their income. Better, since this solution would still leave the
upside-down effect in place, Congress could allow all donors a tax
credit, rather than a tax deduction, for donations, capped at a certain
level. This fix would be of the greatest marginal value to lower income
individuals but would still be an equivalent subsidy for all persons.
Congress has at times debated versions of both remedies, but neither has
ever become law.

Even if Congress were to pass legislation that eliminated these unfair
aspects of the tax code, important questions about the structure of tax
policy would remain. The focus would turn from evaluating whether tax
laws treat the supply-side of philanthropy in a fair and justifiable way
- the donors - to whether the incentive of a state subsidy works in a
way to encourage the good that we wish philanthropy to accomplish and
deter the harms that we wish to avoid. This is important for more than
the obvious reason that we wish for public policies of any sort to bring
about good rather than harm. It is also important because in providing
tax concessions to philanthropy, the state is not merely permitting and
setting guidelines within which philanthropy takes place - offering the
state's imprimatur to every charitable nonprofit and philanthropic
foundation and charitable donation and bequest - but is actively
participating in what nonprofits and foundations and donors do. If the
state is actually funding, through a tax expenditure, some philanthropic
harm, it makes the state complicit in the harmful action of the
philanthropist. It is no exaggeration to say that, as philanthropy is
currently structured, when philanthropists do harm so too does the state
{11}.

This is what lies behind Joel Fleishman's observation, cited earlier,
that philanthropy is harmful when philanthropic foundations fail to
steward their assets wisely and instead waste them without benefit to
anyone. It is false to say of such a situation that a wealthy individual
or foundation simply squanders its assets and to remark, "Too bad for
the donor or the foundation but no loss to the rest of us". Instead, we
should recognize that the individual or foundation squandered assets
that, had there not been tax concessions, would have been the public's
in the form of tax revenue. The wasting of philanthropic assets is the
wasting of assets that are partially the public's.

But, as I have asserted, the potential harms of philanthropy go beyond
poor management of philanthropic dollars. When our focus is on
institutional rather than individual harms, our attention necessarily
moves from the motives and actions of the individual to the effects of
the public policies that structure the philanthropic sector. Do the
public policies encourage good or cause harm? In focusing on the
potential harms, there are a great many ways to proceed. One might
examine how public policies create a regional bias in philanthropy,
favoring parts of the country with concentrations of wealthy people (see
Clotfelter 1988/1989). One might examine how public policies
systematically favor certain kinds of nonprofits, especially those that
save money and earn endowment income. Here the very large beneficiaries
are private foundations and major universities (see Brody 1999, page
696). One might also examine why public policy should ignore gifts of
time and labor and instead reward gifts of cash or assets. The list of
potential institutional harms is lengthy.

In keeping with the initial question of this chapter, I shall focus on
whether and how public policies strengthen or weaken the connection
between philanthropy and equality. Do public policies governing
philanthropy contribute to activities in the form of direct assistance
or structural reform that benefit the poor and disadvantaged? Do public
policies direct or provide incentives for philanthropic dollars to flow
in a redistributive direction, from rich to poor?

On the one hand, public policies in the nonprofit and philanthropic
world appear to take account of the likely distributional flow of
dollars. Most significantly, in order to qualify for 501(c)(3) status as
a nonprofit - the status that permits organizations to receive
tax-deductible donations - an organization must serve religious,
charitable, scientific, testing for public safety, literary, or
educational purposes. This large group of 501(c)(3) organizations is
usually referred to as the "public charities", distinguishing them from
other nonprofit organizations that are primarily mutual benefit
societies (for example, unions, private membership clubs, veterans
organizations, etc.) For certain nonprofit organizations that compete
with for-profit organizations in the marketplace for business, such as
day care centers and hospitals, there are additional rules that the
nonprofit organization serve poor or disadvantaged communities. In the
world of foundations, there is a long history and set of social
expectations that philanthropists work to improve society and benefit
the least advantaged. In addition, the public policies regulating
foundations subject them to more stringent controls than public
charities in order to help ensure that foundations produce benefits that
are public rather than private. Thus, for instance, since 1969
foundations have been subject to a minimum five percent payout rule and
must have a board of governors not controlled by the donor.

On the other hand, public policy seems remarkably indifferent to
equality and redistributive outcomes. One of the oldest objections to
the provision of tax-deductible donations to qualifying nonprofits is
that the policy fails to differentiate between the social benefits
produced by various nonprofits. Thus, from the perspective of the state,
assuming we are in the same tax bracket, the $1000 donation that you
make to a contemporary arts museum to underwrite a video installation at
the local arts museum is worth exactly the same as the $1000 that I give
to tsunami relief. Are these of equal social value? That social policy
should be indifferent between these two kinds of goods and provide
equivalent subsidies to their respective donors seems quite odd. Yet so
long as the recipient organization is a qualifying 501(c)(3), the state
grants a tax deduction.

More damningly, if we move away from the treatment of individual
contributions and consider the total distribution of charitable dollars,
we find a pattern of giving that appears hard to reconcile with
redistributive outcomes. As Figure 1 shows, the great majority of
charitable donations by individuals go to religion. Note too that the
"Other" category includes giving to private and community foundations,
which constitute a comparatively and perhaps surprisingly small portion
of the charitable universe. The unexpected elephant in the room, the
subject so often overlooked in discussions of philanthropy, is the
dominant presence of religious groups as recipients of charitable
dollars. Is giving to a religious group a redistributive or eleemosynary
enterprise? It might be thought so, if contributions to religious
organizations included gifts to religious schools and faith-based social
services. But gifts to these religious enterprises have been sectioned
off and assigned to their appropriate categories of education and human
services, respectively. Gifts to religious organizations can only be
understood as predominantly for the operation and sustenance of the
religious group, and in this sense, religious groups look more like
mutual benefit societies than public charities. It appears very
difficult, then, to construe giving to religion as redistributive {12}.
Even if we ignore the elephant in the room and focus instead on the
other recipients, we find that social welfare groups receive only two
percent of charitable dollars and human services only nine percent. A
larger amount goes to education, health, and science (thirteen percent),
which is potentially redistributive but not obviously so.

Figure 1 is at http://www.law.ucla.edu/docs/reich__philanthropy_equality.pdf

Clotfelter (1992) examines the distributive benefits of nonprofits and
concludes, optimistically I think, that "no overarching conclusions
about distributional impact can be made" and that while "in no subsector
is there evidence that benefits are dramatically skewed away from the
poor and toward the affluent" there is also evidence "that relatively
few nonprofit institutions serve the poor as a primary clientele" (page
22). Based simply on examining the distribution of charitable dollars,
then, it is at best very, very difficult to claim that charitable
contributions benefit the poor. Of the possible redistributive and
eleemosynary aims of public charities, Murphy and Nagel (2002) conclude:
"The word charity suggests that this deduction is a means of
decentralizing the process by which a community discharges its
collective responsibility to alleviate the worst aspects of life at the
bottom of the socioeconomic ladder. Since there is disagreement about
what the exact nature of that responsibility is, and about which are the
most efficient agencies, it is arguably a good idea for the state to
subsidize individuals' contributions to agencies of their choice rather
than itself making all the decisions about the use of public funds for
this purpose. But even if that is so, the existing deduction cannot be
defended on those grounds, because many currently deductible
'charitable' contributions go to cultural and educational institutions
that have nothing to do with the poor, the sick, or the handicapped.
State funding of such institutions may or may not be desirable, but the
argument would be very different, and 'charity' is hardly the right
word" (page 127).

Does the picture change if we limit ourselves to the world of
philanthropic foundations? Though these constitute a relatively small
part of the charitable universe (gifts from individuals and their
bequests accounted for roughly 85% of all private giving in 1998, the
remaining fifteen percent comes from foundations and corporations)
foundations might be more straightforwardly redistributive for three
reasons. First, the funds that create them almost always come from the
very, very wealthy; it would be difficult for the money to flow upward
to the even wealthier. Second, whereas the charitable giving of
individuals is directed very heavily toward religion (sixty percent of
all charitable contributions), foundations direct only a tiny fraction
(less that three percent) of their grant dollars to religion (Foundation
Giving Trends 2006). Third, at a conceptual level, to the extent that
our focus should be on philanthropy as an activity separate and distinct
from charity, we would have good reason to believe that philanthropic
endeavors, conceived as large scale interventions with an aim toward
social melioration, would be more likely to be redistributive in outcome
than the aggregation of charitable contributions to all nonprofit
organizations described above. The eye-popping growth of foundations in
the past fifteen years also warrants special attention. According to
figures produced by the Foundation Center, nearly half of the largest
foundations in the United States were created after 1989 (Foundation
Growth and Giving Estimates, 2004, page 9). An even more explosive
growth pattern can be seen in the subsector of community and family
foundations. Can foundations lay a greater claim than nonprofits more
generally to embrace equality?

Figure 2 displays the distribution of foundation dollars in 2002. The
grant dollars are certainly distributed more evenly than is the case
with the charitable contributions of individuals. But the grant
categories tell us relatively little about whether the grant dollars are
redistributive or not. Take the education category, for instance. Almost
half of foundation dollars to education go toward higher education. But
we have no way of knowing if these dollars are funding boutique centers
for research, the endowment of a professorial chair, or scholarships for
disadvantaged and poor students. Julian Wolpert's extensive analysis of
the redistributional effects of foundations notes a host of other
complex issues, including how to account for the time-horizon of
foundation activities, which are often directed at long-term rather than
short-term change, and the scope of foundation activities, some of which
are very local (community foundations) and others of which are global in
reach (for example, Gates Foundation) (Wolpert 2006). There are both
technical and conceptual issues in trying to measure redistribution.

Figure 2 is at http://www.law.ucla.edu/docs/reich__philanthropy_equality.pdf

Wolpert concludes that foundations are at best "modestly redistributive"
as can be determined with available data (Wolpert 2006, page xx). Let us
assume that he is correct and that, contrary to the evidence in the
nonprofit sector more generally, we are on firmer ground in believing
that the grants of philanthropic foundations are equality-enhancing. We
may nevertheless not yet conclude that philanthropic foundations are
redistributive in outcome, because we must still account for the tax
concessions to philanthropy and the counterfactual scenario in which the
money flowing into philanthropic foundations would have been taxed and
become public revenue. The relevant question is not merely, "Are
philanthropic foundations redistributive?" but rather, "Do foundation
dollars flow more sharply downward than government spending does?" In
order for the return, so to speak, on the public's investment in
philanthropy to be worthwhile, philanthropy must do better than the
state would do had it taxed the philanthropic assets.

Answering this counterfactual question is even more difficult than
determining whether philanthropic foundations are redistributive. We are
forced to speculate about how the state might spend the tax revenue it
could have collected if it hadn't extended the tax concessions to
philanthropists for their gifts to foundations {13}. I will not make any
such speculation here. Instead, I wish to note that anyone who seeks to
ground the special tax treatment of philanthropy on the sector's
redistributive outcomes must confront at least three reasons to be
suspicious that any such redistribution actually occurs. There is the
first and obvious difficulty that a motley assortment of nonprofit
groups all qualify for 501(c)(3) status, puppet theaters and soup
kitchens alike. There is the second difficulty that religious groups
dominate the beneficiaries of individual charitable dollars. And there
is the third difficulty that the burden on the sector's advocate is to
show not merely that philanthropy is redistributive but that it is more
redistributive in its actions than would be the government. In short, we
have some good prima facie reasons to doubt that philanthropy is
redistributive in effect or eleemosynary in aim. Philanthropy's supposed
tight connection to equality looks more and more dubious.

If we accept these prima facie reasons, we must conclude that the very
large tax expenditures of the American public on charitable and
philanthropic giving result in subsidies for the activities of
individuals that, in the aggregate, bear no discernible relationship
with equality, conceived of as money that is redistributed from rich to
poor or that is directed at the needy. Public policies governing charity
and philanthropy appear to be indifferent to equality, and what
redistribution occurs is the effect of happenstance or the fortunate
predilections of individuals rather than the incentive effects of public
policy. Let it be clear: one might still find reasons to justify the
existence of nonprofits and philanthropies, resting the justification on
the importance of decentralizing authority, creating a set of mediating
institutions in civil society, desiring the production of public goods
to be sensitive to local demand, reflecting and generating the pluralism
of a diverse democratic society. But the public policy framework that
gives preferential tax treatment to donors will be more difficult
justify. Though pursuing greater equality is not the only aim of social
policy, it is certainly one of the central aspirations of social
justice. If the massive tax subsidies given to philanthropy do not serve
to enhance equality, the justification will have to lie elsewhere.

And if public policies actively contribute to inequality, generating
greater inequalities than would exist absent the public policy? In this
case, certainly, the extraordinarily generous tax concessions would be
even more difficult, perhaps impossible, to justify. Yet in some cases,
philanthropy actively exacerbates social inequalities in a way that
seems fundamentally at odds with the appropriate egalitarian aims of
social policy. Here, public policy does active harm. And I turn now to
an illustration of exactly this phenomenon.


Generating Inequality: Private Funding for Public Schools

Private funding for public schools is a very old practice. Think of bake
sales, car washes, and spaghetti dinners. What's new is the scale and
professional organization of the effort and the total dollars being
raised. Where once it was parent-teacher associations (PTAs), with their
wide-ranging activities, that were the organizational hub of
fund-raising, today many schools and school districts have created
independent entities known as local education foundations (LEFs) whose
main or sole purpose is to raise private money to supplement public
funds. In some places, the local foundations resemble university
fund-raising offices more than volunteer-driven PTAs. New York City
famously hired Caroline Kennedy, the daughter of former President John F
Kennedy, to lead its education foundation, the New York City Fund for
Public Schools. LEFs are almost always 501(c)(3) organizations.
Individuals and corporations make tax- deductible contributions to the
LEF, which in turn funnels and disburses the money to the school or
district.

School and district policies determine whether private funds can be
collected at the school or at the district level (or at both), and
whether there are limits on how private funds can be spent (on core
academic activities or only on extracurricular activities). Very
frequently these donations are earmarked for particular activities - for
extracurricular events or materials, for additional schools supplies,
for field trips - giving the donors a nontrivial amount of input or
leverage on how the school or district operates. While parents cannot
suggest to the district that a special aide be hired to shadow their own
child around, funded by their private donation, circumstances permit
parents collectively to get the district to hire art and music teachers,
additional teacher aides, sophisticated technological equipment, and so
on, that would targeted to benefit their own children.

With ever-tightening state budgets and a general reluctance in many
states to boost education funding, LEFs have grown exponentially in
recent years. They exist in almost every large urban district, but they
are also increasingly common in smaller and comparatively well-off
suburban districts. For most LEFs, but especially those located in
suburban districts, the potential donors are parents of the children in
the school district or citizens of the town or city in which the
district is located.

It is difficult to fault the motives of parents and townspeople who
respond to efforts to fund-raise for public schools. Parents seek to do
the best by their own children.  Townspeople support their local public
institutions. Everyone can lay claim to a public spiritedness in
contributing to public education. Yet the distributional consequences of
private funding for public schools are not hard to intuit. Wealthy
schools and school districts can raise substantially more money than can
schools that have high concentrations of poor students. The effect will
be that the savage inequalities of school funding described by Jonathan
Kozol fifteen years ago - in which towns with high property wealth spend
much more per pupil on education than do poor towns and cities (Kozol
1991) - will be compounded by the philanthropic and charitable
undertakings of local education foundations. In short, local education
foundations worsen inequalities in funding between schools and between
school districts. And what's more, they do it withthe active support of
the state in the familiar form of tax subsidies for charitable
contributions.

Private giving to public schools is a nationwide phenomenon, but it is
perhaps most prominent in California, a state that has experienced a
long decline in public school funding in the wake of the 1971 Serrano
decision, which mandated much more equal spending across districts in
California, and the 1978 passage of Proposition 13, which capped
property taxes at one percent of assessed value and severely limited the
amount of money that could be raised from property taxes for education.
According to the California Consortium of Education Foundations, more
than 500 LEFs are operating in California. In an ongoing project, I have
been collecting data on the amount of money raised by LEFs and all other
501(c)(3) school organizations (primarily PTAs) in California, and
though the project is not yet complete, I report some results below {14}.

Table 2 shows the distribution of expenditures from LEFs, grouped by
district, on a per pupil basis from the years 1997 to 2002. What stands
out immediately is the large group of districts that have LEFs raising
more than $200 per pupil per year, represented by the bar on the far
right of each graph. This contrasts with the massive clumping of
districts that receive private funds at a rate of between $5 and $25 per
pupil each year. The overall picture of private dollars for public
schools is clear. Most districts are not raising appreciable amounts of
private money, but a small and growing percentage are raising $200 or
more per pupil.

Table 2 is at http://www.law.ucla.edu/docs/reich__philanthropy_equality.pdf

What districts are these, and just how much money are they raising each
year? Tables 3 and 4 give a good illustration of the winners and losers
in the private fundraising campaigns. Table 3 lists the top fifteen LEFs
in California in 1998, ranked by revenue. Two things immediately stand
out. First, we are talking about massive fund raising campaigns, with
each of the top fifteen LEFs receiving well over a million dollars in
revenue. Second, we see that when the revenue available to the
respective district is calculated on a per pupil basis, the list divides
sharply into two groups, suburban and urban districts. The italicized
rows represent suburban LEFs, each of which raised at least $100 per
pupil. The top performer, Woodside Elementary School District, a
district with a single elementary school, raised more than $7000 per
pupil in 1998. By contrast, the urban districts raise far less.

Table 3 is at http://www.law.ucla.edu/docs/reich__philanthropy_equality.pdf

Table 4 lists the top fifteen school districts in California in 1998
ranked by the aggregated revenue of all LEFs and other 501(c)(3)'s that
raise money in the district. The trend seen in Table 3 is here even more
pronounced. Suburban schools enjoy a massive private fund raising
advantage over urban schools, and the top performing suburban districts
in private fund raising have an exponential advantage.

Table 4 is at http://www.law.ucla.edu/docs/reich__philanthropy_equality.pdf

Those who have examined the phenomenon of private fund raising have
sought to explain it as the effort of parents to avoid court-mandated or
legislative efforts to equalize public school funding at the state level
(Brunner and Sonstelie 2003). Or they have sought to celebrate and
expand the practice, seeing it as the virtuous effort of parents and
local citizens to support their public schools. The lesson I wish to
draw from the phenomenon is not a strictly educational one, however. I
believe that the existence of private fund raising for public schools is
but one illustration of the fact that the public policies which guide
philanthropy give much greater deference to liberty than to upholding or
promoting equality. And in the school funding case, we should not at be
surprised. Public policy does much the same thing with respect to
parents and their children. We know that parents are a main cause - from
their genetic endowments, from their parenting styles, from their
socioeconomic standing - of inequalities between children when they show
up for the first day of Kindergarten. Yet public policy is rightly wary
about promoting equality between children at the expense of the liberty
of parents to raise their children as they see fit. A democratic society
would not countenance a "parenting police force" that would, say, limit
the number of bedtime stories that parents read to their children to
two. Liberty has a special place in the domain of the family {15}.

Yet in the private money for public schools phenomenon, the issue is not
an intervention in the family. It is the public institution of the
schoolhouse that is the focus of the money and of public policy. The
relevant question is not about limits on parental liberty within the
family but whether public policy not merely permit but provide
incentives for parents to give money to public schools so that their
children can receive a better education than they otherwise would
without the private funds? For many, the function of public schools and
the very reason why society invests so much money in them and compels
children to attend them is to try to remedy some of the inequalities
that children bring with them into the first day of Kindergarten. We
would think very poorly of the school system if the effect of public
schools was to exacerbate the inequalities between children in
kindergarten. Yet the institutional structure of philanthropy not only
permits charitable giving to exacerbate the vastly different levels of
public funding between schools. The institutional structure subsidizes
the charitable giving of those who, in seeking to support their own
children's or their own town's schools, worsen the inequalities between
schools. Rather than rewarding virtue, public policy rewards what from
the perspective of the public must be considered a vice. The state is
complicit in the creation of harms that it is ostensibly charged to
eliminate.

To see the problem more vividly, consider a hypothetical case - call it
the police department case - that is analogous to the phenomenon of
private giving to public schools. The block on which you live has been
victimized in recent months by a crime wave. The incidence of break-ins,
vandalism, and theft has increased. You and your neighbors attribute the
crime wave to lower funding of the police department, which has seen its
resources stretched thin as a result of budget cuts. Attempting to come
up with a solution, you and you neighbors pool together some money and
offer to make a $100,000 donation to a local police foundation that is
set up to provide additional financial support to the local police
department. You offer the donation only on the condition, however, that
the money be used to hire a new officer whose only patrol will be your
block. You fully expect to take a tax deduction for your donation.

Note that in both the school and the police cases there is an exit
option. Parents could choose to send their children to private school,
but they would not receive any tax deduction for their tuition payment.
Similarly, you and your neighbors could hire a private security officer,
but this would not qualify for any deduction either.

Should you be permitted to make the donation to the police department?
For most people, I believe that their intuition runs firmly against any
such donation. And public policy tracks our intuitions here. Not only
does public policy forbid anyone from taking a tax deduction for
donations to police departments, it strictly forbids the donation in the
first place. With more space, I would take the opportunity here to draw
several lessons from this hypothetical case - lessons about the
importance of public institutions not being deployed in the interest or
at the behest of private individuals, lessons about public policy
helping to set the incentives for citizens to participate in the
messiness of democratic politics rather than seeking private solutions
to their problems, lessons about how the public's interest in schooling
has waned in comparison to the public's interest in security. I restrict
myself however to only one lesson, one that is germane to the general
thesis of this essay. In the police case, the liberty of individuals is
constrained in the interest of equality. Private individuals are not
permitted to make charitable contributions to a public institution in
which all citizens are thought to have an equal stake. Note that nothing
less than the United States Constitution enshrines a version of this
principle. Only Congress can appropriate funding for federal branches of
the government. Beyond making a donation to the US Treasury, individuals
are not permitted to direct funds to a particular federal agency or
organization. This is not a denial of a tax benefit; it is a blanket
prohibition on giving.


Conclusion

I hasten to add that making a blanket prohibition on private giving to
public schools is not necessarily the most justifiable public policy
with respect to philanthropy and public education. The aim, it seems to
me, should be to have policies that make the effect of philanthropy
egalitarian rather than inegalitarian, to provide incentives in the case
of education for private giving to disadvantaged students, schools, and
districts. In other words, the aim should be to make good on the promise
of the old story about philanthropy with which I began - that
philanthropy is tightly connected to both liberty and equality.

Such policies are far from utopian. Institutional design here is key,
and there is much to learn from other societies, which are far less
generous or much more stringent in their tax treatment and regulation of
philanthropy. When we think about philanthropy and the nonprofit sector,
the aim cannot be, as is so often the case in writing about
philanthropy, to justify the current arrangements that we have in the
United States. Rather, the aim must be to identify what role the state
ought to play in the creation and operation of a philanthropic and
nonprofit sector.

It is at this point that an examination of philanthropy becomes an
exercise in political philosophy. There will be no final and definitive
answer in any such exercise, but it is important nevertheless to
recognize the potential injustices of current public policy. Public
policy creates the institutional context in which philanthropy exists.
Laws license and regulate the operation of nonprofit organizations and
philanthropic foundations. Laws also provide significant tax concessions
for the charitable donations individuals and activities of charitable
and philanthropic organizations. The public policies designed to create
a favorable environment for nonprofits and foundations and to offer
incentives for people to make charitable donations represent a
wide-scale governmental intervention within the charitable and
philanthropic sector. As things currently stand, these policies do not
do much, if anything, to enhance equality. Instead, they systematically
defer to the liberty of individuals to make philanthropic decisions of
their own. At worst, public policy is not merely indifferent to whether
philanthropy is equality-enhancing. As the private funding for public
schools phenomenon shows, public policy is sometimes causally implicated
in the creation of greater inequalities.

The rocky relationship between philanthropy and equality and the data I
have presented about private funding for public schools, I wish to
emphasize in conclusion, does not shake the very legitimacy of
philanthropy, charity, nonprofits, and foundations. But it should shake
any conviction or belief we might have that their legitimacy, and the
public policies that give incentives for their activities, might rest on
their connection to equality. In the end, when assessed as an
politically- and institutionally- sanctioned, encouraged, and rewarded
activity, philanthropy is much more tightly connected to liberty than
equality.


Endnotes

1  The most frequent invoked and justly famous Tocqueville reference is
almost certainly this passage: "Americans of all ages, all conditions,
and all minds are constantly joining together in groups. In addition to
commercial and industrial associations in which everyone takes part,
there are associations of a thousand other kinds: some religious, some
moral, some grave, some trivial, some quite general and others quite
particular, some huge and others tiny. Americans associate to give
fetes, to found seminaries, to build inns, to erect churches, to
distribute books, to send missionaries to the antipodes. This is how
they create hospitals, prisons, and schools. If, finally, they wish to
publicize a truth or foster a sentiment with the help of a great
example, they associate. Wherever there is a new undertaking, at the
head of which you would expect to see in France the government and in
England some great lord, in the United States you are sure to find an
association" (Tocqueville 2004, p. 595).

2  Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books,
1974), p. 305.

3  For an economist's perspective on how tax policy creates
"distortions" in the philanthropic sector, see Clotfelter 1988/1989.

4    For an analysis of the content and historical trajectory of these
left-wing critiques in the American setting, see Barry D Karl and
Stanley N Katz, "Foundations and Ruling Class Elites", Daedelus (Vol
116, No 1, 1987): 1-40. For a classic exposition of the Gramscian
critique, see Donald Fisher, "The Role of Philanthropic Foundations in
the Reproduction and Production of Hegemony: Rockefeller Foundations and
the Social Sciences", Sociology Vol 17, No 2 (1983): 206-233.

5  Kymlicka operates with a limited definition of charity: gifts of
money to other people in need, and he specifically separates donations
to organizations that promote activities enjoyed by the donor (for
example, cultural groups) or causes preferred by the donor (for example,
environmental groups or gun lobbies). Nevertheless, Kymlicka's argument
is set to undermine any account of philanthropy or charity whose aim or
justification is redistributive or eleemosynary. His conclusion: "Once
we accept a modern conception of social justice, our first obligation
must be to ensure that social institutions fulfil principles of justice.
And then ... justice will crowd out charity, both in theory and in
practice. It is only by radically curtailing obligations of justice that
earlier religious traditions were able to make significant space for
charity (Kymlicka 2001, p. 115).

6  For a detailed overview of the tax treatment of nonprofit
organizations, see John G. Simon, "The Tax Treatment of Nonprofit
Organizations: A Review of Federal and State Policies", in The Nonprofit
Sector: A Research Handbook, Walter W Powell, editor. (New Haven: Yale
University Press, 1987): 67-98.

7  The "tax expenditure" concept was pioneered by Stanley Surrey in the
late 1960s, and it applied to every tax concession in the tax code.
Surrey equated tax expenditures with direct spending programs in terms
of their respective impact on the federal treasury. For a comprehensive
overview, see Surrey and McDaniel 1985. The concept has had practical
effects: the United States government and many state governments now
publish an annual list of actual and estimated tax expenditures in their
annual budgets.

8  Whether the existence of the deduction actually has any effect on
rates of participation in giving and levels of giving is a matter of
debate. The conventional view is that the tax subsidy has an effect only
on very high income earners. Evelyn Brody concludes that in explaining
why people make charitable donations "tax considerations are not
paramount" (Brody 1999, page 714-5).

9  Calculated from the Internal Revenue Service, Statistics of Income
Bulletin, Table 1 (Individual Income Tax Returns: Selected Income and
Tax Items for Specified Tax Years, 1985-2002) (Fall 2004). Available at:
http://www.irs.gov/pub/irs-soi/02in01si.xls

10   Independent Sector, "Giving and Volunteering in the United States,
2001"

11   This remark suggests that a two-stage justification is needed to
explain and support the current organization of the nonprofit and
philanthropic sector, a fact that I believe is insufficiently recognized
in discussions about philanthropy and the voluntary sector. The first
stage of justification grants a license to philanthropic organizations
to operate; the state permits individuals to create foundations that
will give money away with fidelity to donor intent and without state
interference. A second stage of justification is needed to underwrite
the existence of the generous tax concessions designed to spur
philanthropic behavior. The second stage is independent of the first; it
is possible to decide that while the state rightly permits a nonprofit
and philanthropic sector, there should be no tax incentive for its
operation. I do not explore the
implications of this two stage process of justification here; a full
theory of philanthropy would need to do so.

12 Jeff Biddle presents some interesting though inconclusive evidence
that seventy percent of giving to religious congregations is for
operation of the congregation and thirty percent for philanthropic
undertakings. He also suggests that religious giving might be understood
as redistributive since it is possible, and perhaps likely, that
"wealthy members subsidize the spiritual consumption of less wealthy
members" within congregations (Biddle 1992, page 125). On this view,
charitable contributions to religion are redistributive when the scope
of analysis is confined to the flow of dollars within religious groups
themselves. This is by no means irrelevant, but to understand
redistribution in this sense is to depart from the spirit of the idea
that charity is connected to equality because charitable dollars go to
help the needy and flow from rich to poor.

13   Ken Prewitt notes that western European governments have been
historically more redistributive than the United States, and that the
counterfactual question presented here has correspondingly greater bite
the more redistributive a government is with its taxpayers' dollars
(Prewitt 2005, page XX).

14  Economists Eric Brunner and Jon Sonstelie have undertaken similar
research and were kind enough to share with me their database of
501(c)(3) school organizations in California. See Brunner and Sonstelie
(2003) for their own conclusions.

15 Parents possess great liberty indeed within the family, but it is not
absolute and can still be curtailed under certain circumstances, the
most obvious and uncontroversial of which are when parents abuse or
neglect their children.


Bibliography

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