Ten years ago, when Stanford political science professor Rob Reich sent his first-born son off to kindergarten in Palo Alto, Calif., he was shocked to receive a note from the public school on the first day of his son’s enrollment.
“Our expected, but voluntary, contribution to support the finances of the school is $2,000 per child,” the note read.
That experience so disturbed and intrigued the political scientist that he began to look into the data about private fundraising for public schools. “It showed exactly what you’d predict. It didn’t happen in poorer neighborhoods,” Reich says.
The intersection of education and politics was not a new area for Reich; it had been the subject of his graduate study at Stanford, following an earlier stint as a sixth-grade teacher in Houston.
The inspiration he got from his experience with the Palo Alto school system culminated in his book Just Giving: Why Philanthropy is Failing Democracy and How It Can Do Better, released in November 2018, and gave Reich a voice in the debate about philanthropy that includes social critics such as Anand Giridharadas. The toxic philanthropy of people like Jeffrey Epstein and the Sackler family has intensified concerns.
In looking at philanthropy, Reich takes a more nuanced approach. As he recalls, the donations to the Palo Alto public school were eligible for the charitable deduction—which seemed the opposite of what that public policy was intended to do.
Instead of giving to the poor, “it’s people giving to their own kids’ schools in wealthy suburbs to support their own property values, and the federal government is giving a public subsidy to it,” he says.
Reich thought that only exacerbated the problem that government was supposed to be redressing—and he began a decade-long look into the history of charitable deductions, their tax benefits and the policies that shape big philanthropy.
The tax-exempt 501(c)(3) organization dates to the introduction of the federal income tax, but these groups exploded in popularity after World War II and have grown commensurately with the massive gains in wealth by the top tier of Americans.
Why should we care?
Reich believes, for example, that giving to public schools makes inequality of school opportunity worse, not better. “If the people in Palo Alto think that they are promoting justice or school equity by giving money to the Palo Alto school system, they’re wrong. That’s not fundamental change. That’s a self-interested benefit for them.”
Reich, who is also the director of Stanford’s McCoy Center for Ethics in Society and codirector of its Center on Philanthropy and Civil Society, spoke with Worth about why much of philanthropy is undemocratic and unaccountable, how the tax law should be changed—and what philanthropy can do that’s helpful.
Q: You say that philanthropy is undemocratic. What do you mean by that?
A: One of the fundamental commitments of a democratic society is a commitment to equal citizenship and the equal opportunity to influence politics or public policy. That’s why we have constitutional protections for one person, one vote. Rich people can’t buy the votes of other people. Rich people don’t get five times or 10 times or 100 times the votes of poor people. And when big philanthropists nakedly try to affect public policy, they are effectively acting as a plutocratic element in a democratic setting. I think another way to appreciate the plutocratic character of big philanthropy is to understand it as an exercise of power. Since wealthy people have more private resources than other people have, they can exercise more power. And then the most important thing to recognize in addition to that is that big philanthropy is fundamentally unaccountable to citizens.
How so?
If you start a for-profit company, you have investors who are wanting to show a return over a short time horizon. You have customers you have to please. If you’re a foundation, you don’t have competitors. You don’t have consumers. You have instead basically beggars who are trying to get more money from you. So there’s no marketplace accountability within the world of foundations.
That’s also different from politics.
Yes. When people stand for election, they have to answer to a constituency at some point. And if citizens don’t like the spending preferences of their elected officials, you vote them out of office. In philanthropy, there’s no such thing as voting the philanthropists out of office. Big donors are fundamentally unaccountable, plutocratic powerful entities in a democratic setting. So the task is to ask the question whether different public policies should successfully domesticate plutocrats to serve rather than subvert democratic ideals.
If philanthropy is undemocratic, should it exist in our society?
I think the policies and the social norms that we have right now make philanthropy undemocratic. It’s not inherently undemocratic. We live in an era today, in the second gilded age in the United States, in which the wealthiest people amongst us do everything they can to legally diminish their tax contributions as close to zero as possible. And in fact, wealthy people are paying less in tax today than middle class people as a percentage. We’ve lost the spirit of progressive taxation. Then after having diminished their tax contributions, wealthy people complain about the inefficiency and dysfunction of government and announce themselves as superior contributors to public benefits, put their money into a foundation and take a further tax deduction for doing so. And then they ask the citizens to bend over in gratitude to them for their superior wisdom. That’s effectively a perversion of what it means to try to live collectively as equal citizens in this society, in a democratic society.
Philanthropists often say they don’t trust the government and believe they can do a better job.
When they complain about the dysfunction of democratic government today, there is something to the complaint. In other words, there is a lot that’s dysfunctional about government, but the solution to government dysfunction is not philanthropy. The solution is civic action and rejuvenation of our democratic institutions.
Can you be more specific?
Consider public school contributions. Friends I have in Palo Alto say, “We need to give $2,000 for kids to the public school. And the reason we need to do this is that the school finance system in California is broken.” And I’ll then say, “What difference is your $2,000 making to changing the school finance system in California?” The answer is, none, it’s not doing anything about that. It’s leaving the underlying problem in place and giving wealthy people the sense that as a donor they’re kind of fixing the problem at the most local level. I’ll give the money to my own kids’ school rather than to helping as a citizen to solving the problem in California more generally.
In the beginning of your book, you talk about how Rockefeller was heavily criticized when he wanted to start a philanthropic foundation. Why was it so different then than it is now?
When John D. Rockefeller was the wealthiest person in the world, he did what our current billionaires do—he wanted to set up a private foundation. He wanted to return some of his enormous earnings to society, which is an admirable sentiment or an idea. But some people believe that his money was gained through illicit or harmful means. He broke unions; he was a monopolist. So they viewed him as effectively having tainted money, in much the same way we do today about the Sackler family. Secondly, even if his money wasn’t tainted, people, I think appropriately, directed scrutiny toward the efforts of especially wealthy people to play a policy role in a democratic setting. The story I tell about the founding of the Rockefeller Foundation involves people saying in the U.S. Congress that even if Rockefeller were a wise and beneficent man, the idea of a foundation as large as Rockefeller should be rejected because it’s repugnant to the whole idea of a democratic society.
It is interesting that the U.S. Congress was able to stop it at that time (though Rockefeller was able to get New York state to allow it.) Fast forward to where we are today, would you argue then that we are in a much more plutocratic age than ever in our history?
We are for sure in a second gilded age in which the power of the wealthy and the gaps in wealth and income inequality have never been larger. I think we are in the early stages of, call it a neo-progressive reaction to the second gilded age where Elizabeth Warren and Bernie Sanders are the early green shoots of that reaction.
Why are the tax incentives bad and how should they be changed?
The charitable contributions deduction is a deeply regressive tax instrument or policy instrument. By design, it rewards the wealthy to a greater degree than it rewards the middle class or poor donor. And the way to think about this is that deduction provides a subsidy at the rate of your progressive tax bracket. If I give away $1,000 and I’m a millionaire and I’m taxed at the highest rate, let’s call it 40 percent, my $1,000 contribution cost me $600 and $400 is forgiven from my taxes. There’s a public subsidy in the form of foregone tax revenue from my $1,000 contribution at the rate of $400. If you, by contrast, are a middle class person, you’re taxed with a 25 percent rate. You make the same $1,000 contribution to the identical organization I give to. The same social good is produced, each of us gave $1,000 to the same organization. Your donation cost you $750 dollars, and there’s a subsidy of $250 from your tax bracket. And if you don’t itemize, that contribution costs you $1,000.
I haven’t seen any of the presidential candidates talking about getting rid of the charitable deduction. Why is that?
It’s something in the neighborhood of a third rail. I would say that my own proposal is not to get rid of the tax incentives, but to change them from a tax deduction to a tax credit so that each citizen receives the same tax benefit for making a charitable contribution. Bill Gates gets a $1,000 tax credit, you get $1,000 tax credit, etc.
Would people continue giving if they didn’t get the tax break?
That’s a fundamentally empirical question. The tax deductions for giving only came into being in 1917, so Carnegie and Rockefeller gave money away without any charitable contribution deduction whatsoever. And one-third of all charitable giving in the United States from living donors goes to churches or congregations. Very very few people are tax optimizing when they’re in the Sunday contribution basket mode.
You also argue that to really be successful, philanthropy should have a long-term perspective. Why?
The chief focus of my book is examining the public policies that structure and give shape to the philanthropic and charitable sector. For people who have a lot of money, I think the best case for big philanthropy is for people to take long-time horizon experimental approaches to social problem solving, not short-time approaches, and if they want to do something in a short term, give money to the soup kitchen, give money in the wake of a disaster. They don’t need a private foundation to do that, just make a charitable contribution out of your back pocket.
Every democratic society needs to have a diverse and pluralistic civil society to help support public institutions. And every democratic society needs to have an orientation toward social problem-solving where some problems are only solvable over a long-time horizon. And that’s, I think, where philanthropy can come in and play a role. But that role is not just to have a wealthy person announce that they are superior in wisdom to public officials and are better at distributing public goods than the government is.
