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Sunday, March 30, 2008

Big Gifts, Tax Breaks and a Debate on Charity

by Stephanie Strom

The New York Times (September 06 2007)

Eli Broad, a billionaire businessman, has given away more than $650 million over the last five years, to Harvard and the Massachusetts Institute of Technology to establish a medical research institute, to the Los Angeles County Museum of Art and to programs to improve the administration of urban schools and public education.

The rich are giving more to charity than ever, but people like Mr Broad are not the only ones footing the bill for such generosity. For every three dollars they give away, the federal government typically gives up a dollar or more in tax revenue, because of the charitable tax deduction and by not collecting estate taxes.

Mr Broad (rhymes with road) says his gifts provide a greater public benefit than if the money goes to taxes for the government to spend. "I believe the public benefit is significantly greater than the tax benefit an individual receives", Mr Broad said. "I think there's a multiplier effect. What smart, entrepreneurial philanthropists and their foundations do is get greater value for how they invest their money than if the government were doing it."

It is an argument made by many of the nation's richest people. But not all of them. Take the investor William H Gross, also a billionaire. Mr Gross vigorously dismisses the notion that the wealthy are helping society more effectively and efficiently than government.

"When millions of people are dying of AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum", he wrote in his investment commentary this month. "A $30 million gift to a concert hall is not philanthropy, it is a Napoleonic coronation".

Elaborating in an interview, Mr Gross said he did not think the public benefits from philanthropy were commensurate with the tax breaks that givers receive. "I don't think we're getting the bang for the buck for gifts to build football stadiums and concert halls, with all due respect to Carnegie Hall and other institutions", he said. "I don't think the public would vote for spending tax dollars on those things".

The billionaires' differing views epitomize a growing debate over what philanthropy is achieving at a time when the wealthiest Americans control a rising share of the national income and, because of sharp cuts in personal taxes, give up less to government.

Familiar Recipients

A common perception of philanthropy is that one of its central purposes is to alleviate the suffering of society's least fortunate and therefore promote greater equality, taking some of the burden off government. In exchange, the United States is one of a handful of countries to allow givers a tax deduction. In essence, the public is letting private individuals decide how to allocate money on their behalf.

What qualifies for that tax deduction has broadened over the ninety years since its creation to include everything from university golf teams to puppet theaters - even an organization established after Hurricane Katrina to help practitioners of sadomasochism obtain gear they had lost in the storm.

Roughly three-quarters of charitable gifts of $50 million and more from 2002 through March 31 went to universities, private foundations, hospitals and art museums, according to the Center on Philanthropy at Indiana University.

Of the rest, the Bill and Melinda Gates Foundation accounted for half on the center's list. That money went primarily to improve the lives of the poor in developing countries. Valuable as that may be, it also meant that the American public effectively underwrote several billion dollars worth of foreign aid by private individuals, even though poll after poll shows Americans are at best ambivalent about using tax dollars in such assistance.

In contrast, few gifts of that size are made to organizations like the Salvation Army, Habitat for Humanity and America's Second Harvest, whose main goals are to help the poor in this country. Research shows that less than ten percent of the money Americans give to charity addresses basic human needs, like sheltering the homeless, feeding the hungry and caring for the indigent sick, and that the wealthiest typically devote an even smaller portion of their giving to such causes than everyone else.

"Donors give to organizations they are close to", said H Art Taylor, president and chief executive of the BBB Wise Giving Alliance. "So they give to their college or university, or maybe someone close to them died of a particular disease so they make a big gift to medical research aimed at that disease. How many of the superrich have that kind of a relationship with a soup kitchen? Or a homeless shelter?"

Philanthropists like Mr Broad say that looking at philanthropy solely as a means of ameliorating need is too narrow. "If you look historically at what Carnegie did with creating a library system and the Rockefellers in creating Rockefeller University, I think it does a lot more for society than simply supporting those in need", Mr Broad said.

About two percent of the money Mr Broad has given away through his two foundations over the last five years, or $15 million, went to support organizations like the United Way and the United Jewish Fund, which serve needy people as well as the middle class. The foundations also have given money to groups that help homeless children, and the International Rescue Committee.

Still, Mr Broad dedicates his biggest gifts to areas he thinks lack government support, like the $25 million he gave to the University of Southern California last year to found an institute for integrative biology and stem cell research, or the tens of millions he dedicated to complete the new Disney concert hall in Los Angeles.

Like many major philanthropists, Mr Broad said he considered such gifts an illustration of the Chinese proverb: "Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime." The argument is that simply taking care of the poor does nothing to eliminate poverty and that they will ultimately benefit more from efforts to, say, find cures for the diseases that afflict them or improve public education.

As for Mr Gross, despite his uncharacteristically fiery criticism of what he calls "philanthropic ego gratification", some of the large gifts he and his wife, Sue, have made are not so different from those made by other billionaires. He has given millions to a local hospital, for example, and for stem cell research.

And in 2005 the couple gave roughly $25 million to Duke, Mr Gross's alma mater.

But the Duke gift illustrates Mr Gross's priorities. The money is almost exclusively for scholarships.

"Universities have their own thing going - they want to build infrastructure and endowments and perpetuate their system, which isn't necessarily in the social interest", Mr Gross said. "Scholarships get a little more down to the ground level".

Taking Aim at the Tax Code

The investor Warren E Buffett also voices strong feelings about how donations are used.

When Mr Buffett pledged $30 billion to the Gates Foundation, he included a little-noted requirement that the foundation spend each increment of the gift he hands over, in addition to its own annual legally mandated spending. If Mr Buffett transfers $1.3 billion of stock to it, it must spend every nickel within a year.

"I wanted to make sure", he said, "that to the extent I was providing extra money to them, it didn't just go to build up the foundation size further but that it was put to use".

The Gates Foundation's work is largely international, although a portion of its spending supports efforts to improve urban education and access to college, so Mr Buffett's money is unlikely to be used to address basic needs in this country.

"I think the government ought to make sure that all the people here who drew short straws have a decent minimum", Mr Buffett said. "We moved toward that with Social Security, but we could go a lot further now".

He does not regard his gift as charitable and expects no tax benefit from it, in part because he has credit for past donations that he has not used.

Rather, he calls his sister, Doris Buffett, the "real philanthropist" in the family. Ms Buffett runs an organization, the Sunshine Lady Foundation, that helps the needy pay for college, medical expenses, mortgages, glasses and cars.

Mr Buffett recently has brought attention to himself as a critic of inequities in the nation's tax system, which offers the wealthy better tax breaks for charitable giving than it does the average taxpayer. Deductions for charitable giving can be claimed only by the fewer than half of all taxpayers who itemize, and those falling in higher tax brackets get bigger deductions for cash gifts.

The charitable deduction cost the government $40 billion in lost tax revenue last year, according to the Joint Committee on Taxation, more than the government spends altogether on managing public lands, protecting the environment and developing new energy sources.

Rob Reich, an assistant professor of political science and ethics in society at Stanford, goes so far as to say that the tax code promotes inequities through the breaks it provides for charitable giving.

Take schools. The Woodside Elementary School in Woodside, California., where the median family income is $196,505, raised $7,065 a pupil in 1998 from charitable contributions to a foundation it created, according to Professor Reich's research. Across the San Francisco Bay, a similar foundation to support the Oakland Unified School District, where the median family income is $44,384, raised $138 a pupil that year.

In effect, the government is subsidizing a system that enhances inequities between poor and wealthy public schools, Professor Reich said.

Raising Questions

Legislators, regulators and others are asking more questions about exactly what charities do with the money they are given.

"When foundations, corporations and individuals give money to the opera", said Xavier Becerra, a California Democrat on the House Ways and Means Committee who represents a district in Los Angeles populated largely by young working-class immigrant families, "my folks are very unlikely to benefit from those forgone tax dollars that could have been used for health care, for after-school programs for kids, for help in getting access to college education".

Yet Mr Becerra himself is a beneficiary of one of the country's wealthiest charities, Stanford, which has a $15.2 billion endowment and gave him a scholarship. "There is no way my parents could have afforded for me to go there without the generous financial aid the university gave me", he said.

At the other end of the political spectrum, Grover G Norquist, whose Americans for Tax Reform lobbies for lower taxes, suggests taxing nonprofit hospitals that cannot demonstrate that they provide significant care for the poor.

"I'm not aware of anything they do that a for-profit hospital doesn't do in terms of providing free care", Mr Norquist said.

Like other billionaire philanthropists, Thomas M Siebel, founder of Siebel Systems, has given his largest gifts to his alma mater, the University of Illinois at Urbana-Champaign. In 1999, he donated $32 million for a computer science center bearing his name, and he pledged $100 million this year to support basic research that he hopes will reduce dependency on carbon-based fuels.

But when the university suggested using some of that gift to put up another new building named for him and hire new professors, he said no.

"I told them to use the basement of an existing building and some of the really smart people they already have", Mr Siebel said.

Attracting philanthropic support to fight substance abuse is one of the biggest challenges in fund-raising, but Mr Siebel has donated more than $15 million to the Meth Project, an organization he created. "I think we'll save a lot of lives in the end", Mr Siebel said. "Isn't that what philanthropy is supposed to be about?"

He has also given the Salvation Army more than $18 million over the last six years, mostly to support services for the homeless. He said he gives to the organization because of its low administrative costs and lack of frills.

"When I first started doing this, I made a contribution to some organization, Harvest something or other, I think, that was working on homelessness", Mr Siebel said. "The next thing I knew, I got a plaque in the mail and an invitation to an awards ceremony".

He added: "I never gave them another nickel. What were they spending money on plaques for?"

Bill Totten


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