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Sunday, April 27, 2008

Philanthropy and its Uneasy Relation to Equality

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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http://www.law.ucla.edu/docs/reich__philanthropy_equality.pdf


Bill Totten http://www.ashisuto.co.jp/english/index.html

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