America’s civic sector is substantially unencumbered by government regulation—much freer to act without the advance approval of government officials than America’s famously vigorous and innovative for-profit sector. Moreover, America continues to be a notable exception, as many other countries have witnessed episodes of dramatic governmental intrusion on the very existence of nonprofit organizations.1
On November 30, 2015, Russia’s General Prosecutor’s Office issued a statement regarding two of the foundations created by financier George Soros, which are devoted to the promotion of free and tolerant societies with open, accountable governance: “It was found that the activity of the Open Society Foundations and the Open Society Institute Assistance Foundation represents a threat to the foundations of the constitutional system of the Russian Federation and the security of the state.”2 Between 1993 and 2012, 39 nations, including India, China, and Russia, enacted repressive legislation against some forms of non-governmental organizations (NGOs).3 In India, the recent targets of such state “regulation” have included the global environmental organization Greenpeace and the Ford Foundation. In China, it has included many Christian churches and their leaders. In April 2016, China enacted a broad new law significantly burdening the functioning of foreign nonprofits operating there.4
In Russia, according to another study in the same publication, Russian “legislation passed in 2012 requires locally operating NGOs to register with a special government body before they can receive foreign aid. Although the legislation applies only to groups that engage in ‘political activities,’ the Russian government defines that term so broadly that it encompasses virtually any effort aimed at influencing Russian state policies. NGOs that receive funding from non-Russian sources, moreover, must identify themselves as ‘foreign agents’ in their communication material—a requirement that only heightens their sense of vulnerability.”5
Protected by the US Constitution’s First Amendment guarantees of free speech, assembly, petition, and association, along with the long-celebrated freedom of the press, America’s nonprofit organizations are almost certainly the freest in the world to challenge government officials and agencies, to criticize as well as organize against powerful corporations, to call both majority and minority opinions to account, to propose innovative initiatives in every realm of public policy, to pilot new ways of solving public problems, and to propose and lobby for changes in the federal, state, or local governments.
John Gardner, the widely admired secretary of Health, Education, and Welfare under President Lyndon Johnson and president of The Carnegie Corporation of New York from 1955 to 1965, described better than anyone else I know the essential greatness and scope of America’s nonprofit sector. One of the most creative and admired foundation CEOs, Gardner was not only a funder of nonprofits but also the founder of two well-known national nonprofit organizations: Common Cause and The Independent Sector. Here is how Gardner defined America’s nonprofit sector:
Every American knows some piece of the independent sector.… But very few people have glimpsed its extraordinary sweep and its possibilities.… At its best, it is a sector in which we are allowed to pursue truth, even if we are going in the wrong direction; allowed to experiment, even if we are bound to fail; to map unknown territory, even if we get lost. It is a sector in which we are committed to alleviate misery and redress grievances, to give reign to the mind’s curiosity and the soul’s longing… to honor the worthy and smite the rascals with everyone free to define worthiness and rascality, to find cures and to console the incurable, to deal with the ancient impulse to hate and fear the tribe in the next valley, to prepare for tomorrow’s crisis and preserve yesterday’s wisdom, and to pursue the questions others won’t pursue because they are too busy or too lazy or fearful or jaded. It is a sector for seed planting and pathfinding, for lost causes and causes that yet may win.6
But Gardner also acknowledged the nonprofit sector’s shortcomings:
The nonprofit world does have its share of oafs and rascals.… If you can’t find a nonprofit institution that you genuinely dislike, then something has gone wrong with our pluralism.7
How did America’s civic sector come to be as independent as it is?
The short answer is that, unlike in European and many other countries older than the United States, America’s nonprofit sector preexisted the establishment of the country’s governmental institutions. Remember that the first settlers in Jamestown, Virginia, and Plymouth, Massachusetts, in 1607 and 1620, respectively, came to these shores in order to escape religious persecution in England and France, and on arrival they planted their churches wherever they settled in the New World. Those religious congregations provided not only spiritual sustenance but also a wide array of social services, including secular schooling, financial support for the indigent, medical services, and housing. Note too that, unlike the governance of religious congregations under the established Anglican Church in England and the Roman Catholic Church in France, each of these congregations was an independent, self-governing body. These churches were the first nonprofit organizations established in what later became the United States, and they, along with the schools, hospitals, and indigent care institutions they founded, continued to provide social services long after governments were gradually established in their areas. Essentially, they beat the government to the punch and they, as well as the governance models that they embodied, became the foundation of and precedents for the expansive civic sector that America now has.
America’s civic sector is not only the freest but also the largest such sector in the world. As of mid-2015, there were approximately two million nonprofit organizations in the United States—1,059,150 public charities, 101,892 private foundations, 368,720 noncharitable nonprofits, and 315,629 nonprofit religious congregations.8 As of 2013, the total revenues reported by US public charities were $1.74 trillion and the total expenses were $1.63 trillion. In addition, public charities reported owning assets worth over $3 trillion.9
To understand how significant America’s nonprofit sector is, consider these figures: in the 2014 fiscal year, the United States had a gross domestic product (GDP) of about $17.4 trillion. In that same year, the annual expenditures of the federal government totaled $4 trillion, of which 66 percent ($2.6 trillion) was “mandatory” spending, 16 percent ($640 billion) was for national defense, 6 percent ($252 billion) was to cover interest on the national debt, and only 12 percent ($520 billion) was for “discretionary” spending. Within “mandatory spending” were $1 trillion for Medicare/health, $900 billion for social security, about $106 billion for food assistance, about $47 billion for unemployment benefits, and $500 billion for “other.” Within “discretionary” spending, $72 billion went to education, $61 billion went to housing and community development, $38 billion went to international-serving organizations, $38 billion went to energy and the environment, $26 billion went to transportation, and $284 billion was for “other.”
So, if the total of “discretionary” expenditures by the federal government was $520 billion, the amount of money spent by the nonprofit sector ($1.7 trillion) was three times the amount spent by the federal government for roughly analogous purposes. I say “roughly” because medical services are not included in the federal “discretionary” purposes, and therefore, federal “discretionary” spending does not include entitlement expenditures for health and human services. The amount received from the federal government and spent by nonprofit organizations for health services, omitting entitlement support for Medicare and Medicaid, is estimated at $82 billion in 2015 dollars.10 But even when we add $82 billion to the federal “discretionary” category to make it parallel with the full range of nonprofit domestic activities, we come to around $600 billion. Nonprofit expenditures, at $1.7 trillion, are still nearly three times larger than that adjusted federal “discretionary” figure.
The point is not substantially altered if we subtract from total nonprofit expenditures the portion that is funded by the federal government. Total federal contribution to nonprofit spending amounted to $597 billion (including Medicare and Medicaid entitlement spending), which would bring the nonprofit/nonfederal total down to about $1.1 billion. Even after that subtraction, the ratio of nonprofit expenditures to federal “discretionary” spending stands at almost two-to-one.
What are the sources of the revenues received by nonprofit organizations?
Approximately 40 percent are from income for services rendered, such as tuition paid by students to educational institutions and hospital fees paid by patients or their insurance companies. Approximately 40 percent are from federal, state, and local government contracts and grants, and about 20 percent are from charitable contributions and gifts from all sources.11
American monetary generosity takes many forms, but what is most impressive is its consistency over the years. Charitable giving in the aggregate has been tracked by the Internal Revenue Service since 1956. Between then and 1972, donations from all sources were at or above 2 percent of the US GDP. From 1973 to 1998, charitable contributions’ percentage of the GDP was between 1.6 percent and 1.7 percent. Between 1999 and 2014 it returned once again to at or above 2 percent of the GDP, with the exception of the four years in the aftermath of the Great Recession between 2008 and 2011, when it dropped to 1.9 percent of the GDP, and slowly rebounded to 2 percent in 2013 and 2.1 percent in 2015.12 To put those figures in proper context, note that nearly the closest country for which comparable statistics are available is the United Kingdom, in which tax filers made contributions at the level of 0.84 percent of the United Kingdom’s GDP.13 In other words, over most of the past 40 years, American taxpayers gave almost two and a half times the share of GDP of the next most generous country.
Americans give huge amounts of money every year to the nation’s nonprofits. In 2015, total charitable giving from all sources was $373.25 billion. The breakdown is in Table I.1 below.
Compared with the size and growth of America’s GDP, the growth of today’s nonprofit sector and level of charitable giving, while large, is not outsized. Between 1990 and 2015, the US GDP grew, in 2014 inflation-adjusted dollars, from $10.8 trillion to $17.4 trillion. During that same period, total US charitable giving from all sources, in current dollars, more than tripled, from $98.3 billion in 1989 to $373.25 billion in 2014.14 In inflation-adjusted 2014 dollars, however, US charitable contributions grew from $178.6 billion in 1990 to $373.25 billion in 2015, slightly more than doubling.15 Moreover, if measured by personal disposable income in 2015 inflation-adjusted dollars, charitable contributions also grew only commensurately. The personal disposable income in the United States in inflation-adjusted dollars tripled from $4.254 trillion in 1990 to $13,403.2 trillion in 201516 while charitable contributions by individuals grew from $79 billion to $264.58 billion, just a bit more than tripling.18 In short, the share of Americans’ real after-tax income devoted to charitable contributions has risen only modestly since the 1990s, on average, but that growth has come atop a consistently high base. In 2015, Americans gave 2.0 percent of their personal disposable income to charity.19
I.1 Total charitable giving from all sources17
Type of Giver: Individuals during lifetime
Amount Given: $264.58 billion
Percent of Total Given: 71% of total
Type of Giver: Individuals by bequest
Amount Given: $31.76 billion
Percent of Total Given: 9% of total
Type of Giver: Foundations
Amount Given: $58.46 billion
Percent of Total Given: 16% of total
Type of Giver: Corporations
Amount Given: 18.45 billion
Percent of Total Given: 5% of total
The fact that 80 percent of the dollar value of all contributions comes from individuals is a testament to Americans’ devotion to nonprofit organizations as an important vehicle for community building. People give to express the values about which they care deeply. Thanks to their actions, many vital organizations, on the national level as well as in local communities, can regularly depend on the money (and time) of countless individuals of all income levels. This is powerful evidence of the commitment and altruism of Americans.
It is also significant that about two-thirds of those who file US tax returns—those who do not have income sufficient to make it worthwhile to itemize their deductions—contribute to charity without benefiting from any specific tax deduction for their donations. Instead, they benefit from the “standard deduction,” which for many years was calculated at 10 percent of gross income but which now floats a bit depending on tax status and is intended to reflect all categories of otherwise deductible expenditures. They thus benefit from this provision whether they make contributions or not—meaning that their gifts earn them no financial reward.
After individual giving, the next largest percentage of civic-sector organization revenues—$58.4 billion in 2015—comes from American foundations.20 As the late Paul Ylvisaker, the much-admired, long-standing senior program officer at the Ford Foundation, put it, “foundations are America’s passing gear.” They not only provide year-after-year support for existing nonprofit organizations, which are primarily the domain of midsized and smaller foundations’ giving as well as community foundations, but they are also the “go-to” source for enterprising individuals who need start-up money for new nonprofit organizations.
For example, inspired by Rachel Carson’s Silent Spring, which was published in 1962, four young men fresh out of Yale Law School decided in 1967 to try to create a national organization that would focus on strengthening America’s capacity to conserve its natural resources and protect its environment from degradation by using their legal training. They turned to Mitchell Sviridoff, the Ford Foundation’s visionary but highly practical vice president for national affairs; they were successful in persuading him to have Ford provide significant start-up and sustaining support for what became, in 1970, the Natural Resources Defense Council. In 1968, other like-minded individuals who had in 1967 gone ahead and founded the Environmental Defense Fund, a science-based environmental organization, approached the Ford Foundation and it, too, started to receive significant Ford support that year. Today, having been primed and sustained for several years by foundations, both of these organizations have attracted broad membership support across the nation, with the Environmental Defense Fund having more than 2 million paid members and the Natural Resources Defense Council having 1.5 million. Both are widely admired for their numerous, vitally important accomplishments in the creation and enforcement of a body of national and state legislation, informed by rigorous scientific research and evidence-based economics and public policy findings. These two organizations are continuing to confer extraordinary benefits on America, a very significant return on the investment capital provided by the Ford Foundation.
Foundations are in fact the only readily available source for financing innovation in America’s civic sector. They have catalyzed, mediated, and facilitated many of the major social changes over the past century and have seeded new fields of research in universities and think tanks, such as that which led to the understanding of the human genome. They were “angel” as well as “mezzanine” investors in social change before the venture capital community as we know it today was born and invented those terms.21 The list of large and small nonprofit organizations now playing vital roles in America that were founded and/or significantly funded by foundations is mind blowing, from Human Rights Watch, Human Rights First, and the NAACP Legal Defense Fund to the Center for Science in the Public Interest, the mission of which is to protect the safety of our food and medicine, often against decisions of both government agencies and corporations.
Where, other than foundations, could the creators of these and other organizations have gone to seek the funds to realize their visions for America’s benefit? Of course, wealthy philanthropists can serve the same start-up purpose, but, unlike foundations, they are not as visible or as easily reachable. Moreover, with only a few exceptions, individuals tend not to be a fruitful source of early capital for new ventures. No matter how wealthy and philanthropically inclined, they do not readily opt to support untested ideas championed by people with whom they are not already acquainted. Because the role of piloting new ways of tackling social problems and of filling perceived niches in America’s civic sector is among foundations’ unique strengths, they often are the first and last resort of would-be social entrepreneurs.
One reason foundations have been relatively welcoming sources of support for new methods of solving social problems is that they can be patient investors, testing the waters and observing and learning over time which approaches hold promise, which ones call for more nurturing and experimentation, and which are likely to be dead ends. They can underwrite organizations whose mission must press on over long periods of time and adapt to new information and circumstances. The ability to make such judgments and to stick with them over many years is among the forms of wisdom—or, at least, of strategic judgment—that can accumulate in a secure and long-lasting institution. To be sure, not all old or perpetual foundations have shown such canny judgment or consistently managed their risks so wisely. But experience, discernment, and a willingness to persevere and learn all depend on a time frame unrushed by some fast-approaching day of reckoning. Are funders with a much shorter time horizon able to apply these long-term approaches? If the goal is to expend all of one’s charitable wealth in a few years or decades and then depart the field, is there time enough to master philanthropy’s subtler and slower arts?
It is too early in the evolution of time-limited philanthropy—whether “giving while living” donors or spend-down foundations—to know whether they, too, will be willing and able to play the same role of discerning and patient backer of new and long-range projects. In principle, both “giving while living” donors and foundations that are deliberately spending themselves down must spend larger amounts in a foreshortened period of time than would be appropriate if they instead were to create permanently endowed philanthropies. Thus the large amounts and shortened time frames put a premium on dramatic gestures over the slower, more methodical approaches that can lead, by and by, to big discoveries. But the evidence that now exists suggests that they are more interested in making novel “big bets” on complex problems than on supporting and enlarging the infrastructure of existing nonprofits and birthing new ones. It is this question that I will investigate in the pages ahead: since we are so reliant on the health and impact of our diverse weave of independent sector activities, does the recent shift to “giving while living” support or threaten the well-being of, and innovation within, our pluralistic civic sector?
Charitable nonprofits are exempt from many forms of federal and state taxation, including taxes on their income and, in most states and localities, on their real property; individual and corporate contributions to these organizations are also deductible, with certain limitations, against income taxes. This means that when citizens give in large amounts, as Americans do, government treasuries lose significant revenues that, but for such tax exemption and the deductibility of contributions, they would otherwise receive.22
Many persuasive reasons exist for government to provide tax incentives to individuals and corporations to encourage them to donate to civic-sector organizations. To begin with, while the loss to the US Treasury from the deductibility of contributions to nonprofit organizations is less than $50 billion annually,23 the amount donated at present to nonprofit organizations by living individuals and by bequest at death is almost $300 billion. Add in the amounts donated by corporations and foundations, and the total annual giving is above $373 billion. In other words, for every dollar the Treasury loses because of the tax deductibility of contributions only by individuals to charitable organizations, Americans give about seven dollars to charity, for a net gain to society of about $250 billion with only a very modest loss to the Treasury’s capacity to serve the public good.
Moreover, I strongly believe that, in most countries but especially in America, there is much greater comparative social benefit in incentivizing individuals, corporations, and foundations to allocate discretionary dollars to public purposes than for government to reserve to itself the privilege of spending a comparable amount of money. Considering the trillions of dollars that government will spend for various purposes and the half-trillion it already spends for purposes analogous to what the civic sector itself spends, encouraging the contributions of nongovernmental actors seems like a healthy balancing of the sources of civic-sector revenues. Incentivizing citizens by means of tax benefits to make gifts to tax-exempt organizations in appropriate circumstances, therefore, seems much more conducive to the public good than is direct government spending for the same purposes authorized by elected officials and doled out by the executive branch.24 Doing so permits the diverse values of millions of individual American citizens to balance and temper the collective judgment of majorities, as well as elites, about how best to advance the public good.
As noted by countless scholars and observers, the dynamism of America’s for-profit sector is powered by the ability of individuals and groups to test out and shepherd their ideas into organizations that prosper or perish on their own motion. Aside from ministerial government approvals, entrepreneurs of business ventures are unencumbered by significant substantive restraints upon what they choose to launch. That same freedom is what has enabled America’s not-for-profit sector to thrive steadily. Innovative ideas for social problem-solving almost always originate with individuals, think tanks, civic organizations that specialize in particular problems, university researchers, activists, or others rather than from committees within government. Even when government appoints and convenes problem-oriented task forces or commissions, most of the members recruited for such groups are from outside government. They are selected because of their expertise, usually as members of an organization or as researchers in an educational institution substantially supported by the charitable contributions of individuals, corporations, or foundations.
Ideas that are critical of government policy or that aim at changing such policy almost inevitably require a test run before being found worthy of and ready for scaling with government funds. Because their goal is to alter public policy or practice, they are very unlikely candidates for being piloted initially by the federal government itself. The very same factors that have created gridlock in Congress make it extremely unlikely that that legislative body would appropriate funds for such pilots. Consider, for example, the Patient Protection and Affordable Care Act, also known as Obamacare. It was designed by a nonprofit think tank—The Urban Institute—and piloted by the State of Massachusetts before it gained enough traction to be advanced as a national program by the Obama administration. Another example is the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, recommended by President Bill Clinton and enacted by a Republican Congress, which transformed public assistance from “welfare” grants to work incentives. That transformative program’s provisions had been piloted and evaluated for 20 years under the direction of the Manpower Demonstration Research Corporation, a civic-sector nonprofit organization created by the Ford Foundation and supported by other philanthropies as well as the US Department of Labor. Still another example is the Obama administration’s Race to the Top initiative in education reform. In that program, states wishing to compete for US Department of Education dollars to implement reform of their K–12 education systems received substantial planning grants from the Bill and Melinda Gates Foundation to prepare their proposals for submission to the US Department of Education.
Some of the most important public policy initiatives of the federal and state governments over the past 50 years have been developed, honed, and advocated by civil society organizations. For example, the equal housing and fair lending laws of the 1970s were substantially designed by nonprofit organizations before they were enacted, as were the Low-Income Housing Tax Credit and the New Markets Tax Credits of the 1990s. Organizations supported by the Robert Wood Johnson Foundation and other health funders played a decisive role in the development of state and federal antismoking policies in the 1990s. The environmental groups mentioned earlier created the scientific, policy, and legal staff infrastructures of the environmental conservation and protection movement. Those and other like-minded organizations have initiated, advocated, and litigated such important national legislative provisions as the Environmental Protection Act, the Clean Air Act, and the Clean Water Act, along with their updates and improvements since the 1970s and 1980s. Another example is the growing number of states that have enacted legislation to prohibit or severely constrain payday lending, for which the Center for Responsible Lending, a nonprofit organization supported by foundations and individual philanthropists and based in Durham, North Carolina, has supplied the energy and strategic direction. On the political right, the American Legislative Exchange Council, funded by conservative donors, has provided many state legislatures with draft bills on social and economic issues ready-made for them to enact into law—which they have done repeatedly.
Given the critical role that public-interest organizations play in the development of public policy, it is peculiar that the US Tax Code constrains those very organizations from many forms of communication with lawmakers and voters who would benefit from hearing their views. No such barriers bar corporate interests, of course—which leads to a strange and unhelpful imbalance in the range of messages legislators may hear and citizens may express. Corporations, both individually and collectively, have long recognized the critical role that government at all levels plays in regulating their business interests, practices, and decisions, and they have accordingly built often huge advocacy and lobbying staffs to protect their interests in Washington and in many state capitals across the United States. Corporate officials have often banded together in political action committees to make campaign contributions to candidates for public office, and they continue to do so today. Therefore, while corporations are free to lobby for their interests, with after-tax dollars, foundations, ostensibly because of their tax exemption, cannot. Foundations, however, which often find themselves on the opposite side of corporate interests with respect to many issues, have been prohibited by the Internal Revenue Code from engaging in lobbying, with four minor exceptions—one of which is where the foundation’s own existence is at stake—and of course foundations themselves cannot use their funds to support or oppose candidates for political office, which recent Supreme Court decisions permit corporations to do.
Moreover, operating charities continue to be limited in the amount of money they can spend on advocacy regarding legislation and remain prohibited from spending any organizational money on behalf of or opposed to candidates for political office. Because much of what corporations seek to do in their public policy advocacy is regarded by many as less in the public interest than in their own private interest—such as their efforts to protect themselves from tighter environmental regulation or stricter consumer protection legislation—it is all the more important that the ability of civil society organizations and foundations to engage in advocacy and lobbying be widened. No persuasive logic exists to support permitting corporations to lobby without limit while stringently prohibiting foundations and substantially limiting operating charities from doing so. The ostensible rationale for such a distinction is that charities are tax exempt and therefore should not be able to lobby at will, while corporations, even if they receive tax subsidies, are permitted to do so with after-tax dollars. Like many other scholars and tax lawyers, I am persuaded that this is another distinction without a difference.
Another arena in which tax exemption is the only way of publicly supporting an essential function in American public life is religion. The nearly half-million nonprofit organizations that are religious institutions cannot receive general operating funds from the federal government because of the constitutional separation of church and state derived from the First Amendment’s two clauses dealing with religion: the Establishment Clause and the Free Exercise Clause: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” If private contributions to religion were not incentivized by federal tax policy through the deductibility of such contributions against individual income taxes, a major source of funding for religion would be diminished. Religious organizations now receive about one-third of all the money contributed to charity each year by Americans; providing tax deductibility for such contributions is the only way government can constitutionally facilitate the flow of unrestricted financial resources to this wide diversity of organizations that support both spiritual and civil society. While government has been permitted by the courts to provide funds to religion-supported nonexplicitly religious secular activities, such as housing for the homeless, soup kitchens, and job training, such nonexplicitly religious service activities by religious organizations are estimated as consuming 30 percent or less of religious organization budgets.
Along similar lines, consider the many other kinds of objectives on which it is technically permissible for government to spend public revenues but for which there is often little or no public or political agreement to do so. The visual and performing arts are a good example of this reluctance, and the bitter controversies over some of the grants made by the National Endowment for the Arts are reminders of how diverse Americans’ definition of art can be and how passionate Americans can be about the differences reflected in certain kinds of art. If there were no charitable deduction for fostering the artistic pursuits, and if the representatives of the public remained reluctant to appropriate funds for them, America would be impoverished culturally.
All of which is to say that providing tax exemptions for organizations and permitting tax deductibility for charitable donations to them are powerful—and, I would add, indispensable—ways of providing significant benefit to the American public as a whole, when government either cannot or will not make funds available for those purposes.
Whether the benefits conferred by America’s civic sector outweigh the revenue loss to government is clearly subject to disagreement. Many on the left of the political spectrum quarrel with the provision of generous tax benefits to organizations such as art museums, symphony orchestras and opera companies, private K–12 schools, elite private and public universities, and hospitals, some of which are patronized primarily by Americans who are well-off. Many on the right and in the center of that spectrum see such organizations as benefiting society as a whole, and therefore view their tax-exempt public support as appropriate, but may still want to use the levers of the tax code to enforce certain directions among the beneficiaries (such as arguing that university endowments should be used to lower today’s tuition rates).
Proposals have been made by countless policy wonks and various interest groups whereby more generous tax benefits could be provided to organizations and their contributors serving only America’s least well-off, with lesser benefits to organizations that do not specifically benefit that demographic. So far, however, no one has been able to figure out how to distinguish persuasively between the two kinds of organizations. The many opponents of establishing preferential tax benefits for organizations that focus on serving America’s least well-off argue that such distinctions are difficult, if not impossible, to calculate persuasively and that the very act of differentiating between them is inherently invidious when, for almost four centuries of English and American law, all nonprofit organizations have been regarded as of equal worth to society as a whole.
Making persuasive distinctions between “poor-serving” and “all-serving” nonprofits is in fact challenging analytically. For example, in most of the elite universities, as many as half of the enrolled students receive financial aid; penalizing such universities by reducing or eliminating the tax benefits extended to them or their donors would inevitably harm the least well-off students who benefit from those institutions’ financial aid programs, as well as all the other students enrolled there. The very same problem plagues calculations with respect to religious institutions and their contributors. Most of these kinds of institutions devote about one-third of their incomes to soup kitchens, charity given to the poor, mentoring programs, housing for the homeless, retraining for former criminal offenders, rehabilitation for those addicted to illegal drugs, and the like. Curtailing tax benefits to them would therefore harm those now receiving help from these places, as well as all members of their congregations, irrespective of their financial situation. A third kind of analogous problem is raised by how tax officials might characterize organizations that benefit people regardless of need—such as medical research, environmental protection, and efforts to improve governance—for purposes of being regarded as “poor-serving” versus “all-serving.”
Because of the difficulty of making persuasive distinctions of social merit between one kind of historically charitable undertaking and all others, most observers, scholars, tax policy specialists, and politicians have been opposed to giving more generous tax deductions to organizations that benefit the least well-off than to other groups.
The consequent standoff led only to proposals by President Obama—and by some Democratic representatives and senators—to cap the benefit to donors at the level prevailing for those in the 28 percent marginal tax bracket, which would diminish the value of the deduction benefit available to any taxpayers whose income is federally taxed at higher levels (now subject to rates as high as 39.6%). When such proposals have come up for review in Congress, they have been roundly defeated. They simply decrease the loss to the US Treasury but do nothing to incentivize charitable contributions to flow to a greater degree toward America’s poor rather than to institutions that benefit the American population without regard to socioeconomic status.
Many good reasons exist for Americans’ long-term commitment to empowering, as well as to supporting by generous tax breaks, the nation’s civic sector in benefiting all Americans. While America’s first nonprofit organizations—the freestanding Protestant churches in New England that delivered comprehensive services to their local community—operated independently because they preceded the establishment of government, today the role of most nonprofits is a collaborative one that includes countless partnerships with both government—federal, state, and local—as well as often with for-profit corporations along with other nonprofit organizations in implementation and in funding. It is no exaggeration to describe today’s civic sector—operating charities and the philanthropic individuals and foundations that support them—as playing a key role alongside the public and the for-profit sectors in striving to solve the many problems facing individual citizens and groups, as well as in sustaining all manner of citizens’ voluntary activities and organizations that contribute to the public good in innumerable ways. As I have proposed, it is tricky to try to impose a “control panel” on how this wide range of important causes is supported. The splendidly diverse tapestry of public-serving institutions and organizations makes big differences in all of the “in-between” spaces of our national fabric.
Criticisms similar to those advanced above regarding the monolithic treatment of all kinds of nonprofit organizations have been revived, around the turn of the new century, regarding the institution of endowed foundations. The reasons have been much the same, although with a different twist. The core of the criticism is an attack on the idea of endowing foundations and requiring them to pay out to operating charities only an annual specified minimum (5%) of their endowment. The critics argue that it is inherently discriminatory against the present, and perhaps especially the poor of the present, to allow warehousing of such capital assets, presumably perpetually, while enabling donors to benefit from the full value of their charitable gifts at the time the gifts are made. Thereafter, present and future society are permitted to benefit only from modest annual payments from the income on those assets.25
By describing all perpetual foundations as “restricted-spending philanthropy,” Professor Brian Galle of Georgetown Law School has attempted to load the dice at the outset. In essence, he disagrees strongly with the idea of creating perpetual foundations that preserve their “purchasing power” over the years in order to serve society’s needs at any time over the long run. He argues that public policy, by exempting foundation earnings from taxation, actually encourages foundations to spend as little as possible and that board members tend to regard the preservation of purchasing power in their endowments as an obligation of prudent management. The result, in his view, is a systematic bias in philanthropy in favor of the future at the expense of the present.
In fact, virtually all perpetual foundations are unrestricted in how much they can spend annually. During the Great Recession of 2008–2011, many foundations often paid out as much as 7 percent or 8 percent of their assets to ensure that grantees could continue their work despite the decline in the economy. Furthermore, in my interviews for this book, I often asked whether a particular foundation’s trustees would be able to spend its assets completely down if they chose to do so, and virtually all of my subjects answered yes—if the board found an initiative that would convincingly serve the mission of the foundation.
In truth, what such critics are attacking is the fact that founders of, or contributors to, foundations are able to receive a tax deduction for the value of their gifts in the year that the gifts are made, while the public will benefit only from the income earned on such gifts that is spent year by year in the future. The same criticism is now also being made against the donor-advised funds that have come to flourish since 1990, discussed at greater length in Chapter 3. Here, again, donors receive a tax deduction in the year the gifts are made to the organizations hosting the funds, whether national for-profit firms or regional community foundations, but their donations are not paid out until future years. Of greatest importance, however, is that the argument made by such critics could be applied equally to a gift that is immediately donated to an operating charity, if the recipient organization does not itself put the money to instant use. If the organization receives the money in Year 1 but spends it only in increments in Years 2, 3, and 4—or perhaps uses the money for its own endowment, spending only the income and not the principal—it would surely run into the same objection.
The argument for favoring the needs of the present over those of the future is arbitrary and almost certainly difficult to define and utilize practically. Moreover, if acted upon and extended to its full logical consequences, such a regulatory preference as forcing perpetual foundations to pay out more than the federally required annual amount or requiring universities to spend stipulated percentages of their endowment for particular purposes such as scholarships, would have devastating effects not only on foundations but on all nonprofit organizations whose existence depends in part on endowments. Indeed, recent years have also seen calls for taxing large university endowments or mandating that some portion of such endowments be spent to lower tuition. Such a change in America’s tax policies would in effect kill the goose that laid the golden eggs and threaten the very existence of these institutions that are indispensable to America’s continuing dynamism.
No one has made the point more forcefully or cogently than the late Nobel Prize–winner Professor James Tobin of Yale University. In mandating that endowment asset managers must not spend more annually than the endowment’s “after-inflation rate of compound return, so that investment gains are spent equally on current and future constituents of the endowed assets,”26 he wrote, “The trustees of endowed institutions are the guardians of the future against the claims of the present. Their task in managing the endowment is to preserve equity among generations.”27
The American civic sector, whatever its eccentricities and imperfections, plays a critical, if not always well understood, role in the quality of our common life. It has proven to be a durable asset but it’s not indestructible. The current ferment in early 21st-century philanthropy—much like that in the early 20th century—suggests profound changes ahead, both for the organizations that do the hard labor of serving the public interest and for the donors and foundations that furnish them with the means to do their work. Those changes may be thoughtful or reckless; they may take due note of the richness and complexity of the American public-interest landscape or proceed only to disrupt and dismantle. In the following pages, I will propose some means of recognizing and choosing among these different courses and suggest ways that American philanthropy can innovate and adapt, serving both the present and the future, without sacrificing the principles that have made it the envy of the world.