The Super-Rich Are Stockpiling Wealth in Black-Box Charities
bloomberg.com
bloomberg.com
Yes, donors get a deduction for charitable giving. But they are ALWAYS better off (in terms of money received in their bank account) by NOT GIVING TO CHARITY. There is no way to give money to charity in such a way that you end up with more money than if you had not given to charity.
The article points out that there can be some hedging; the assets donated can be managed and management fees paid to a manager before liquidation. And the particulars of the valuations mean that they can sometimes get a larger deduction than if they sold the asset and then donated the proceeds to charity. And there are loopholes that allow them to claim a larger deduction than the maximum deduction allowed in the tax code.
But no matter what, if they just sold the damn asset and kept the money, they would have more money at the end of the day than they would having gone through this rigmarole.
Note that a 501(c)(3) non-profit charity is different from 501(c)(6) non-profit business league. Donations to a 501(c)(6) are not tax-deductible, so how they are spent is not restricted -- and thus 501(c)(6) organizations are more subject to influence by their donors.
A particularly timely example would be to look at what Donald Trump's 501c3 has been up to over the last several years.
The tax deduction seems pretty reasonable for giving up control of a large chunk of land. On the one hand, maybe our hypothetical wealthy person get special access. On the other hand, they have given up the right to change their mind and have the land logged and then strip-mined.
The giving-up-of-an-economic-resource aspect is significant enough that a reasonable government could compensate the individual for it, the long term benefits seem to be present and our wealthy friend has committed himself to a course of action.
One of the IRS requirements for land trust is that it has a public benefit.
https://www.journalofaccountancy.com/issues/2011/nov/2010360...
"From 2003 through 2007 approximately 3,000 tax returns per year contained a charitable deduction for donation of a qualified conservation contribution. During this time and since, the IRS has continued to scrutinize deductions for contributions of conservation easements, often challenging them on issues including the quality of the appraiser and/or appraisal, the appraisal technique employed, failure to comply with substantiation requirements or protection of the conservation purpose. Tax practitioners need to be aware of the rules and procedures to successfully support these transactions and their tax treatment. They must be able to select a qualified appraiser and assess an appraisal for compliance with procedural and substantiation requirements. Then they must be able to structure and document these transactions appropriately and correctly calculate the deduction."
https://www.propublica.org/article/conservation-easements-th...
https://www.washingtonpost.com/politics/how-donald-trump-ret...
Example:
Rich person buys asset for $10m. 3 years later gets it appraised for $75m, knowing full well that no one would actually buy it for that.
Rich person then donates the '$75m' asset to charity. Rich person made more money via charity rather than trying to sell the asset for $75m.
This is a very common strategy.
But remember that the IRS doesnt care much about the 90%. They DO care about the 0.1%.
Doing something like that is a high risk way of getting audited.
https://www.propublica.org/article/after-budget-cuts-the-irs...
The 0.1 have access to the very best tax advisors money can buy (and probably some IRS insider info as well).
If you make a seemingly reasonable decision, even with an ultimate (very) beneficial tax outcome, there is not much that can be challenged if no laws have been broken.
Add to that the army of lawyers that on meaningful cases will keep pushing things out forever, and you should have an understanding as to why tax authorities around the world do not like to challenge the very wealthy that much. They often also control companies and assets that employ people, which can be used as leverage in negotiations.
Examples other than art: Company shares, real estate, time in certain contexts.
Edit: I'd like to point out GFischer's excellent summary on this https://news.ycombinator.com/item?id=18130720
https://www.unrealengine.com/en-US/blog/epic-games-releases-...
IRS rules are you don't get an "appraised" (or blue book) value for the car, you get whatever the charity is able to sell the car for or $500 (whichever is more).
The only time you might get the blue book value is when the charity is able to use the donation as is for itself (i.e. donate a car to meals on wheels and their volunteer uses the car to deliver the meals).
I think a charity would have a hard time justifying an "art" donation as something they are using as is.
if you had opted to be born rich, your friend's charity would have bought your car over the appraised value and you would have made a profit! all with tax free dollars all around.
If the article genuinely depreciated in value, then the burden falls on the taxpayer to prove this, and in illiquid markets this is very difficult to establish.
I.R.S. Tax Fraud Cases Plummet After Budget Cuts https://news.ycombinator.com/item?id=18115729
Something something we are all equal but some are more equal than others.
Otherwise it's just a very baseless claim about an otherwise well documented problem about a few IRS bureaucrats. ( https://en.wikipedia.org/wiki/IRS_targeting_controversy )
I argue we should know more about this but don't because "oh, it's fake." ... And because of the deleted evidence.
http://www.breitbart.com/irs/2017/03/13/fitton-obama-irs-sca...
(and that control is there or they would never be able to sell that illiquit painting)
So charities can and do hold art pieces for years, then sell them at auctions when they know a good buyer is available and interested in benefiting the charity.
It may even sell for higher than appraisal just because of competition for the piece, or competition to look as of you are giving the most to charity. After all, no one goes to charity auctions for a good deal.
This is a very good way to trigger an IRS audit. Contrary to popular perception, those investigators weren't born yesterday.
> This is a very common strategy.
You are saying this based on what data? Are you a CPA or a tax planner?
They can also pay management fees on their capital.
You can own the investment fund that is managing its capital. You can then bleed money out through those management fees while only paying capital gains on money when you take a specific amount out as carried interest, avoiding the majority of your capital gains liability on most transactions with most of your capital.
I forget where I originally heard this from, but they claimed to have this setup and claimed it was common, and I have since ran it by multiple CPAs and have not yet gotten back an argument for specifically how this would be illegal.
I have never heard of this being done, most DAF’s are run by independent foundations or by special wings of investment funds.
So, it’s not that the donors are getting kickbacks in the form of management fees. It’s simply that people are upset that money is going into these funds and isn’t instantly available to charities. Never mind that many large charities like hospitals and universities run their own endowments that invest contributions.
Especially those related to art: there's a loophole where the deduction is exponentially higher than the value of the donated art (on the article it's spelled out: If instead that asset is contributed to a DAF, an appraiser determines its fair market value before it’s donated. That yields a bigger deduction,), and even worse, the donor doesn't lose access to art, since he donates it to his private "museum" that's only open a few times a month or a year.
https://www.nytimes.com/2015/01/11/business/art-collectors-g...
http://law.siu.edu/_common/documents/law-journal/articles-20...
And, as the article says, * their financial advisers may be allowed to direct how the money is invested and earn management fees.* , so they can still pump money into the companies they need to and extract wealth (very useful when pumping a private equity debt-laden corporation).
And that's without getting started on how they have access to all the "charity's" assets, so they can use buildings, vehicles, even private jets on the "charity's" dime - see Ingvar Kamprad and IKEA:
https://www.fastcompany.com/3035734/ikea-is-a-nonprofit-and-...
So I don't agree that they're always better off not giving to charity. There are some legitimate charities, but there are also a lot of tax loophole charities.
Second, while private museums are a thing, the rules that a private museum must satisfy to qualify for non-profit status are fairly rigorous, and the scenario you describe would not qualify. Thus, a "donation" to the "museum" in your hypothetical would not yield a deduction. A donation to a DAF that loaned the artwork to that museum would likely violate self-dealing rules and lead to various sanctions, including potentially prison.
IKEA isn't a US charity, so none of the rules we're discussing apply.
About the valuation, as I mentioned elsewhere, my mother used to work on collectibles auctions, and it is a VERY opaque world, with several ways to inflate price - using frontmen to buy other pieces by the same artist would be one way.
I'm not a 0.1% and I'm not even from the U.S. :) , I just wanted to point out that in my experience such loopholes are exploited. In my country we get examples of charities being subverted very often. I do hope most charities are indeed that, charities.
Dollars and cents, you're absolutely right. But at a certain point, money isn't that valuable to the wealthy.
It also denies money from the government financed programs which you may not agree with, whilst allowing you to get your name on a building.
The choice of how to distribute your tax outgoings is a simply a terrible idea.
Yes, that's true, but that ignores the personal benefits derived from giving to charity. (In theory, "personal benefit" portion can't be deducted - in reality, it can be).
For instance, in the highest tax bracket in CA, donating $0 basis stock could result in your taxes being reduced by ~80% of the fair market value; i.e. you can donate $X by only paying 20% of X. As long as you derive more than 20% personal benefit from the charitable gift (and that's a low enough threshold it isn't that noticeable), giving to charity might beat selling that stock.
California uses same tax rate for long term cap gains. So highest long term rate is 37% (20% federal, 13.3% California, 3.8% net investment).
If you sell and keep proceeds of $0 basis stock, you get $0.63 per $1.
If you donate $1 of said stock, you get up to a $0.54 tax deduction.
In this extreme example, there's only a 16% gain by selling vs donating.
With those kind of "for the super rich" taxes, it can be (depending on the implementation) more interesting to give enough of your wealth to charity to be under the cap.
You note that the particulars of valuations can allow people to claim a larger deduction than if they sold the asset and donated the proceeds. But that's precisely the point. If you have a $10 million tax bill, and you're looking to keep as much of that $10 million as possible, then donating an asset to charity with an optimistic valuation puts more money in your pocket compared to selling it for actual market value (especially since you would pay further taxes on the sale). The fact that you never see any of the money, because you took it as a deduction instead of a check, is irrelevant. At the end of the day, after your tax bill is settled, you have more money in the bank compared to selling, and that's all that matters.
No not necessarily, the charity's purpose itself can be to perpetuate and buoy a particular asset. It can be to develop the market for the asset.
Lets say you own a housing community and benefit from the demand and price of that housing community. You can donate cash you have, borrowed cash, an underdeveloped property, a whole house, or even shares of the housing community project.
In all of these circumstances you get a tax deduction, and yes that is moved off of your balance sheet. The charity could be formed for the purpose of building out the housing community and now it is funded and can do whatever necessary to make your housing community attractive, raising the value of all the rest of your assets. The charity isn't trying to make money (as revenues) so its doesn't encroach on commercial purposes.
As the charity spends it gets no tax deductions aside from its exemption to taxes in general. But your benefit is still long term capital gains. Therefore when you are an individual, the benefit isn't that clear because couldn't you just get the deductions from your own expensable efforts? Typically you wouldn't be the only entity donating to this charity. Other people in your industry would be using it for the same purpose, letting it be an autonomous entity fulfilling its narrow purpose. So then the benefit becomes more clear.
If that was actually true, giving to charity would be an aberration; in fact, giving to charity is done because it is seen to be advancing the giver’s interests, meaning they are, from an experienced utility standpoint (the only meaningful one), better off, not worse.
Reforming this law would cause outrage among the non-profit and charity sector, because it would instantly dry up alot of US philanthropy. It still seems like a necessary reform however.
Why? (Serious question. As a matter of full disclosure, I've read 'Dark Money'. To my mind, DAF's don't seem any more evil than any of the other much larger pools of concentrated wealth out there. eg-corporate lobbying money. In fact, the rules seem to make DAF's a good deal less evil.)
My question was, "Why do DAFs need to be reformed?"
Even if you got rid of the charitable deduction, you would still have things like DAFs and Foundations.
Think of it this way, WRA came into being in 1917. But if you take, say, the Carnegie Foundation, that's been around since 1905 at minimum. So even without a charitable deduction, these foundations and DAFs would exist. So the question is, why do they need to be reformed? (Or, more precisely, why do DAFs need to be reformed?)
You linked to an article explaining why you believe WRA to have been a bad idea. (Or maybe why you believe that WRA has become a bad idea? But either way, it's about the reforms introduced by WRA, not specifically about DAFs.)
I don't have any beef with the foundations, I have a beef with our tax policy.
That's just not the case. The reasons that a donor might choose a DAF are legion.
Again, I won't go into them all, but let's take an example that is more common than people realize. A donor who has passed on. Sometimes in life, a couple's children need encouragement to be kindly and generous. Let's put it that way. DAFs are part of a somewhat complicated legal framework that can have the effect of actually obliging heirs to share the family's resources.
And of course there are a million other reasons that one might be motivated to use a DAF.
Point being, DAFs are not solely used as a tax dodge. And the donors are not seeing the benefits from the tax dodge in any case, the vast majority of that benefit is going to the charities and the financial industry. (Heck, many of the donors have even passed on, so of course they don't care about any tax benefit. They made those arrangements for other reasons.)
I agree that the benefit is largely not accruing to the people claiming the tax deduction, but it is a subsidy coming out of the public purse that we should get rid of.
[EDIT]: Actually, I take that back, once you take into account the fact that the amount people donate is not significantly impacted by the tax situation, it seems clearer that the people getting the deduction are the ones getting the benefit/subsidy.
This was surprisingly hard to determine, as it appears this is one of very few such references on the internet.
My bad. I should have defined what that was for people.
WRA of 1917 is what introduced the charitable deduction to the tax code of the United States.
1. No required distribution per year. A DAF has no obligation to actually give its money away in any timely manner. The Bloomberg article actually undersells how close this was to being regulated. Everybody likes this rule though because it allows people to siphon fees off money which should be in a charity.
2. Upfront tax benefit for later charitable benefit. Charitable tax deductions should be linked to actual charitable giving, not promises to do so. DAFs should only give a tax benefit on the disbursements they make to charities, not on a donors disbursement to the DAF. I think this is the least likely fix to happen but also the one that would most directly fix the problem.
3. Capital gains dodging. The article mentions this but this discrepancy with private foundations should be fixed and donations should be deductible at the cost basis level. Think of this as double-dipping.
2. There are a lot of reasons that the tax benefit to the DONOR, is given on disbursement to the DAF. I won't go over all of them, but without getting too technical, imagine that the donor has passed on, or soon will. Should his/her heirs be allowed to take that tax benefit as they donate money in the DAF? I think most people would answer "No" to that question. (Believe it or not, oftentimes more money is left to the DAF or Foundation, than is left to the heirs. You could end up in a situation where heirs pay no tax on the money they're earning from their own portion of the estate).
So again, we can argue the propriety of the general idea of the charitable deduction, but there are a lot of very good reasons that if the deduction exists, it should be given to the donor, or his/her estate, on donation to the DAF.
3. I wouldn't have too much of a problem with a cost basis deduction, and neither would any of the donors. But again, two things, the financial services industry and the charity would have a problem with that. And second, yet again, what we're really talking about is the existence of the deduction at all, because +/-5 to 10% is not going to make much of a difference to a donor. (Many of whom have passed on in any case.) So these DAF's would exist with or without cost basis level deductions. The only difference is, charities would end up with a bit less money or a bit more money. (Depending on what you're looking at with the capital gains.)
Reforms have to be taken into the context of their overall impact towards greater good. If overall charity drops, then the reform is bad. If you cause the charities that are out there scrapping with what they having, using 100% of every resource they have to help as many people as possible to go dry because of a small percentage of bad actors, then there must be another way. Incentivize these greedy assholes to chase money in a different avenue that doesn't impact the general welfare.
Only if the benefits are smaller than the impact of the drop to overall charity.
If we taxed a bunch of money that is, say, 95% billionaire tax-avoidance and 5% effective charity, and spent that tax money on the things we democratically spend money on (and say that's, say, 80% lobbying and pork and what have you and 20% effective stuff like infrastructure and well-targeted welfare programs) then that would be a net win.
Minus the Bill Gates of the world, which we can count on our hands, the vast majority of charity is not done by a "handful of rich philanthropists" but rather, normal, everyday people that want to make a difference. If you turn this into a bureaucratic exercise, there are number of problems that become introduced that have been well pointed out in the past (bureaucracies are slower, the incentives are now not aligned, you now have a third party entity spending instead of first party, so waste is now introduced).
The other issue is public charity only works when society shares common values and beliefs. Unfortunately this just simply is not the case anymore in America and if 2016 made that obvious, it's even more apparent with the Kanavaugh hearings.
Additionally -- this is how every socialist system has started -- "just let the government do the good for you" which many disagree with on principle: why strip people their freedom to do charitable works on some presupposed better governmental solution?
Finally, people forget that the people are what constitutes the public.
Weight by money, not by number of people. What proportion of "donations" to 501.cs come from where?
> If you turn this into a bureaucratic exercise, there are number of problems that become introduced that have been well pointed out in the past (bureaucracies are slower, the incentives are now not aligned, you now have a third party entity spending instead of first party, so waste is now introduced).
Decent charities inherently don't have aligned incentives, because the people they're supposed to benefit are not the people funding them, by definition. So making them accountable is very important and much harder than for other kinds of organisation.
> The other issue is public charity only works when society shares common values and beliefs. Unfortunately this just simply is not the case anymore in America and if 2016 made that obvious, it's even more apparent with the Kanavaugh hearings.
That we have divergent values and beliefs is all the more reason that public money shouldn't be funding private charities. Private charities can and do push particular political or religious causes, or benefit particular groups and not others. If you want to spend your money on your cause that's diametrically opposed to mine, that's fine - but you shouldn't get to spend my tax dollars too. Publicly-funded organisations have a lot more accountability in terms of having to treat everyone fairly, and that's a good thing.
> Additionally -- this is how every socialist system has started -- "just let the government do the good for you" which many disagree with on principle: why strip people their freedom to do charitable works on some presupposed better governmental solution?
You still have the freedom to spend your own money as you see fit. You just don't get a special exemption from the democratically-agreed taxes that everyone else has to pay.
Trump did increase the standard deduction if you’re not itemizing, and dramatically curtailed the state and local tax deductions, so many fewer people will be itemizing, and thus in effect reduced the incentive to donate for those people who’s best tax strategy is to take the standard deduction.
One charity I consistently give to is Fisher House. They're directly related to the US government -- they provide houses for military families whose loved ones are in a military or VA hospital. I like the cause, but one reason I give to them over others is because they're incredibly efficient[1]. If the charitable deduction went away, would they raise as much money? Would the government have to step in and do it, and is there any prayer they'd do so as efficiently as Fisher House?
Either way, Fisher House is a great charity, check it out.
[1] - https://www.charitynavigator.org/index.cfm?bay=search.summar...
Are things really so dire in America?
Homelessness is very much on the rise for the world’s richest nation that grew its wealth dramatically in the last couple of years.
Dark money runs through networks of 501(c)(4) organizations. They're a different beast entirely and can participate in politics. You don't get a tax deduction for donating to a 501(c)(4).
There are several oddities in our tax laws:
- extremely generous treatment of donating long term appreciated property. You deduct the FMV and also avoid paying capital gains tax. I have yet to understand why we think it is good policy to offer both advantages. Allowing only basis to be deducted (as is case for short term) seems much more reasonable.
- our tax system has a standard deduction that itemizations must go over to see benefits
- we have a progressive tax system that doesn't smooth over multiple years of unsteady income.
I've been a big user of one myself, contributing heavily in a year of an IPO (abnormally high income plus lots of highly appreciated stock). Using a Daf allowed me to have more time to vet target charities; if they didn't exist, I would have still donated heavily in the IPO year (because the tax benefits are leveraging my donations), just less efficiently (less vetting).
Point being, the way our tax system handles charitable donations is what is "unfairly" benefiting the rich; DAFs are just a symptom.
It’s not like Tax breaks create new money they just redistribute resources.
I live in Belgium, where the system is a bit different (you get a 45% tax deduction on money donated if a charity has an accreditation) and the tax deduction is a significant part of why I give to charity.
If there would be no deduction, I would still give, but a lot less.
As you say, even the ones you support are not worth giving much of your money to. But, you are also directly supporting charities with your tax money that you actively disagree with.
EX: Direct Food Aid is generally (though not always) considered a bad idea, but if even a small portion of people disagree then everyone chips in.
But the deduction incentivises giving. I tend to gift double the money I would without the deduction, because the cost is exactly the same to me. The US system is probably too generous when comparing both.
I personally don't oppose the deduction. Most are not investment vehicles but actual charities, doing something good in the world. I wish more people would do something good in the world.
I'm sure more money goes lost every year due to political corruption and graft, than through the charity tax deduction.
Then you give ~exactly the same money, it's the public that's giving more money. Forcing everyone else in your country to chip in just a little more for roads is not the same as giving more money.
There's a sort of pre-vetting in the charity's original 501(c)3 application. A charity can also be investigated and stripped of its status if it's found to be non-compliant with the public benefit clause.
One possible answer to 'why' question: Assume the tax rate is 50%. If the deduction encourages someone to give money they wouldn't otherwise, now 100% of the donated money is being used for a society-agreed-upon cause instead of 50% of it. In those cases, you could view it as a spending boost if the goal is to have more money spent publicly.
To me the more important reason is the different structure of public vs private money. If the government was perfect at directing money wisely, there would be no need for private investment or businesses at all. But sometimes there are advantages to a few people directing a small pool of money, instead millions of people directing an enormous pool of money. You can have a greater variety of projects since not everyone needs to agree. And huge organizations can be less efficient/less likely to be held accountable, since even though there are many stakeholders their attention is limited (relative to the scope of what goes on).
I think it's valuable to have a pool of 'risk money' for charitable causes in addition to the much bigger government-directed pool. And keep in mind that money is still directed some by the public with restrictions on what it can be spent on - if those are too lax it might be better to tighten them up than get rid of them all together.
You pick the cause.
An advocacy group like MADD https://www.charitynavigator.org/index.cfm?bay=search.summar... is a charitable donation.
Calling it a 'public good' when people specifically disagree with their viewpoint and someone could also get a tax deduction for supporting a different viewpoint is a net loss to society.
I can't see a difference between that and spending the same money on Beanie Babies or whatever.
Not sure about about 'when people disagree' thing (requiring majority consensus for public goods). It's easy to see this going both ways, in some places politics will disfavor religious groups, in other places it will disfavor birth control, LGBT groups, etc. I think it's OK to encourage public goods overall without requiring consensus (but not counting things that might be zero-sum like political advocacy as public goods).
The point is that a society needs funds to function, and in a democracy, society gets together and decides what to do with their pooled resources. We vote on what we want to prioritize, such as military, research, education, infrastructure, spying on its own citizens, etc. Everyone contributes to these causes via taxes, except if you set up your own little organization and call it a "charity". Then you can opt out society's liabilities and fund your own little pet causes, regardless of whether or not they are actually beneficial to everyone. And you can increase opacity since you're not subject to open records (like the government should be ideally), and in general, add a layer of bureaucracy for no reason.
I don't see a compelling argument that all the added overhead of lawyers and accountants and inspectors who then need go around checking every stupid charity offset whatever benefit the charity provides. Instead we should be focusing our efforts on making government transparent, reducing waste, and pursuing efforts to benefit all in society.
Why is this stipulated on charitable deductions going away?
I think the advantages of charities are along the same lines, smaller organizations can be more efficient, redundancy avoids a single point of failure, etc.
Would I want to rely on charities to provide all essential services? No. But if for political reasons, the government doesn't provide some service I don't think it is a bad thing to have charities around that might be able to mitigate things somewhat.
I guess the tax policy really depends on the numbers for me. If 50% of public spending is charity spending / 50% is gov. that's very high and maybe they should consider scaling back the deductions. But if it's 5% charity 95% government, I'd say leave the deduction alone since charities have a valuable purpose.
This is all independent of preventing any sort of abuse which should be done first, then the remaining number could be looked at.
If people "donate" less because they're now getting less "value for money" out of whatever they were buying with their donations, that suggests that these weren't true donations and we're better off with less of them.
The better way in the long term would be to pay for the activity one wants to incentivize, just like we do everything else. Obviously, that would expose all the implicit costs and it's more difficult to win elections.
You shouldn't try to play fast and loose with tax breaks for charitable giving because the IRS actually keeps pretty close tabs on that stuff. As far as they're concerned, an organization either has charitable status with them, or the organization does not have charitable status with them. There is no middle ground. Trying to argue that an organization is a charity, and therefore your gift should be tax deductible, is a losing proposition where the IRS is concerned.
https://en.wikipedia.org/wiki/Kars4Kids
That's just the first example off the top of my head, but also, when someone donates a wing or lecture hall to a school, why do they get to name it? They are gaining prestige and public relations, and admissions status for their descendants. A real charitable donation would be credited to anonymous.
But even then, taxes are for the operation of society, that we as voters have come together and decided on. There just isn't a reason to subvert that with a million other little organizations, even if one were to claim that they are being audited and whatnot, when one can clearly see favoritism in the group's beneficiaries and quid pro quo from the donations.
The rest of your argument is spot-on, but one rebuttal is that charitable giving exemption is a way to provide a truly democratic way for citizens to give votes of partial non-confidence in how their tax dollars are spent.
The only solution is to remove this option period. The US government even negotiated with Scientology where they kept their charity status even after being proven corrupt:
https://en.wikipedia.org/wiki/Tax_status_of_Scientology_in_t...
How can anyone take "charity" as a legal term seriously?
The IRS rules state that if the benefit to the donor is quantifiable, it has to be subtracted from the overall amount of the donation. You would have to come up with a reasonable fool-proof rule to quantify those benefits.
For one example, what's a "charitable donation" to a mega church to one person is a scam to let Joel Osteen live like a king without paying taxes to another.
If your argument is that many of these charities aren't actually doing useful work, and that they only exist as a way to get tax deductions, is shaky when you consider that you still end up poorer when making a charitable contribution than when you don't (in no case does the deduction exceed the amount donated).
Especially considering that many tax-deductible "charities" are actually people getting together to pay each other money for personal services (for example: schools, churches, and hobby associations)
It has been born out in practice that these extra tax payments are not deductible. Few people would expect this to be the case, either. The absurdity does not exist. This is not an intellectually honest argument.
>Especially considering that many tax-deductible "charities" are actually people getting together to pay each other money for personal services (for example: schools, churches, and hobby associations)
Private schools provide an alternative means of educating children when one does not trust the culture or capabilities of the local public schools. Taxing them would reduce their prevalence and would worsen the burden on private parents whose economic activity already supports both public (through property tax, etc) and private schools.
Churches provide moral support to communities, organize deeds of service, and are generally a force for exercising virtue. I say this as an athiest. Some bad churches exist, but taxing churches would be throwing the baby out with the bathwater.
Tax-free hobby organizations are a little less defensible, but it is worth considering that they are limited in scope by law (https://cullinanelaw.com/501c7-social-and-recreational-organ...). But it is worth considering that making it cheaper to fund hobby organizations makes it easier to participate in the sort of activities that we enjoy, and that improve our physical and mental health.
We are already living in a society where we spend every dollar we make, and we still feel lonely and isolated nonetheless. Encouraging these outlets, with their socialization and tight focus on community, is a force for good.
Changing the overall tax rate is bringing a much larger argument into this (tail wagging the dog).
As you point out, it's very possible to raise taxes/eliminate a loophole on a bad policy without giving more money to the government overall.
Sure, the rich give more to charities, but they also pay the most taxes. The net change of parent's proposal would probably be smaller than most people expect for the average charitable person.
The whole point of democracy is to enable legal equality, political freedom and rule of law.
I have money. I want to help Syrian refugees. The US government is extremely hostile to helping the refugees. I can't wait for another election which has a less than 50 percent chance of bringing in a new administration anyway.
Should I spend my money on lobbying the government to have a Syrian refugee plan? Or should I just spend that money on charities myself?
It is a great policy of the government that encourages us as people to help causes we care about. Some things should not be left to the whims of ever changing politics of Washington DC.
Charity should be voluntary and unsubsidized.
The idea that government ‘subsidizes’ charity by not calling it income of the donor and the charity is upside down.
Why does the same logic not apply to any money you expend that year? We tax people on gross income; making anything tax deductible is completely equivalent to subsidizing that thing.
If we’re taxing failure to keep and spend money on yourself, we might as well tax based on failure to earn as much as you can — we’re subsidizing teachers that could be paying taxes like VCs. But no one thinks like that.
People seem to think there’s a social contract via government, but no private social contract -- but there is.
People exchange their money for all kinds of benefits, tangible and less so, and 503.c status is an extremely poor measure of whether a person is getting a benefit for their money. They could be funding their kind of artists - or buying their favourite art for a "museum" next door, open only by appointment to them. Lobbying for their preferred political causes, investing in their businesses, hiring their friends... plenty of ways to benefit.
Certainly it is absurd to imagine that state and local taxes (which are spent in a democratically organised way) are somehow more for your own benefit than private "charitable" donations to foundations you control, and it's obscene that the latter should be more tax deductible than the former.
> If we’re taxing failure to keep and spend money on yourself, we might as well tax based on failure to earn as much as you can — we’re subsidizing teachers that could be paying taxes like VCs. But no one thinks like that.
Income tax isn't about how much you spend on yourself - if that were the intent it would be a consumption tax rather than an earnings tax. It's about how much you control. If you want to direct a big chunk of society's future production to particular ends, the rest of society gets to take a cut.
Money that you received and disposed of according to your personal preferences is, in fact, income just as much of those preferences are to support a church as they are if that preference is to buy a game console.
> The idea that government ‘subsidizes’ charity by not calling it income of the donor and the charity is upside down.
No, it's factually accurate that it is subsidizing certain personal choices of what to do with income received. Money that you choose to spend doesn't retroactively stop being income you received because of what you choose to spend it on, no matter how much government creates a tax system that represents that fiction.
You seem to be upset that church and philanthropy are not seen as a personal expenses. Cynicism about altruism isn't a good reason to thwack private charity. "Democracy" doesn't always have clean and pure motives, either.
[1] https://www.vanguard.com/us/insights/saving-investing/model-...
https://www.researchaffiliates.com/en_us/publications/articl...
10% is absurd.
The 4% rule is using a withdraw amount fixed to an initial start time, only increasing with inflation.
If your withdraw in a given year is percentage of current portfolio size, you can tolerate a higher percentage.
If in the prior year it doesn't take in any money (no donations, market down turn, etc), the organization can still operate in perpetuity.
Maybe a charity with the sole purpose to preserve some specific artifact (a piano) or the like, but somehow I want it to not get more money than is required for that purpose.
edit: typo
Secondly, as I've stated elsewhere, any charity or foundation ought to be required to get buy-in in the turn of new funds to keep operating. If it's truly a social good, that should be pretty easy.
Let's turn your example around: what about a foundation founded in 1910 who's purpose is to protect the family unit by preventing women's suffrage? Should they be able to operate in perpetuity without additional support from the generations whose lives their work affects?
> "Should they be able to operate in perpetuity without additional support from the generations whose lives their work affects"
Yes. Bad ideas should still be allowed to exist. You seem to disagree, and I'm sure you've probably assumed that when the lists of good and bad ideas are made, you'll be the one doing that.
Remember that the total amount of charitable giving is not a fixed pie. People are more likely to give, and give more, when the are free to organize their giving as they see fit.
That said, anything operating in perpetuity, under the direction of the dead, eventually becomes obsolete and potentially dangerous. The Earth belongs to the living. The charity should be required to distribute 100% of its assets immediately upon the death of the last of the heirs of the founders, who were alive at the time the founder from which they inherited died.
A foundation that wants to live in perpetuity should have to continually refresh itself with the dollars of later generations.
edit: typo
It's a great way to shelter money from taxes and governments. It has been used to fund worthwhile enterprises. But it could also be used to give wealthy families political/institutional power for generations.
Well, something here is new since the sum total of DAF contributions tripled in 6 years. Are you referring to charities in general, or DAFs specifically? This article is less about charities as a whole and more about a specific style of donation where the funds accrue interest and are locked up and not usable by the charity until later.
In essence, the rule prevents a person from putting qualifications and criteria in a deed or a will that would continue to affect the ownership of property long after he or she has died, a concept often referred to as control by the "dead hand" or "mortmain".
Harvard has a very large endowment it uses provide free tuition and much more, but I would think the overall sentiment is positive about their actions. What about the Norway's sovereign fund? Why would it be different for an individual who wants to setup an organization to impact the world in some way in perpetuity?
Would you want the "Keep the blacks as slaves" foundation to still be ticking along these days?
A charity should have to get money from each generation to survive.
The USA of 1776 is quite different from today. I think one of the big breaks was about states rights causing the civil war and effectively reconstituting the country. Even something like free speech (probably one of more unique things about USA) actually has its formulation in the 20th century. There are more obvious things like constitutional amendments or changes in interpretation.
Finally of course the USA is a creation of not abiding to the rules and traditions of the UK.
The laws of the past are not a tyrant over us and should not be.
It also feeds into Americans' general belief of government's inability to deal with local issues swiftly - democratic process sounds fine and dandy, but it's pretty unrealistic to require extensive legislative processes to address one-off issues in every town - families losing income, escaping abusive significant others, needing help while transferring jobs, etc.
E.g., 20% of Swedes live in Stockholm, so a government-run hospital or food bank there would be accessible to a larger share of Swedes than a similar institution in NYC or LA.
IKEA has been exposed as having used that shell game of corporations and foundations to obscure illicit wood sourcing practices ... all the while people feel good about buying furniture amidst a whirlwind of diversity and social responsibility and environmentalist PR propaganda. It's utterly fascinating to me, it's like observing how a cult leader operates to snare and psychologically rope in their members and then brain wash them so thoroughly that they can't even operate without anchoring everything in the cult. If you were to strip away all the social justice, diversity, environmental responsibility, social do-goodery propaganda, you are left with a corporation that by all indications that are only available in a gleaning fashion, is quite devious and malevolent. It's very existence as a company that produces what is essentially throw away furniture alone, by itself, when you think about it, is in stark contrast to the very notion of environmentalism and ecological responsibility, even without examining their sourcing and manufacturing practices.
It's all just such a fascinating exposition of the gaslighting nature of the European corporate culture in general where the facade of social responsibility that is projected outward to the commoners is in direct and stark opposition to the nefarious activities and behaviors of the ruling elite that remain obfuscated behind their now legal and tax and accounting walls, where they would have remained hidden away behind castle walls in the past. It's very much at the core of the subject article; where these "charities" that serve to boost an image of benevolence, are actually far more self-serving tax avoidance malevolence. I am all for lowering and doing away with taxes whenever we can, but what is worse is dishonest and insincere taxation and charity that are far more fraud and theft than the benevolent do-goodery they are touted as being by the psychopathically dishonest.
Why should lower taxes only be something for the elite that saddle the middle and lower classes with the costs of their exploitation? ... well, because nothing has really changed from the aristocratic elite of the past, even though the methods have shifted and the labels for them have been revised and rebranded. All hail the king and our lords.
Also, Wright Patman's report on Family Foundations and Charitable Trusts: https://openlibrary.org/works/OL11465104W/Tax-exempt_foundat...
Because dealing with such conditions is a pain, 501(c)(3) charities prefer to receive undirected funds.
Two common examples are donations to museums that are restricted to development of a certain collection or type of work, and donations to universities restricted to funding a specific field of research.
I have one, but can see how this leaves a bad taste in mouths. I can "donate" money to my DAF, get the tax break, invest it and it doesn't do any real good by going to a charity until I decide to recommend a grant.
On a related theme, I really like the sentiment shared by the Gates and Buffett families to try and "spend all of our resources within 20 years after Bill's and Melinda's deaths"
> The decision to use all of the foundation’s resources in this century underscores our optimism for progress and determination to do as much as possible, as soon as possible, to address the comparatively narrow set of issues we’ve chosen to focus on.
https://www.gatesfoundation.org/Who-We-Are/General-Informati...
Also, the Gates foundation funds projects that create benefits that continue indefinitely, such as eradicating diseases. Better to do that now and have malaria-free populations contribute to their own increasing prosperity than to keep the money in a bank for later.
My personal hypothesis is that spending is better for the economy than investment, so I would prefer to spend 10% and invest 90% for 20 years, then spend the remainder, than to spend 3% and invest 97%, forever.
More importantly, inflation and opportunity costs will take a big chunk out of your investment. Assuming consistent 2% exponential growth, and a civilization lasting millenia, that generous $8 billion you set aside today for budget year 3018 is worth about $20 in today's dollars.
http://www.in2013dollars.com/2018-dollars-in-3018?amount=20&...
The point is, they aren't actually giving the money away.
If you want to criticize DAFs (which I don’t, but I’d rather debate my opponents’ best arguments, not their worst), the tax credit significantly precedes the distribution to any 501c3s, and those 501c3s might theoretically be benefitting society.
I’m generally in favor of removing the charitable deduction entirely, but the time shifting really doesn’t bother me. Most 501c3 missions barely benefit the people I think actually need and deserve help, in large part they just provide jobs to rich westerners and then as almost an after thought benefit needy people, often with such onerous strings attached that their primary purpose looks like marketing and signaling, not improvements to the aggregate human condition.
Guy puts $1M in stock or some other non-cash asset that can change in value into a DAF. Gets a tax receipt for $1M and uses it to reduce his taxable income (this is where the subsidy happens).
The $1M may sit in the DAF for years, not going to work in the charitable sector. It may depreciate in value. In this case when liquidated and moved from the DAF to some charity actually doing charitable work, it may be worth substantially less than $1M. Which means although taxpayers subsidized the $1M donation, it's actually a lot less money that's actually put to work in the charitable sector. Of course, it could also appreciate in value.
Source: I built an online DAF for 8 years that's taken in $410,000,000+ in donations.
True, though the 1M saved (from taxation) can also be invested elsewhere to something that might appreciate in value.
If you have your own yes-man assessor, you can inflate the value of your worst-earning asset, donate it to a charitable trust you control, take a tax deduction for the amount you declared to offset the cash flow from your better holdings, decline to distribute for years, as your management company manages the asset for operating costs and your financial management company reaps administrative fees, then eventually buy the asset back from the trust for pennies per dollar of its previously declared value, and repeat.
There are no doubt plenty of legal loopholes that enable this. The net result is perpetual tax avoidance, very little money actually getting spent for charitable purposes, and a founder that can declare he is the most charitable-giving person the world has never seen.
It is yet another example of rich people moving money between their various pockets in lieu of actually spending it. The maximum benefit from moving a dollar is realized when the person who moved it no longer has any control of it after the move. The best thing you can do with a dollar is spend it; it is literally that dollar's sole purpose for existing. Allowing someone else to temporarily use your dollar is just a cruel joke upon them, because most of what they do with it will then belong to you.
I commented about this elsewhere in the thread. This is a ridiculous point of view because there is no net tax break for the individual.
If instead of donating $1M in stock, they sold the stock and kept the money, they would have more money than if they donated the stock and claimed the deduction. They get to deduct the $1M, but they don't get to keep it as well.
> Which means although taxpayers subsidized the $1M donation
This is true, but seems like a net benefit. They get to give a gift of $1M that only costs them $600k. But that's still $600k that they could have kept and spent on gilded washing machines and penguin-egg omelets (I'm assuming that this is what the rich spend their money on). Instead, that money, plus a "matching" donation from the government of $400k, goes to a charity that can't really directly benefit the donor.
> I commented about this elsewhere in the thread. This is a ridiculous point of view because there is no net tax break for the individual.
How is there no net tax break? In one scenario they keep the stock and pay more tax, in the other they donate the stock and deduct the charitable gift.
> If instead of donating $1M in stock, they sold the stock and kept the money, they would have more money than if they donated the stock and claimed the deduction.
Unless they don't sell the stock. Or can't (yet) sell the stock (private companies).
> They get to deduct the $1M, but they don't get to keep it as well.
Unless they control the recipient charity where the money ends up.
> This is true, but seems like a net benefit. They get to give a gift of $1M that only costs them $600k. But that's still $600k that they could have kept and spent on gilded washing machines and penguin-egg omelets (I'm assuming that this is what the rich spend their money on). Instead, that money, plus a "matching" donation from the government of $400k, goes to a charity that can't really directly benefit the donor.
You're missing my point. Often the money doesn't go to a charity doing charitable work for years, if ever. Many DAFs only let you allocate the GAINS on the principal to charity (in this case, the gains on $1M). DAFs are another investment vehicle to minimize tax and maximize gains.
Sure there is, because even if the fund and the “charities” it supports don't directly work to the financial benefit of the donor, they serve the interests of the donor, and financial benefit is just an intermediate goal sought as a mechanism to enable serving other interests.
The donor gives up $1m, suppose he has a marginal tax rate of 40% on his income, he can subtract the $1m from his taxable income and save $400k in taxes at the cost of $1m.
The donator is economically worse off. Even in the best case scenario that a $1m donation reduces his to-be-paid taxes by $1m (is that how it works in the US?), there's still no gain. Instead the stock could've been sold for $1m, and there'd be a hypothetical future $1m tax payment, so he'd be left with $0. Or he'd give away the $1m and there'd be hypothetical future tax savings of $1m, so he'd be left with $0, too.
As for the DAF, he can never retrieve that money, nor spend it on anything that's not for the public benefit. Donator has no economic benefits to gain. Perhaps prestige, or donating to a politically-coloured charity (e.g. a charity that informs on abortion rights), but there's no direct economic gains to be made here for the donor right?
I can see why it's problematic if donated stocks in a DAF depreciate. But I see no reason to believe that would consistently happen, nor why there's any reason to not liquidate the donated asset right away and invest the cash into a diversified portfolio until the money is spent on a charitable cause. Typically stock-markets rise in the long-term, so it's more likely that appreciation will occur, in which case the 'subsidy' of a $1m tax break for a >= $1m asset seems well spent.
Would appreciate more info as I've got very little knowledge on this and I don't really see the big issue.
The only issue I see is if assets consistently get misappraised, e.g. a $1m asset appraised at $10m, generating a huge tax break. But that's fraud, illegal.
That's that flaw. The money can be allocated to a charity that the donor controls. Or invested in a private e.g. hedge fund... also potentially controlled by the donor.
It may be fraud, but I'm not sure that's true either. In the hedge fund scenario I'm not how it'd be fraudulent. The money has to go back to the DAF at some point - the hedge fund is an investment vehicle.
In the charity scenario how is it fraudulent? I don't see it but could be missing something.
Basically is tax free investment and R&D mechanism.
The gates foundation is famous for it, even caught investing in companies doing the total opposite of the foundation mission statement, such as weapon makers.
But the best part is that people think bill is a great guy because he gives away so much.
I'm inferring that you think people are silly for buying into some kind of curated persona. But to provide a counterpoint: even after what you've said, I still think Bill Gates is a great guy for his philanthropy. I don't really care if Gates is motivated by purely ascetic altruism or a complex sea of competing incentives. I'm really happy with the work he does.
That's not to say he's perfect. Some of his charity is controversial, that's definitely true. And I'm generally skeptical anyone is wholly motivated by altruism. But much of his work has had a profoundly beneficial impact on the world on a global scale. I like the world with the Bill & Melinda Gates Foundation as it is more than I like the idea of the world without it.
pet theories regardless of scientific consensus. He also "donates" to creating dependencies on Microsoft/Windows products. And "his" money is money he largely extorted from the computer using public using illegal market manipulation. It's our money.
From this perspective, I believe that it could be argued that "our" money is in fact the money of long-dead people and/or now-extinct societies.
Obviously some charities can have missions that not everyone agrees with, but that constraint is still, well, constraining.
I looked it up, and it is rated as 'Unproven'; appears to be likely untrue, and based on who's pushing it, it's even less likely to be true.
https://www.snopes.com/fact-check/clinton-foundation-paid-fo...
For example, The Trump Foundation paid $10k for a portrait of Trump himself. Not only that, the painting somehow found its way into one of his resorts.
https://www.washingtonpost.com/news/fact-checker/wp/2018/06/...
in a highly stylized example:
1. A donor gives the DAF a $10m yacht
* DAF gives a donor $10m donation receipt
* Government gives donor <donor tax rate> * <donation receipt> rebate i.e. .30 * $10m = $3m
2. DAF liquidates yacht into $9m cash and invests it
* the DAF charges .006 management fee on this for 5 years with a 5% return
3. At the end of 5 years the DAF liquidates its investments and puts all of that money to work on a cause.
* ~$11.2m goes to work on a charitable cause
* DAF has collected ~340k in fees
This is more or less the description the DAF in the article but now but we've simplified to assume a conservative consistent return and that the whole donation gets put to work at once at the end of a set term whereas more likely it would be slowly liquidated over time. Now let's assume that instead of the government paying up the tax rebate when the donation is made that it is paid out when the money left the DAF and went to work on a cause.
1. donor gives a DAF $10m yacht
* DAF values it at $9m and gives the donor <donor tax rate> * <donation receipt> rebate i.e. .30 * $9m = $2.7m
2. DAF liquidates yacht into $9m cash, covers their $2.7m rebate outlay and invests $6.3m
* the DAF charges .006 management fee on this for 5 years with averages a 5% return
3. At the end of 5 years the DAF liquidates its investment and puts all of that money to work on a cause.
* ~$7.8m from the DAF goes to work on a charitable cause + a $2.7m from the government to match that original rebate for a total of ~$10.5m
* DAF has collected ~238k in fees
What's the difference here?
1. The government saves $300k on a rebate because the DAF has to liquidated the yacht to come up with the money to pay the rebate so the valuation is based on something the reflects the actual cash
2. The government keeps <rebate amount> ($2.7m in this case) in its bank account for the 5 years while is in the DAF. This means the government can use it for it's own operations over that time period rather than it sitting in the "warehouses of wealth". It also means the DAF can't collect fees on this money because it is not managing it.
I'm not trying to make a statement on if the government should or should not subsidize donations to charity, just point out how that subsidy seems to be leveraged by the introduction of DAFs against its original intent.
sorry for the terrible formatting
This is charity abuse taken to the extreme, but i have a feeling russians have copied the approach from their western counterparts.
https://themoscowtimes.com/news/prime-minister-medvedevs-sup...