In his 2021 Senate campaign, current Vice President-elect J.D. Vance has not said a single word of disdain for two of America's largest private philanthropic organizations, the Ford Foundation and the Gates Foundation.
As with both, he said“They are basically a cancer on American society, but because they pretend to be charities, they benefit from tax breaks.” Their donations include “hundreds of billions of ill-gotten dollars. wealth,” and funding “radical leftist ideology,” he continued. In response, he advocated a drastic redress: their assets should be seized. ”
Although Vance's language was excessive, he was not wrong in labeling America's largest foundations, including Ford, MacArthur, and Soros, as left-wing. And while his radical prescriptions are unlikely to pass legal or political mobilization, it's well worth revisiting the tax advantages of private foundations he advocated.
They have been able to grow dramatically even as individual charitable giving, the core of American civil society, is shrinking. surely, Overall charitable giving adjusted for inflation and as Percentage of adjusted gross income As we enter the holiday season and end-of-year gift-giving season, they tend to decline.
The next Congress will consider whether and how to extend President-elect Donald Trump's 2017 Tax Cuts and Jobs Act, which includes tax benefits for non-wealthy people who don't itemize their tax returns. Taking action should be set as a top priority. Incentives to make charitable donations.
It compensates (in Hill's terminology, “compensation”) for the reduction in tax revenue caused by a minimum 1.39 percent excise tax increase on appreciation in foundation assets (capital gains on investment portfolios), rather than the 4 percent that has been set. Significantly low. In the Tax Reform Act of 1969.
Its ultra-low tax rate (especially compared to the standard capital gains tax rate of 15 percent) has fueled the growth of tax-advantaged private foundations.
According to foundation markrelies on public data and states that “U.S. foundation assets rose by nearly $200 billion in 2023, setting a new record and surpassing the $1.5 trillion level for the first time.
Over the past five years, foundation assets have grown from $1 trillion in 2018 to their current high due to a favorable investment climate and large donations. ” The latter is also tax-advantageous, as up to 30 percent of your income and total can be deducted. 80 billion dollars in 2023.
Because foundations are required to devote at least 5% of their assets to grantmaking activities, the growth of foundations has led to grants becoming a larger share of total U.S. charitable giving. For the past 10 years, according to donate to americathe foundation's giving grew from 16-18% Of all the charitable giving tracked by the IRS, individual giving is on the decline. 71 percent to 67 percent.
This is not just a statistical trend. Giving to foundations is, by definition, the domain of wealthy individuals who make initial gifts. But it is often directed by a staff of “philanthropists” with their own agendas, such as Ford's focus on reducing revenue. inequality Or what Hewlett focuses on: reduce climate change.
Private donations may support similar goals, but rather than focusing first and foremost on social change, they are often made up of large groups that support local causes, whether churches or historic organizations. It is best seen as a decentralized giving group in the United States, helping to knit American society together.
Keep in mind that even if major foundations focus on issues such as climate change (MacArthur), racial healing (kellogg) or reduction of incarceration (open society), Giving USA's definitive analysis shows that donors overall support religious and human services far ahead of the environment or “public social good.”
But the tax code penalizes small donors. The Tax Cuts and Jobs Act of 2017 probably had many benefits. However, by significantly increasing the “standard” deduction, the number of taxpayers has decreased significantly. List items for return. This means that all but the highest earners have reason to claim certain tax deductions, including for charitable donations.
In other words, giving to charity has become a luxury, at least for tax purposes. Or as a parliament joint economic committee “In 2018, only 9 percent of charitable donations that avoided taxation due to deductions were made in the bottom four quintiles, and more than half came from the top 1 percent of Americans.” states.
An obvious approach to redressing this imbalance is to include “above the line” tax credits. This allows people who don't itemize their tax returns another way to reduce their taxable income through charitable giving. This was actually part of the COVID-19-era CARES Act, albeit briefly. This provides a credit of up to $300 per taxpayer.
Of course, we don't know if this will actually increase charitable giving. Nevertheless, many taxpayers who do not itemize their returns leave money on the Sunday collection plate. However, expanding charitable tax benefits to low- and middle-income earners involves a strong dimension of tax fairness.
But Congress' biggest barrier to doing so isn't whether extending the deduction would increase contributions. Rather, lawmakers are concerned about the resulting loss of revenue for the IRS.
In fact, CARES Act incentives, which have now expired, are presumed to have been the cause. Those losses totaled $4.8 billion. So Congressional officials considering the issue now will be looking for ways to make up for that loss. What we should pay attention to here is the basic consumption tax.
Lawmakers considering expanding the charitable deduction must face a harsh reality. Stronger deductions would increase charitable giving, but that would not be reflected in the federal budget. What will appear is a decrease in tax revenue.
Increased excise taxes on foundation asset growth could play a major role here. Assuming that raising this tax from 1.39 to the top capital gains tax rate of 20 percent would result in a similar increase in revenue, it could mean excise tax collections would increase from $1 billion to $14.3 billion, which would This is a major step towards offsetting the province's losses. This is obviously a rough estimate. Changes must be rigorously modeled or “scored.”
Even if the tax increase is limited, largest foundation Those with over 1 billion in assets, or roughly the top 50, will be rewarded handsomely.
This has another benefit as well. Notably, this would be a step towards curbing the overall growth of these foundations. Foundations have evolved from vehicles for those who earned the funds to be disbursed (such as John D. Rockefeller) to self-perpetuating piggy banks for boards and staff. own agenda.
Taxing these foundations to allow for more individual giving, pushing major foundations toward eventually “sinking” or closing, as the Gates Foundation says they will do by 2047. Better yet, despite Vance's criticisms, it would be a good example for the field. .
The current tax code disadvantages small charitable donors. It's time to restore the long-awaited balance.
Howard Husock is American Enterprise Institute.
