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The Dark Side of Billionaire Philanthropy

Aug 14, 2020 11:59 AM 5 min read
Editorial

The super-rich are donating hundreds of thousands of dollars into charities and foundations that provide shelter and food to the homeless, fight deadly diseases like polio and malaria and help educate children. How can any of this possibly be perceived as a bad thing?

Philanthropy or Exploiting Financial Loopholes?

Philanthropy by big billionaires has now been reduced to just a smokescreen to hide their dark side and it actually enables them to evade taxes, which often lead to ridiculous situations like Warren Buffet paying less in taxes than his secretary.

Take for example Donor Advised Funds (DAFs). It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. The charity receives the money often much later as the money is allowed to sit in the fund indefinitely. Billionaires and the ultra rich have been exploiting this loophole for years. 

In late 2014, Nicholas Woodman, the founder and chief executive of GoPro, announced a $500m worth of stock donation to a DAF within a foundation. Mr. Woodman, who had just taken the company public and was suddenly worth around $3bn. Within months the value of their stock started tanking and so did their donation. But he still got that tax deduction on that $500m, which saved him millions. Today, there’s almost no trace of that $500m or that fund.

This loophole in the system has caused the amount of money held by DAFs to triple in the last decade. Although even tycoons like Mark Zuckerberg have time and again enjoyed tax deductions by donating to DAFs, some billionaires like John Arnold do question the system that benefits them. In a tweet he said:

...Money keeps accumulating in philanthropic vehicles but doesn't end up with true operating charities. It just gets shifted around from foundation to DAF, and DAF to DAF.

 

Taxation Systems and Wealth Inequality

When it comes to taxation, there’s a lot of difference between how individual wealth is taxed and how the wealth of corporations is taxed. Almost all individuals pay their major chunk of tax through income tax which, varying from country to country, ranges around 30-40% depending upon the amount of income generated. Individuals often have few financial resources and tools to sneak around loopholes and evade taxes legally.

However, corporations are taxed very differently. They are levied a corporate tax, which is also around the same range as personal income tax for individuals. But with the resources of a big company and legal tools, they get a lot more power than an individual.

Hedge fund and private equity managers benefit from the infamous carried interest loophole. They are required to pay capital gains tax, which is much lower than income tax at around 20-25%. These unfair taxation systems lead to a much bigger problem: wealth inequality. There are more billionaires than ever before, and their fortunes have grown to record levels. The world’s richest 1% have more than twice as much wealth as 6.9 billion people combined. These facts are very concerning.

 

Reputation Cleansing

Reputation cleansing is arguably one of the insidious benefits of philanthropy by the super rich. Since their donation gets a lot of media coverage, a donation of a few million dollars seems to do wonders in cleaning up their image. The world almost forgets almost all of their wrongdoings and they are celebrated with enthusiasm. This illustrates how the system has been made more friendly to the wealthy.

Anand Giridharadas, author of the bestseller, ‘Winners Take All’, says:

The same group of people who have lobbied for, fought for an economy of injustice, have marketed themselves to us as saviours, as in fact the solutions to the very problems, they are still busily creating. They are getting public credit for solving but the causing never gets the same notoriety,

Through philanthropy, Giridharadas warns that the wealthiest people “can do bad things in the billions and good things in the millions”.

Corporations do this all the time: they contribute some small (but very visible) amount of money toward the solution for a problem that they themselves have created in the hunt for outsized profits.The world is filled with such examples like the Sacklers (Purdue Pharma) responsible the opioid epidemic but much more known for their extravagant donations towards art museums in the US. Or Coca Cola funding youth sports initiatives to hide its clear connection to obesity.

Mark Zuckerberg, chief executive and a founder of Facebook, announced a $100m donation to the long-troubled public schools in Newark the day before the Hollywood film The Social Network was released, a biting critique of Zuckerberg’s personal and business relationships. Although he might argue that those schools made modest progress, the majority of the money went to contracts, chartered schools and consultants instead of classrooms and new books.

This is why it is tricky to trust billionaires to fix education. They try to change things how they see fit while bypassing our consent with huge resources.

 

The Unchecked Powers of Big Philanthropists

Concerns over exploitation of philanthropic loopholes started a long time back in the late 19th century in the Gilded Age. People back then worried that big philanthropy would give the rich immense power over society. It starts with Andrew Carnegie, America's richest man back then. He wrote an essay on philanthropy called The Gospel of Wealth. In it, Carnegie wrote that the rich are obligated to help the poor.

But here’s the catch: he also wrote in the same essay: “(The rich should use their) superior wisdom, experience and ability to administer, doing for them better than they would or could do for themselves.”

Andrew Carnegie isn’t the only member of this very concerning school of thought. Michael Dell, founder of Dell Technologies, when asked about his opinion about reducing the wealth inequalities through taxes in the World Economic Forum 2019, said: “I feel much more comfortable as a private foundation to allocate funds (to charity) than I do giving them to the Government.”

But this causes people to wonder, what is the problem with big billionaires trying to go out there changing the world for good? What’s wrong with people like Bill Gates, who are trying to eradicate diseases such as polio and malaria? They indeed are doing a great deal in changing the world how they see fit.

The problem is that the voices of the have-nots, gets reduced to noise. Billionaires are good at doing what they do, the books of their businesses are proof of that. But changing and maintaining overall order and welfare of the world is a task for democratically elected Governments. And hence we need to close loopholes in our financial system to stop the rich from exploiting them to escape paying more in taxes.

 

Written by Kaustav Mukherjee

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