This IS the rainy day, you idiots!

Our colleagues at Philantopic have been posting major foundations’ statements on the current economic situation.  With the happy exception of the Gates Foundation, the words “grow our payout” are conspicuous by their absence from these statements–and even Gates modifies the phrase with the unwelcome word “less.”  Typical of the statements is the one from the Voldemort Foundation [name changed to protect the guilty], which leads with the all-important question, “How is the Foundation doing?”  As though the health of our nation’s repositories of unspent private wealth really were–or should be–everyone else’s most pressing concern.

Which leads the Nonprofiteer to wonder, not for the first time, why our sector pays any attention to anything written by a foundation executive which omits the words “Pay to the order of.”  If now is not the time to increase foundation payouts–when governments are strapped, businesses are shaky and individuals are tapped out–when would be?  And if it’s never time to spend more than 5% of charitable money on charity, what is the justification for the foundations’ tax-favored status?

This point was made several months ago more calmly and thoroughly by Steven M. Teles at the Reality-Based Community (a broad-spectrum policy blog edited by the Nonprofiteer’s brother).  He was right then, and he’s righter now, when he pointed out that increased payouts are only a bad idea “if your basic mission is to stay in business forever.  That’s not the purpose of charitable foundations.  Their purpose is to support groups and causes that reflect the objectives of those who endowed the foundation in the first place.”

Mr. Teles advocated “shaming” foundations into assuming this component of their responsibility.  Absent any evidence that foundations feel shame, the Nonprofiteer advocates taxing them into it.

If not now, when?  And if not the foundations, who?

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4 Responses to “This IS the rainy day, you idiots!”

  1. Anita Bernstein Says:

    I ought to know this but I don’t–how does the taxing plan work? Does the federal government tell the foundation that if it doesn’t increase its payouts (say to 10% of its total endowment each year) it will levy a comparable amount in corporate income taxes? If that’s the way, how does the government calculate the size of the mandated increase? And does there have to be some kind of urgent social need to trigger this pressure from the government–do arts organizations, say, get to sit on their wealth?

  2. Nonprofiteer Says:

    No, actually, the Nonprofiteer is the one who ought to know this and doesn’t. She does know that she’s proposing use of a hatchet (withdrawal of tax exemption) where a scalpel (proportionate reduction in exemption) might work better.

    On how to calculate the size of the mandated increase (by which you mean, “So what IS the appropriate payout rate?”, right?): what’s objectionable about the 5% rule is that it’s designed to perpetuate foundations rather than direct money to charity. If the goal is to foster charity, the issue isn’t the percentage but why a foundation should get any tax benefit for doing anything short of putting money into the hands of charities. Operating a little corporation whose product is beard-pulling shouldn’t be favored by the tax code when individuals who are making equally thoughtful decisions about what charities to benefit don’t get a deduction until they actually part with the money.

    This isn’t an argument from urgent social need–though urgent social need certainly makes it a more appealing one–so much as from justice: if you put aside money for the public good (defined as whatever section 501c3 says it is), you damned well ought to spend it on the public good. And until you do, you ought to pay taxes on it.

    Legions of tax lawyers are lining up to explain why the Nonprofiteer’s Soak the Rich approach wouldn’t or shouldn’t work. But she’s not offering it as a legislative proposal; she’s suggesting it as a way of thinking about how and why private wealth should (or should not) be protected from taxes paid by the private not-so-wealthy.

  3. Scott Jones Says:

    >>He was right then, and he’s righter now, when he pointed out that increased payouts are only a bad idea “if your basic mission is to stay in business forever. That’s not the purpose of charitable foundations. Their purpose is to support groups and causes that reflect the objectives of those who endowed the foundation in the first place.”

    There are a bunch of foundations, including the one I work for, that do in fact intent to be around forever. It’s quite unlikely that the problem will be “solved” any time soon (if ever), and our mission is building the capacity of other local community groups (some with c3 status, some still too young for it). Charitable status for this organization is a definite no brainer, and while I understand how charitable tax status is abused by groups (hello LDS and Prop 8 in CA) and the ultra rich shielding their assets (you know who you are), this is a huge blanket statement – one that covers a serious chunk of the society-really-needs-these organizations.

  4. Nonprofiteer Says:

    I don’t doubt that society really needs foundations as a counter-weight to the government; and you’ll notice that I didn’t suggest (nor did Mr. Teles) that foundations should spend down their assets because the problems they address will be solved soon, anyway. What we’re arguing is that a capitalist society is based on the theory that there will always be new money-making ideas and therefore new money. A capitalist society with a tax structure favoring foundations is based on the theory that new money-making ideas and new money will produce new foundations; therefore we don’t need to make sure that the first foundations ever created live forever, any more than we need to make sure that the Studebaker Company still stands.

    Spending down foundation assets for the purpose for which they’ve been segregated is not a system for punishing bad foundation leaders; it’s a way to make sure that charitable assets go to charity before the sun’s light is forever dimmed. Other aspects of Anglo-American law are subject to a rule against perpetuities; why shouldn’t this one be?

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