Making the World Better: Higher Taxes or Higher Philanthropy

The Internal Revenue Code (IRC) defines the list of “qualified charitable organizations” whose purpose might be religious, charitable, scientific, literary, educational, testing for public safety, the prevention of cruelty to animals or children, or the development of amateur sports. In the U.S., a qualified charitable organization is known as a 501(c)(3) organization and its role is to help society or groups in the community flourish over a long-term period.

A qualified charitable organization enjoys tax privileges. Donations that these organizations receive are not subject to taxation. At the same time, the qualified charitable organization is prohibited from engaging in any political advocacy, including supporting specific candidates or trying to influence legislation. Also, If the charitable organization receives a large amount of money from commercial activities, it can lose its standing as a qualified charitable organization.

Wealthy philanthropists typically make commitments of their money and time to selected 501(c)(3) organizations. They often establish a foundation to handle the gift giving. The foundation might be managed by an experienced foundation manager or entrusted to a relative of the giving family.

How do wealthy persons view their gift-giving? We assume that they feel good about giving gifts to worthwhile causes and institutions. It takes the edge off of thinking that they have earned or received too much. They are not misers or living just to accumulate money. Furthermore, this money goes to good causes. They think that they do a better job than the government would do with the same money. The government would just give more to the defense department and lots of the money would be spent on wasteful projects. They see their philanthropy as a form of efficient altruism using “private initiatives for the public good”.

This probably describes the 223 families who signed the Bill Gates/Warren Buffet “giving pledge.” The pledge says that they will give away half of their wealth to good causes within 10 years of the pledge. We have to admire these pledgers more than the thousands of billionaires who did not sign the pledge.

Who are the top givers? For five years running, Berkshire Hathaway chairman Warren Buffett tops the list at №1, while Bill and Melinda Gates, Michael Bloomberg, the Walton family and George Soros round out the top five. In total, America’s 50 most generous philanthropists gave out $14.1 billion in 2018. A positive finding about the high-givers: some studies show that high-giver philanthropists have less depression, higher self-esteem, lower blood pressure, and may even live longer than those who don’t give.

  • $471.44 billion in total giving by individuals, foundations, bequests, and corporations
  • 28% Religion ($131.08 billion)
  • 15% Education ($71.34 billion)
  • 14% Human Services ($65.14 billion)
  • 12% Grantmaking foundations ($58.17 billion)
  • 9% Health ($42.12 billion)
  • 10% Public-society benefit ($48 billion)
  • 6% International affairs ($28.89 billion)

Since a lot of philanthropic giving goes to good causes, why do pro-tax critics complain? Here is the list of complaints:

1. The philanthropic money goes in a scattershot way to causes. There is little or no coordination by gift givers. As a result, a lot of highly important causes are under resourced and too many less important causes are over resourced.

2. Wealthy families carry a disproportionate influence in determining who is chosen to run for political office and who votes for policies favoring the rich. A new report from Americans for Tax Fairness shows that 465 billionaires spent nearly $900 million to influence the 2022 U.S. election.

3. Philanthropy may be done for tax breaks. Some very wealthy individuals use charitable giving to shield themselves from large tax bills. They dodge paying their fair share of taxes under the guise of charitable giving to the needy.

4. The wealthy should continue their charitable giving but also be required to pay much higher taxes in order to prevent the wealth gap from worsening.

The Case for Relying on Higher Taxes to Address Major Social Problems

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Philip Kotler

Philip Kotler

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Philip Kotler is the S.C. Johnson and Son Distinguished Professor of International Marketing, Kellogg School of Management, Northwestern University (emeritus)