Making the World Better: Higher Taxes or Higher Philanthropy

Philip Kotler

The world is in pain. The world’s people are immersed in a deep psychological depression. Having been infected with Covid 19, warned that planet earth is warming, living with product shortages and rising inflation, and witnessing power “wars” (China, Russia, Iran and North Korea), people yearn to go back to the relative peaceful economic and social conditions of 1945–1980.

The world’s nations are struggling with infinite problems in the face of very limited resources. Most of the world’s wealth is concentrated in very few hands. In America, 750 billionaires have 50% more wealth than the entire bottom half of American society. Worldwise, Oxham reports that the world’s 2,153 billionaires have more wealth than the 4.6 billion people who make up 60 percent of the planet’s population.

What is wrong with this incredible concentration of wealth? For one thing, billionaires exercise too much control over our elections. They support the most conservative candidates who want minimum government, minimum taxes and minimum regulations. Their candidates will favor trimming or abolishing Social Security and Medicare and other programs. America can no longer be called a democracy when so few people have so much influence on our country’s policies.

To protect democracy, one answer is for the government to raise taxes on the wealthy and use the additional revenue to fix our economic and social problems. However is this fair to wealthy people? Many — such as Bill Gates, Warren Buffett, Michael Dell, Mark Zuckerberg and others — have earned their wealth by creating new successful product and service businesses providing many jobs to people. On the other hand, a great number of multi-millionaires and billionaires inherited their money and did not create new products or businesses. They had the luck of being born into a rich family. True, many inherited-wealthy persons are active in philanthropy. By raising their taxes, their philanthropy might decline and hurt museums, universities, churches, and other worthwhile institutions and causes.

The Case for Relying on Philanthropy rather than Higher Taxes

Does it make more sense to rely on philanthropy rather than higher taxes to solve our formidable social problems? Most wealthy individuals and families practice some level of giving to others in need. They might donate money to homeless people or contribute cans of food to a local food pantry. These acts of charity are short term responses at the moment. Philanthropy is a much broader effort to commit money and/or time to a few basic causes that will improve the well-being of people. The gift of money may go to improve the conditions and services of museums, hospitals, universities, libraries, religious organizations and other qualifiednonprofit organizations. As an example, MacKenzie Scott, Jeff Bezos’ ex-wife, donated nearly $3.9 billion to 465 nonprofits over the last nine months, including Planned Parenthood, climate action, reproductive rights, youth outreach, support for military veterans and refugees.

The 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 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.

Giving USA publishes an annual report on giving levels. In 2021,

  • $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 . 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

Here we examine the case for raising taxes on the rich. Among the advanced industrial nations, the U.S. has one of the lowest income tax rates on wealth. The federal income tax system use seven income brackets, For the 2021 tax year, the tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Let’s examine the tax brackets more closely. For married couples filing jointly, here are the results depending on their income.

A family whose total income is just less than $19,000 pays an income tax of 10%, that is $1900.

If instead, the family has an income of $80,000, their taxes would be $9,202, or approximately 11.5% of their income.

If the family instead has an income of $628,301, their income tax would be $168,993, or 37%.

The good news is that the tax system is progressive. The higher the income, the higher the tax rate. The bad news is that the progressive character immediately stops at an income over $168,993. The person who earns $5 million will actually pay a tax of 32%, not 37% on his income of $5 million.

The progressivity of the income tax system stops and slightly reverses for those with much higher incomes than $168, 993! Super rich individuals and families never pay more than 37%, however high their income is. This has a simple solution. To build further progressivity into the income tax system calls for creating several more brackets for upper income families, with each successive bracket carrying a higher income tax rate reaching at least (say) 50% for very high income earners. A large number of tax experts say that the tax system needs to create more brackets with the tax rate going higher in higher brackets.

Add that high income people employ the best tax advisors who find a way to get the average tax rate maybe at 30% of his income that year or even zero. These tax experts and tax loopholes have led to the following mischief:

· Jeff Bezos’s company Amazon in a given year paid nothing in federal income taxes after making billions in profits. Bezos himself paid nothing in federal income taxes despite being worth nearly $200 billion.

· Fedex paid $0% on $8.2 billion in profits from 2018 to 2020.

· Nike, 3.3% on $9 billion in profits between 2018 and 2020.

We need a new tax bracket system and a better closing of tax loopholes. This way the government would raise considerably more revenue. The legislators would be in a better position to identify big potential solutions to big economic and social problems. In the past, some elected political party would declare a war on drugs or war on alcohol (prohibition). However, how about the government finally declaring a war on hunger or a war on homelessness!

Yet the opposition to setting higher taxes on the rich remains unabated. In 2021, Democrat Elizabeth Warren proposed an annual tax of 2%, or 2 cents, on every dollar of people’s wealth worth above $50 million. Individuals with fortunes worth more than $1 billion would face an annual tax of 3%, or 3 cents, on every dollar above that threshold. This was never passed.

More recently, Democrats unveiled another plan for a billionaires tax. Billionaires would be taxed on the unrealized gains in the value of their liquid assets (stocks, bonds and cash). Billionaires normally don’t cash in on their stock and bond profits. Their value continues to grow endlessly and the billionaires can borrow any needed money virtually income tax free.

Yet Joe Manchin, a Democrat, told reporters “I don’t like the connotation that we’re targeting different people … who contributed to society and create a lot of jobs and invest a lot of money and give a lot to philanthropic pursuits. It’s rime that we all pull together and row together.” It should come as no surprise that the billionaire tax proposal went nowhere.

Which Solution is Better, Higher Taxes or Philanthropy?

In theory, the best solution would be higher taxes on the rich, in the form of higher income taxes, wealth taxes, and estate taxes. Otherwise, income disparity would continue to rise to an obscene level, enough to possibly cause an armed insurrection. The billionaire Nick Hanauer warns “Beware, Fellow Plutocrats, the Pitchforks are Coming.” In Brazil and many other countries, members of the upper classes have to employ armed guards and worry about their children being kidnapped.

With low tax rates continuing, the rich will enjoy ever growing wealth (“money produces more money”) until a point might be reached where most people are serfs working for a pittance to serve the rich.

There is, however, a lingering question. If the government substantially increases income and wealth taxes, how will the rich react? Will many philanthropists sharply cut their gifts to museums, hospitals and religious organizations? We don’t know the answer. Certainly nonprofit organizations will oppose the passage of new taxes on the rich if they believed that their donations would drastically fall.

My purpose in writing the article is not to say that I have the answer. My purpose is to encourage more discussion of a thorny issue that is too often buried or avoided.

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Philip Kotler

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