There are a bunch of reasons to be unnerved by this week’s news that Mark Zuckerberg and Priscilla Chan aim to use 99 percent of their Facebook shares to make the world a better place.
Maybe you worry about so much power in the hands of two private individuals at a time when the wealthy already have so much influence. That’s my big fear, as I wrote here a few days ago. Or maybe you’re worried about the lack of transparency of an LLC, which is the vehicle that Zuckerberg and Chan have chosen to administer their good works. That, too, is a legitimate point to raise—philanthropy is opaque enough as it is, without donors retreating behind corporate vehicles unencumbered by reporting requirements.
But here’s one concern that really misses the, um, mark: That what Zuck really has his eye on is keeping his dough out of the hands of the IRS.
Several smart people who should know better have made a fuss about that—like Jesse Eisinger of Pro Publica.
I understand where these critics are coming from. The closer you look at the U.S. tax code, the more you realize that it’s like Swiss cheese for the richest of the rich, with all sorts of ways to shelter income from the U.S. Treasury, evade what’s due, and perpetuate dynastic wealth. David Cay Johnston has written the book on this.
I also get people’s qualms about the charitable tax exemption, which allows dollars that the people might control as tax revenue to stay in private hands. The U.S. Treasury may lose as much as $750 billion over the next decade from this tax break—during a period when all sorts of crucial government programs face cuts. We as citizens won’t decide where that money goes; a bunch of rich people will. This growing subsidy for private charitable giving certainly deserves closer scrutiny. And with the rise of donor-advised funds—which, by the way, is where Zuck has stashed most of his philanthropic cash up till now—the link between charitable tax deductions and near-term public benefit is getting hazier. DAFs have no payout requirements, remember. Nor are they transparent.
All these points are true. Yet none of them, I suspect, have anything to do with the motivations of Mark Zuckerberg and Priscilla Chan in creating an LLC to spearhead their efforts at social good. In fact, the couple have offered up perfectly logical reasons for choosing this more flexible vehicle, and in making this choice, are following in the footsteps of other major donors, like Pierre Omidyar and Laurene Powell Jobs. Quite a few emerging donors these days are drawn to private investing vehicles.
Anyway, the choice Zuckerberg and Chan have made isn’t the best way to keep their money away from the IRS. A surer bet would be to go the traditional route and slowly transfer all their Facebook shares to a private foundation.
The hybrid model that Zuckerberg and Chan have chosen—to allow them to invest in both nonprofit and for-profit investments—could actually mean higher tax bills. If they sell off Facebook shares to fund for-profit investments in social enterprises, they’ll have to pay capital gains on those sales. Which would not be the case if the couple made straight-out grants.
In other words, the critics of Zuckerberg and Chan who are going on about tax avoidance have it exactly backward: They’ve chosen a path that will likely lead to more taxes than would be the case if they’d followed the standard philanthropic playbook.
I know: We live in a jaded age, and there are plenty of good reasons to distrust today’s wealthy elites, judging by the events of the past decade. Yet sometimes, just maybe, the folks at the top really do have their hearts in the right place.