How Wealth Inequality Distorts Philanthropy

The growing inequality of wealth is, not surprisingly, unfolding in the charitable giving sector with both small donor declines and the rise of the mega-donor. Philanthropy is becoming more “top-heavy,” as donations by wealthy donors mask an overall decline in giving by the non-rich.

This has been a concerning trend for some time. In its 2016 Philanthropy Awards, Inside Philanthropy reported that the “Most Alarming Long-Term Trend” was top-heavy philanthropy—and the “Hottest Issue Most Funders Aren’t Addressing” was inequality.

Now, our new report, “Gilded Giving 2020: How Wealth Inequality Distorts Philanthropy and Imperils Democracy,” documents the continued drift toward top-heavy philanthropy and proposes an urgent reform agenda to protect the charity sector from the distortions of concentrated wealth.

Between 2000 and 2016 (most recent data), the percentage of households giving to charity has dropped from 66% to 53%. Wage stagnation, unemployment and declining homeownership all contribute to economic insecurity and declines in giving.

Almost $450 billion was given to charity in 2019, according to Giving USA, a 4.2% increase over last year. But any overall expansion in giving over the last decade has largely been driven by wealthy donors. In the early 2000s, households earning $200,000 or more made up only 30% of all charitable deductions. By 2017, the most recent year for which data is available, this group accounted for 52%. The percent of total charitable deductions claimed by households making over $1 million grew from 12% in 1995 to 33% in 2017.

One negative implication of top-heavy giving is that a greater proportion of charitable money is diverted into wealth-warehousing vehicles such as private foundations and donor-advised funds (DAFs), rather than going to recipient nonprofits.

Low- and middle-income donors are more inclined to give directly to working charities. When they give through intermediaries, they give to local United Ways or community foundations. But wealthier donors are more likely to park funds in their own private foundations and DAFs, slowing the flow of funds to charities.

Giving to these intermediaries is the fastest-growing part of the sector. Between 2005 and 2019, the number of private foundations grew from 71,097 to 119,791, an increase of 68%. Over the same period, their assets grew 118%, from $551 billion to $1.2 trillion. The proportion of all charitable dollars going into foundations has tripled over the past 30 years.

Donations to DAFs have increased even more rapidly, from $20 billion in 2014 to more than $37 billion in 2018—86% growth over just five years. DAFs have seen their share of the giving pie triple between 2010 and 2018, rising from 4.4% of all individual giving to 12.7%. The single biggest recipient of charitable funds is the Fidelity Charitable Gift Fund. And over the past three years, six of the top 10 charity recipients have been DAFs.

Implications of top-heavy giving are troubling for the independence of the nonprofit sector, which must reorient itself to major donor fundraising, attempting to locate elusive DAFs and preparing project proposals for foundations rather than sending fund appeal letters.

The 1969 law that forged the modern charity and foundation system is premised on the social contract that donors receive a tax deduction in exchange for relinquishing dominion and control over their gifts.

Taking advantage of the fact that DAFs have no mandated payout, a whole industry has emerged with these vehicles serving as tax-advantaged platforms for impact investing. The Conrad Hilton Foundation pays $35,000 a year to each of the six Hilton heirs who serve on the foundation’s board. Paul Singer, a signer to the Giving Pledge, fulfills his foundation’s payout requirement by giving to his DAFs. What part of this is relinquishing dominion and control?

The ultimate problem with top-heavy philanthropy is power. Concentrated philanthropic power is now becoming an extension of the increasing wealth and influence of the richest 0.1%.

This group already has significant clout in our democracy through our donor-driven politics, elections and legislating. And they dominate the economy and culture through corporate and media ownership. Now, mega-philanthropy has become another means to shape society to their liking, with considerable tax benefits to boot.

Their power will only grow in the years ahead because of shrinking government and rising billionaire philanthropy. The post-pandemic years will be consumed by fiscal austerity as local, state and federal governments juggle the costs of services and shrinking tax bases. Meanwhile, a new generation of billionaire-controlled private foundations will rise up, throwing their weight around.

Reversing the Drift Toward Top Heavy Philanthropy

The drivers of top-heavy philanthropy—rising income and wealth inequality—lie outside of the sector, and so do most of the solutions. For example, small donor declines likely will not be fixed with expanded charitable giving tax incentives. As our report shows, declines in small donor giving are highly correlated with rising economic insecurity, or what the Brits call the “precariat” class.

The only way to restore mass giving is to rewire the economy to a middle class, eliminate poverty, and close the racial wealth divide. A universal giving tax credit that rewards those who dig deep may move a tad more money to charities, but the ultimate solution will be economic policies that strengthen economic security and well-being, including living wages, subsidized mortgages to expand homeownership, and universal health insurance.

Similarly, the growing concentration of wealth and power will not be addressed through changes in laws governing philanthropy, but through the restoration of progressive tax policies, including a national wealth tax and a more robust estate or inheritance tax. Ironically, these will probably be the last advocacy campaigns funded by billionaire philanthropists.

There are, however, several ways that the laws governing philanthropy should be modernized to protect the independent nonprofit sector, increase the flow of funds, discourage warehousing of charitable assets, and protect the integrity of the tax code.

In 1969—a half-century ago—when the current rules governing charity were written, the U.S. was a considerably less unequal society. The racial wealth divide was smaller and the concentration of wealth within the richest 1% was significantly less than today.

An immediate action, in the face of the pandemic, is for federal lawmakers to institute an Emergency Charity Stimulus to mandate a higher foundation payout for the next three years and the implementation of a DAF payout. This would move an estimated $200 billion in charitable dollars off the sidelines to frontline charities without costing taxpayers additional funds.

But we need a long-term “charity reform” program that fixes the design flaws in donor-advised funds by requiring a payout and higher levels of transparency. Foundation payout should be increased and exclude donations to DAFs, excessive compensation and overhead, and for-profit investments, regardless of their virtues (these activities can continue, just not counted toward payout).

We need to measure reforms by the 1969 proviso as to whether donors have given up dominion and control, and outlaw perpetual warehouses of wealth. To this end, the rules governing philanthropy should move to eliminate the taxpayer-subsidized private family foundation as we know it.

Wealth taxes should be levied that consider closely held foundation assets as private wealth. This will encourage donors to build more democratically controlled foundations or, better yet, transfer funds to public-interest charities controlled by those historically excluded from wealth ownership. As Edgar Villanueva has proposed, billionaire philanthropists should start with a 10% tithe of their wealth to foundations controlled by Black, Indigenous and other people-of-color-led initiatives.

MacKenzie Scott demonstrated some of these instincts in her first wave of significant donations, giving $1.67 billion directly to 116 charities, mostly addressing issues of racial injustice. She is both increasing the flow to working charities and giving up some control of decision-making—two steps in the right direction.

Chuck Collins is director of the Program on Inequality at the Institute for Policy Studies. Helen Flannery is an associate fellow at IPS and charity sector researcher at ROI Solutions. They are co-authors of “Gilded Giving 2020: How Wealth Inequality Distorts Philanthropy and Imperils Democracy.”

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