Individual generosity and corruption by tax code

Noting The Assault on Generosity and Voluntary Action by Karl Zinsmeister, not because I agree or disagree but because I have found myself reconsidering some of my precepts around non-profits in recent years.

“Around the turn of the last century, the steel magnate Andrew Carnegie paid to build 1,689 libraries across the United States. Many are still in use, celebrated as monumental works of philanthropy. They should be seen as monuments to the failure of public policy. The United States could have built a lot more libraries by taxing the incomes of Carnegie.”

Those were the words of the official editorial board of the New York Times in a high-profile May 2019 screed. That’s an especially visible -- and flagrant -- example of attempts to derogate and rewrite America’s remarkable history of mutual support and social improvement through the voluntary action of civil society.

But this thrust by the Gray Lady is just one of hundreds of recent jabs into the face of philanthropy. Every few months now there is a new guru out on book tour, savaging the motives, effects, and humanity of some of our most generous voluntary givers. Here are cover lines from some of the new works thrust upon America over just the last year:

“Why philanthropy is failing democracy”
“The elite charade of changing the world”
“Philanthropy does more harm than good”
“Giving…can be a way of taking”

These themes are being endlessly repeated in media appearances and tut-tutting speeches, some of them delivered by men and women with 2020 national political ambitions. The sages tell us that wealthy donors are secret oppressors, cynically laundering their reputations, distracting us with candy, blocking the rubes who make up the everyday public from seeing that our whole system is rigged, and our country manipulated by a rotten oligarchy. Who knew that second-guessing Americans who give away money could be a full-time job?

The NYT. Putzes. "The United States could have built a lot more libraries by taxing the incomes of Carnegie.” What a bunch of anti-freedom statists. And what a bunch of historical ignoramuses. Carnegie started building libraries in 1889 and the final grant was made in 1919 by which time nearly half of all libraries in the US had been built with Carnegie's support. The Sixteenth Amendment permitting income tax was only passed in 1913, very near the end of Carnegie's library building spree. So much for building more libraries by taxing Carniegie's income in a period when federal income tax was unconstitutional.

Zinsmeister notes:

Alexis de Tocqueville considered America’s tradition of citizen initiative to reform and repair communities without resort to impersonal, bureaucratic, coercive mechanisms of government to be the most original and valuable creation of our new civilization. That priceless American innovation is now under ferocious, concerted, coordinated attack. Enemies of private giving and voluntary action are insisting that only government should be allowed to improve the common good, and that alternatives to state power must be shut down, or taxed away.

I agree that individual charitable generosity of the American people is a wonderful feature and part of the package of American exceptionalism. We give more than any other peoples in the world and to a greater range of recipients. We should foster that generosity.

But how? This is where my thinking has been shifting. Right now we do so through tax deductions for charitable giving. Makes sense. I have long been highly supportive of such a tax break. Not because I think it makes a huge difference in the act of giving, though possibly it does, but because I suspect it increases the size of the giving. The motive to give is I think reasonably inherent and somewhat fixed, but if you make it tax deductible, it makes it cheaper to give, effectively increasing the size of the gifts.

Well and good. Better that local charities spend tax money than for centralized bureaucrats to do so.

I have always recognized that the tax exemption is effectively a subsidy by the government, primarily to richer people, to make more generous donations. OK. For a good purpose. I have a greater issue with this tax policy when we are running deficits. Under that scenario, we are not giving generously then of our own money but are increasing taxes on future generations. And yes, we are almost always running a deficit.

So to summarize - I think individual generosity is good and to be encouraged. I am comfortable using the tax code to subsidize and increase the size of donations as long as we are not running a deficit.

There are two factors which have been causing me to rethink this earlier reasonably strongly held position.

First is, of course, that we are always running ever higher deficits. If we are not willing to sacrifice the nice-to-haves in order to afford the need-to-haves, then we are not serious about the financial health of our children and shame on us. This argument has loomed larger and larger in my mind.

Second, we always end up subverting the good intentions of a public policy so that it becomes almost evil.

In this instance, we have extended beyond simply providing tax relief to individual charitable donors for individual gifts to local good acts.

Now we have a plethora of 501(c) organizations which receive tax relief/subsidies. Where there is a regulation there is an incentive for graft. And boy have the swamp dwellers grasped the graft. And under the guise of such good intentions.

501(c)(3) tax-exemptions apply to entities that are organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for testing for public safety, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.

A 501(c)(4) organization is a social welfare organization, such as a civic organization or a neighborhood association.

A 501(c)(5) organization is a labor organization, an agricultural organization, or a horticultural organization.

A 501(c)(6) organization is a business league, chambers of commerce like the U.S. Chamber of Commerce, a real estate board, a board of trade, a professional football league or an organization like the Edison Electric Institute and the Security Industry Association, that are not organized for profit and no part of the net earnings goes to the benefit of any private shareholder or individual.

A 501(c)(7) organization is a social or recreational club that is organized for pleasure, recreation, and other nonprofitable purposes.

A 501(c)(8) organization is a fraternal benefit society.

Children and education and animals and farmers and local unions, and reading - all so good.

And so quickly corrupting and so easily having dire unintended consequences.

Each of these type of organizations is now an independent entity to some extent controlled by the government. Government regulations drive their actions and behaviors.

Even more insidious, many, if not most, of these organizations end up functioning as advocacy groups for more government funding. So the government is, through tax policy, funding organizations who then lobby it for more funding. There is something wrong with that model.

On top of that, these entities become accountable to no one but the IRS.

I have been dealing with one such local entity. It is a 501(c)3. It is supported primarily by developers and local government contractors who want to build hard surface recreational paths through wetlands and residential communities despite the environmental destruction and the already demonstrated increase in crime in the residential communities.

The primary purpose is to improve the property values of undeveloped land adjacent to these new paths, even if it erodes the values of already existing property.

This local entity exists to apply for grants to fund these paths and bridges. Some of the grants come from foundations but most of it is from various city, county, state and federal agencies. They have already spent a couple of million dollars of money intended for federal highway maintenance and money from a local bond issuance intended to fix badly maintained local roads. They are scheduled to spend a couple of million more.

A further problem is that all these developers and government contractors make large donations to the local political campaigns. They get an audience when the residents do not.

The core problem, though, is that there is no oversight or accountability. There is no sanctioned plan by the various governmental entities. There is no City Council authorization. There is no recourse for actual residents.

As a consequence, we are diverting $4 million dollars from its authorized use (maintaining and repairing existing public infrastructure) to build new infrastructure which is desired by property speculators and developers, in a fashion which is environmentally damaging and increases crime, in the face of overwhelming opposition by 80% of the residents in the areas affected, and with no oversight or accountability.

And all because of the tax code. If this depended on residents contributing their own money, this project would not exist.

Once you see how this mechanism works, you see it everywhere. Behind any advocacy group arguing for this or that government program or policy change, you almost never find actual citizen money. It is always grants from agencies or other foundations. It is a child of the Mandarin Class who support and protect it because it is so beneficial to them. It substantially increases a democracy deficit. It substantially increases public money not being spent spent for the common good but rather spent for factional or private interests. It substantially undermines citizen trust in government institutions.

But it sure is lucrative for the private interests and for the Mandarin Class characters who dominate these institutions. All under the guise of ostensibly doing good.

The ideal would be to reform the tax system. But reform lasts only as long as someone is looking. As soon as attention shifts, it is back to the bad old ways.

I am increasingly inclined to believe that the best reform would be to get rid of the 501(c) status completely. The argument would be that we are throwing the baby out with the bath water. But at this point a root and branch approach seems called for. There is very little baby and an awful lot of putrid swamp water.

All of which is kind of emphasized by this very article. Not in what is written but by the fact of who is writing it.

The author of the article calling for continued support of the existing infrastructure of charitable giving?

Karl Zinsmeister, a vice president at The Philanthropy Roundtable, is author of The Almanac of American Philanthropy, which has been issued in an updated 2017 compact edition.

And what is the The Philanthropy Roundtable you might ask?

The Philanthropy Roundtable is a nonprofit U.S. membership organization that advises and serves the interests of philanthropists.

It is an advocacy group for advocacy groups. It is an advocate for unaccountable spending of tax revenues on things that are nice to have but which we don't need to have, an advocate for unaccountability, for the corruption of local government and the undermining of citizen trust in governmental institutions.

But they are nice guys with good intentions.