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How a wealth tax could totally remake charity in the US

Vox.com logo Vox.com 9/20/2019 Dylan Matthews

In the past year, a massive, predominantly left-wing backlash to mega-philanthropy has broken out. Writers like Anand Giridharadas, Rob Reich, and Rutger Bregman have turned the idea that philanthropy is taking on tasks that are properly the role of government — and allowing the rich to expand their influence and avoid taxation in the process — into a mainstream critique, one that major philanthropists have had to answer.

But the critique has, with some exceptions, lacked a positive dimension: How, exactly, do we transition from the status quo to a world where the rich are taxed enough to shrink the philanthropic sector and the federal government has enough revenue to pick up the slack?

That specificity isn’t just the next logical step in the argument; it’s crucial to the whole thing hanging together. I am persuadable that philanthropy has taken on an excessive role relative to government, but there are still some areas (like foreign aid or reproductive health care) where having a third force besides government and business is valuable. Otherwise, those sectors will underinvest. You need to know the exact philanthropy-shrinking reforms to know if they go too far, or just far enough.

Luckily, University of California Berkeley economists Emmanuel Saez and Gabriel Zucman have provided just such a plan, in the form of their new paper on wealth taxes. The paper was prepared for the Brookings Papers on Economic Activity, a prestigious twice-annual event where leading economists present their most policy-relevant research. And what Saez and Zucman propose would dramatically change philanthropy in America.

The two authors had previously helped design Elizabeth Warren’s signature wealth tax proposal, which calls for a 2 percent annual levy on wealth between $50 million and $1 billion and a 3 percent levy on wealth in excess of $1 billion.

Those are high rates by international standards, but not enough to make very wealthy people no longer wealthy. The taxes would eat up most of the returns to investments in stocks (which average something like 6 to 8 percent in the long run) and all of the returns and then some to safer investments like bonds. But for the most part, the rich would grow richer at a slightly more modest pace or become only mildly less rich.

The new paper considers even bolder options: A “radical” wealth tax of 10 percent of wealth over $1 billion that’s meant to gradually draw down the wealth of billionaires, and a “confiscatory” tax of 90 percent on wealth over $1 billion meant to raise huge sums of revenue all at once and then (by setting a de facto maximum wealth level) never again.

Most strikingly, from a philanthropic perspective, Saez and Zucman propose making foundations and donor-advised funds subject to the wealth tax if they are still controlled by their wealthy benefactor. The Bill and Melinda Gates Foundation would be treated the same as Bill and Melinda Gates, individually. To avoid the tax, the foundation would have to either (a) put people other than the Gates in effective control or (b) spend its philanthropic funds quickly.

It’s hard to overstate how quickly this would transform American philanthropy. The first response would be evasion — philanthropists would try to use LLCs and other corporate forms to avoid the tax or put loyal aides in charge of the foundation while still de facto controlling it.

But if the tax is rigorously enforced, it would spur a massive increase in the speed and pace of giving. This wouldn’t be a one-time increase either. Billionaires would likely opt to front-load their donations in general, as they would have to donate outside their foundations to get income tax breaks. They would stop waiting to give through bequests or late-in-life gifts.

I worry about this effect a lot. As my colleague Kelsey Piper has argued, it’s actually quite difficult to find useful philanthropic opportunities and forcing people to spend down rapidly could lead them to give subpar donations. It’s easier to just empty a dump truck of money at Lincoln Center than it is to design an effective anti-malaria intervention.

At the same time, the volume of giving would increase — and if giving shifts to nonprofits that aren’t controlled by donors and are thus exempt from the wealth tax, those nonprofits could conceivably take over the task of researching effective interventions and gradually spending on them.

That, to me, is the most attractive feature of this plan, for all the administrative and constitutional difficulties it poses. It presents an alternative vision of a civil society, where recipient nonprofits gain a structural advantage over their donors. My prior is that this would be a positive shift. But this is such uncharted territory that there’s plenty of room for my prior to shift.

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