A perpetual charitable foundation … is a completely irresponsible institution, answerable to nobody. It competes neither in capital markets nor in product markets (in both respects differing from universities), and, unlike a hereditary monarch whom such a foundation otherwise resembles, it is subject to no political controls either. It is not even subject to benchmark competition‚ that is, evaluation by comparison with similar enterprises‚ except with regard to the percentage of its expenditures that go to administration (staff salaries and the like) rather than to donees. The puzzle … is why these foundations are not total scandals.
Richard Posner, “Charitable foundations: Posner’s comment“
1. Introduction
This is Part 2 of my series on Billionaire philanthropy, following the series introduction in Part 1.
Today’s topic is the uneasy relationship between billionaire philanthropy and democracy. It can seem today as though large philanthropic foundations are a natural, almost inevitable feature of the democratic political landscape. But the legal scholar Ray Madoff reminds us that the modern philanthropic foundation is a recent, historically contingent invention:
Given their ubiquity, it might be hard to believe that charitable trusts were not allowed under American law throughout most of the nineteenth century. It was thought to be poor policy to allow individuals to create their own perpetual entities devoted to whatever purpose they thought best. Beginning in the twentieth century, however, the private perpetual charitable trust became not only tolerated but favored in the law and subsidized by the government through the tax code.
Ray Madoff, Immortality and the law
One of the first test cases for charitable foundations in the United States was John D. Rockefeller’s attempt to establish the Rockefeller foundation. Rockefeller initially applied for permission from the United States Congress and was outright refused, in part on the grounds that the foundation would be anti-democratic. During the debate, the Reverend John Haynes Holmes maintained:
[M]y standpoint is the whole thought of democracy. . . From this
Reverend John Haynes Holmes, Testimony before Commission on Industrial Relations, 1912
standpoint it seems to me that this foundation, the very character,
must be repugnant to the whole idea of a democratic society.
That is probably too strong. But what exactly was the good Reverend on about? And why was the United States Congress so concerned about the place of charitable foundations in a democratic society that it was prepared to turn away Rockefeller’s fortune?
To get a handle on these questions, let’s think about the distribution of power and wealth in society today. Much of my discussion will focus on the United States, although similar trends are found in many other countries today.
2. Oligarchy
The rich are getting richer, and the poor are getting poorer. Take a look at this chart of annual income growth in the United States by income percentile in the past few decades:
As you can see, real incomes have fallen for the vast majority of the population, but skyrocketed for top income earners. This is one of many factors contributing to a growing wealth gap in the United States.
Over time, wealth has become dramatically concentrated among the top ten percent of households, with only a negligible proportion of family wealth held by the entire bottom half of American households.
Wealth buys many things, including houses, companies, and yachts. But wealth also buys power and influence. There is a growing consensus among political scientists that the wealthy and the interest groups that they fund wield an outsized influence on American politics.
For example, Martin Gilens and Benjamin Page analyzed the effect of average citizens’ preferences, economic elite preferences, and interest group preferences on the likelihood that a policy will be adopted in the United States. Their results show a slim responsiveness of policy to average citizens’ preferences, but strong responsiveness to the preferences of interest groups and economic elites.
Here is how Gilens and Page summarize their findings:
Not only do ordinary citizens not have uniquely substantial power over policy decisions; they have little or no independent influence on policy at all. By contrast, economic elites are estimated to have a quite substantial, highly significant, independent impact on policy … Economic elites stand out as quite influential—more so than any other set of actors studied here—in the making of U.S. public policy.
Gilens and Page (2014), “Testing theories of American politics: Elites, interest groups, and average citizens“
How is it that economic elites manage to wield so much influence in society? There are many answers to this question, but one answer that is not always highlighted involves philanthropy. As Rob Reich reminds us:
Philanthropy is a form or exercise of power. In the case of wealthy donors or private foundations, especially, it can be a plutocratic exercise of power, the deployment of vast private assets toward a public purpose.
Rob Reich, Just Giving
Once we understand philanthropy as an exercise of elite economic power, with lasting effects on public policy, we are naturally driven to raise questions about the extent to which philanthropy is compatible with the democratic ideal of equal (or at least, not-too-unequal) influence over public decisionmaking.
What exactly is the nature of the tension between philanthropy and democracy? At least three points of tension are worth exploring.
3. Plutocratic bias
It is a democratic ideal that all citizens should have an equal voice in the allocation of public goods. Like other democratic ideals, this principle can be given an intrinsic justification on grounds of liberty, equality or public justifiability, but also an instrumental justification: fairly incorporating a diverse range of voices in decisionmaking is a good way to identify the best policies.
Elite philanthropy introduces a plutocratic bias into the allocation of public goods, giving the wealthy more voice in how public goods are allocated. This happens in two ways. First and most obviously, elite philanthropists have near-complete autonomy in their own philanthropic endeavors. A philanthropist can fund the opera, a soup kitchen, or a recreational sports team, depending on her whims. The public has no formal voice in any of these decisions, which affect the allocation of large pots of public goods in society.
Second, as we saw above, elite philanthropy confers substantial political power upon philanthropists. Most directly, elite philanthropists often fund politicians, either with the aim of changing the balance of power in a contested race, or else with the goal of influencing later policy decisions. For example, Sam Bankman-Fried gave at least $70 million to politicians, and once mused about the prospect of spending a billion dollars on a single election. Money talks, and donations of this magnitude gave Bankman-Fried an unusually strong opportunity to influence the direction of public policy.
The second path to plutocratic bias, through political influence, can have pernicious consequences. That is because political influence does not only confer political power upon wealthy philanthropists. It also gives them the opportunity to wield personal power within society. For example, The Guardian reports that the Securities and Exchange Commission launched an initial investigation into FTX earlier this year. They were stopped after a letter of protest was penned to the SEC by eight lawmakers, five of whom had received large direct or indirect donations from SBF.
Let that sink in for a moment. There is reason to believe that SBF successfully used his political influence to block an investigation into allegations of fraudulent business dealings by influencing members of Congress to pressure the SEC to close an active investigation, which might otherwise have uncovered evidence of fraud months in advance of the FTX collapse. That really happened.
In such cases, plutocratic bias in democratic decisionmaking becomes problematic, not merely because it undermines decisions about the allocation of public goods, but also because it confers illicit power and other benefits on the members of society who need them the least.
4. Accountability and transparency
I opened this discussion with a complaint by the legal scholar Richard Posner that charitable foundations are “answerable to nobody”. The same complaint has been raised by the political theorist Rob Reich, who helpfully splits it into two parts.
First, foundations are largely unaccountable to anyone except themselves. A foundation may allocate its assets in virtually any way that it chooses, and if the rest of us do not like it, we have no legal recourse.
The unaccountability of modern philanthropists is especially concerning when we have reason to believe that philanthropists hold beliefs and values that differ substantially from the beliefs and values held by most citizens. During times of famine, an unaccountable foundation can literally lock the granary doors, then call on police to haul away a hungry mob and use the coercive power of the state to enforce its will.
Unaccountability should therefore be a concern with effective altruists, who aggressively pursue an unpopular longtermist agenda. In such a case, philanthropists use the lack of formal accountability to allocate goods against the democratic consensus, enforcing this allocation with the full backing and power of the state.
Second, foundations lack transparency: they have no legal requirement to explain the reasons for their actions. Although many major foundations do publish annual reports, this is purely voluntary, and the reports may contain exactly those details which the foundation considers important. Some are rather lax about reporting. For example, here is the entirety of the Musk Foundation’s website.
That isn’t an excerpt. It is literally the entire website. On such a slim basis, how is the public to understand what the foundation does with (at least) hundreds of millions of dollars? How are its decisions made?
Although effective altruists have been admirably transparent in explaining the motivations for many of their short-termist funding decisions, effective altruists have recently spent a good deal of money on longtermist causes and organizations with little formal explanation, and certainly nothing like a cost-effectiveness analysis. This is legally permissible, because there is no formal requirement for effective altruists to explain themselves, or to construct explanations which the community at large would find convincing.
A lack of transparency comes into conflict with the democratic ideal that public goods should be allocated on the basis of processes that are transparent and open to all.
5. Tax policy
Just stop talking about philanthropy and start talking about taxes.
Rutger Bregman, remarks during panel, “The cost of inequality”
Even if you think that billionaires should in principle have the right to spend their money as they please, this should not compel you to endorse modern forms of elite philanthropy. One problem is that tax policy amplifies the spending power of elite philanthropists by exempting them from a number of taxes, effectively providing a public subsidy for elite philanthropy.
In many countries, donations coming in to foundations are exempt from income tax, or even capital gains tax on the assets used to fund them. Foundations themselves are often exempt from taxes on property and capital gains, allowing them to build and hold wealth over time. More subtly, foundations are exempt from the inheritance taxes used to break up large individual fortunes, since foundations cannot die.
If public money is being used to amplify the spending power of philanthropists, then it is no longer obvious that the public should have no say in what philanthropists fund. After all, it is not just their own money that philanthropists are spending. In a very real way, they are spending the public’s money as much as their own.
A second problem is that within democratic societies, elite philanthropy can be used to mask an uncomfortable truth: many of the wealthiest members of society are not paying their fair share of public expenditures. Philanthropy allows many billionaires to provide the appearance of fairness, even generosity, even while paying much less than society expects them to pay. For example, an investigation by ProPublica looked at the percentage of income paid to income tax by American wage earners. They found that while this percentage rises for middle income earners, the highest income earners actually pay substantially less income tax than many lower income earners.
The same analysis also found that tech billionaires, among the largest contributors to effective altruist projects, paid less income tax than billionaires in other sectors.
In this vein, we must not forget that the opening of the FTX foundation coincided with the movement of FTX into the Bahamas, a notorious tax haven. While we should rightly praise billionaires such as SBF for taking the opportunity to engage in philanthropy, we should also be mindful of their attempts, often blatant, to reduce their public contributions by avoiding taxes. When we take the measure of billionaire philanthropy against tax avoidance, philanthropy often begins to take the appearance of something more like a palliative or a smokescreen than a concerted and costly effort to give back to society. All too often, philanthropists toss society a few pennies while keeping dimes on the dollar away from the tax man.
6. The case for philanthropy in democratic societies
So far, we have seen that there are at least three serious tensions between elite philanthropy and democracy:
- Elite philanthropy leads to a plutocratic bias in public decisionmaking, which in turn confers illicit personal power on philanthropists.
- Elite philanthropy is unaccountable and lacks transparency.
- Philanthropy exploits generous tax subsidies and often masks failures to contribute to public expenditures.
However, most commentators think that it would also be going too far to deny that philanthropy has an important role to play within democratic societies. Why might a democratic society want to make room for foundations?
One reason to make room for philanthropy is that philanthropists can take a long-term vision of society’s needs. There are many institutional and motivational reasons why democratic political decisionmaking tends to be biased towards short-term needs. When properly managed, foundations can take a longer-term view, providing a much needed corrective for political short-termism. Indeed, it is perhaps primarily on these grounds that Rob Reich, himself no friend of many contemporary philanthropic foundations, singled out the Future of Humanity Institute in his 2018 book Just giving as an example of a worthy philanthropic foundation. While I am not sure whether Reich would stick to that assessment given subsequent developments, Reich has a point: effective altruists aim to provide a long-termist perspective that is, within bounds, sorely needed in democratic societies.
Another reason to allow philanthropic foundations is that they can function as a check on the tyranny of the majority. Democratic governance often makes it difficult for unpopular views, groups and approaches to influence policymaking. By allowing public goods to be provided not only by the government, but also by a range of philanthropic foundations, we make room for many different perspectives to be included in the allocation of public goods, even if those perspectives are unpopular.
Relatedly, a broad playing field of philanthropic foundations bolsters experimentation by allowing societies to try out many different models for public good provision on a small scale and observe the results. The most successful models can thus be implemented on a larger scale.
All of this suggests that democratic societies should not be opposed in principle to philanthropy, even elite philanthropy. But we might want to shape policy in a way that curbs some of the worst tensions between philanthropy and democracy.
7. Implications for philanthropy
What follows from this discussion? At least four classes of implications are worth exploring.
First, we should seek ways to increase accountability and transparency of philanthropic decisionmaking. Insofar as philanthropists are involved in allocating public goods and doing so with the generous support of public institutions and public funds, citizens of democratic societies have a good case to have a voice in how funds are allocated. This may mean limiting donor discretion to make arbitrary decisions about how funds are spent, and increasing transparency requirements for foundations to explain and justify their decisionmaking to the public. That could spell trouble for longtermists in particular, who exercise substantial discretion to allocate resources in unpopular ways with little in the way of explanation.
Second, the tax code needs an overhaul. The amount of public money being used to subsidize elite philanthropy is historically unprecedented. This money is being used to amplify the power, influence and agendas of the wealthiest and most influential members of society. None of the arguments just given for allowing philanthropy to have a role in democratic societies could be used to support anything like the current tax-favored status of philanthropic foundations, and it is likely that this status is morally unsupportable.
Third, we need to make sure that legal features of philanthropic foundations are specifically justifiable by appeal to the roles that we want philanthropic foundations to serve in a democratic society. For example, to say that philanthropy allows society to take a long-term vision must of necessity justify a long lifespan for philanthropic foundations, but by what right is that lifespan unlimited, allowing the dead hands of donors to dictate the lives of their distant descendants? And if we want philanthropy to serve as a check on the tyranny of the majority, then why should we so generously support elite philanthropists who already exercise an outsized voice in public decisionmaking?
Finally, our reaction to elite philanthropy must be colored by a background of social critique. The rich are getting richer and the poor are getting poorer. Many of our most fundamental institutions are increasingly structured to the advantage of the wealthiest members of society, who are growing ever richer and more influential even in the supposedly democratic arena of public policy. Wealthy individuals are increasingly finding ways to pay less than their fair share towards the public purse and often use philanthropy in part to be perceived as benefactors instead of tax cheats. None of this is to suggest that all billionaires are bad, or that society is fundamentally or irredeemably corrupt. But even as we genuinely praise philanthropists for their efforts to give back to society, we must not forget the social, political, financial and institutional context against which these donations take place.
What else might we conclude about the place of philanthropy within a democratic society? Are there other sources of tension or complementarity? Perhaps I have missed some important justifications for current attitudes and practices towards philanthropy within democratic societies. Let me know what you think.
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