Troubles include: abuse, unintended consequences, complication and bureaucracy, conflicts of interest, diversion, frustration, perpetuation, perversion, proliferation and vagueness.
The Troubles With Philanthrophy -Part I
By: Mitch Levin – July 12, 2020
As you may have noted from the masthead, this post is authored by a guest blogger. Mitch Levin is a friend of more liberty – less government and provides some keen insights into the world of philanthropy, which he knows firsthand. Following a career as an ophthalmologist, Dr. Levin turned his focus to the world of finance, becoming CEO of Summit Wealth Partners. He is very active in the community, particularly in the performing arts. The following (presented in two parts) is unedited. Note: We will consider publishing guest blogs; contact us if you are interested. Postings should be no more than 600 words and have a nexus to more liberty and less government.
The charitable, tax-exempt (sometimes non-profit) sector comprises 10% of American employees or 12 million jobs – and is the third largest, behind retail and manufacturing. Under IRS code 501(c)3 these receive donations tax-free, while donors deduct the amounts given from income taxation. They also pay no sales, property or income tax on “profits”.
Charities may have positive cash flow and they simply reinvest these profits, in an accounting sleight of hand into either increasing salaries or purchasing other assets such as advertising, marketing, buildings, supplies and equipment. Incomes of tax exempts have grown by 20% over the past 10 years along with an increase in their staffing by more than 50%. In contrast, the private sector has grown by 2-3%.
About 90,000 endowments and foundations in the USA hold some $2.5 trillion (also income and capital gains tax-free), 10% of total stock market value. They only need distribute 4% of that to be compliant; 1% is allowed for “costs”. There is an incentive to maintain the investment corpus to sustain the organization and sinecures, while delivering only the minimum required by law to the intended beneficiaries.
Colleges and hospitals also own substantial portions of property in their communities. The local taxpayers therefore must pay more than their “fair share” to make up for the lost tax revenue. And because they get to receive tax-deductible donations, in addition to federal redistributions from the tax receipts, all US taxpayers at least indirectly subsidize them.
Americans are generous. Total charitable giving in the US in 2016 was about 10% of federal spending at about $390 billion. Americans are the most charitable of any nation. There have been several studies that indicate a causal relationship between free markets and charitable donations. Also, there is an inverse relationship; the more a government provides for charitable entities and beneficiaries, the less compelled and the more reluctant are citizens to donate beyond their taxes. In the aggregate, American donations as a percent of earned income may appear to be falling. But the amount of giving is increasing – even to organizations with a high cost of acquiring donations.
There is the mistaken impression that high administrative costs detract from beneficiaries. These high costs sometimes imply a poorly run organization. Yet many organizations will not be able to raise sufficient funds without a larger infrastructure of costs. The accounting can be misunderstood or misleading.
The Troubles with Philanthropy
Trouble and controversy come in many forms and includes abuse, unintended consequences, complication and bureaucracy, conflicts of interests, diversion, frustration, perpetuation, perversion, proliferation, and vagueness.
Abuse: Kaleo Pharmaceutical Company, maker of the Ezvio naloxone injector, also created and donated to a patient assistance program (“PAP”). Kaleo then quintupled the price to cover the cost of the PAP that lowers the out-of-pocket costs for people who now cannot afford Ezvio.
Unintended Consequences: The road to hell is paved with good intentions. A church group on a mission to Africa installed pumps in a village without running water. Two years later the pumps were broken and the women walked to the river to haul water on their heads. The reason: no one was trained in repairs and there were no spare parts.
To be continued – Next week Part II picks up where we left off.