State-Sponsored Empire Building: A Conversation with Rob Reich

By Edward CarverApril 8, 2020

State-Sponsored Empire Building: A Conversation with Rob Reich
WEALTHY AMERICANS HAVE PLENTY of ways to exert influence on public life, especially through targeted philanthropy. Few journalists cover the charity sector with a critical eye. This helps big donors build up goodwill — and in some cases, burnish their progressive credentials — even if their actions are aimed at preserving their wealth. Warren Buffett opposed pro-union reforms early in the Obama administration, and Bill Gates recently spoke out against Elizabeth Warren’s wealth tax plans, yet both remain liberal darlings. 

If philanthropy is an exercise of power, all Americans help pay for it: the US Treasury loses at least $60 billion a year to charitable deductions, and probably much more once the full range of tax benefits are counted. A philanthropist like Gates avoids roughly $370 million in income tax with every $1 billion that he gives away. This means that the public effectively pays for more than a third of whatever charity work Gates has deemed worthwhile, be it bed nets for malaria prevention or charter schools. The same principle applies when a member of the Koch family gives money to right-wing groups registered as charities, such as the American Legislative Exchange Council. This influence is almost entirely unchecked. If Americans object, they can’t vote the philanthropist out of office.

Michael Bloomberg embodies the antidemocratic ethos at the heart of modern charity. The New York Times estimated he gave away more than $3 billion last year — more than any other philanthropist — as he prepared his presidential campaign. More than 50 staff members at Bloomberg Philanthropies moved over to his campaign team.

The connections between philanthropy and politics are not news to Rob Reich, a political scientist at Stanford University and author of Just Giving: Why Philanthropy Is Failing Democracy and How It Can Do Better, published by Princeton University Press in November 2018. LARB spoke to him on the phone in late February.


EDWARD CARVER: In your book, you use the words “philanthropy” and “charity” interchangeably, as there’s no legal distinction. Why choose “philanthropy” in the subtitle?

ROB REICH: The idea was that philanthropy might call to mind big donations and large foundations. Those forms are the most problematic for a democracy.

Why does philanthropy have an uneasy relationship with democracy?

Philanthropy has a political dimension. It involves the plutocratic — no negative connotation intended, except to call out a class of persons who have a lot of money — exercise of power to direct one's private resources for public influence. That sits in tension with ordinary expectations of equal citizenship and equal ownership over political affairs. Philanthropy can simultaneously be an honest attempt to do good in the world and have political dimensions that subvert equal citizenship in a democracy.

To whom are charities accountable? How does this compare to the accountability of businesses and governments?

Big philanthropy is one of the most unaccountable forms of power in a democratic society. Big donors and big foundations are almost wholly unaccountable to anyone else. There is no internal logic of accountability and no organizational logic of accountability. Foundations don’t have investors or shareholders looking to make a profit, and there’s no competition between foundations. What the Gates Foundation does can't put the Ford Foundation out of business. There aren't consumers to please. Instead, there are supplicants asking for grants. And no one stands for election. As Diane Ravitch put it, Bill Gates serves as the nation's unelected school superintendent, as a result of his foundation’s education initiatives. There’s little an ordinary citizen can do if they don’t like what the foundation does.

How much money does the US Treasury lose in forgone taxes due to deductions for charitable giving?

$60 billion would be the low estimate. It’s hard to measure as there are tax advantages at different stages.

What tax advantages do philanthropists have?

First, there are tax deductions when putting money into a foundation or giving to charity in the first place. The wealthier you are, the more you are subsidized, and the less it costs you to be a philanthropist. If you're in the top income tax bracket, your subsidy is 37 percent. (These deductions are all that’s accounted for in the $60 billion figure.) Then there are further tax benefits once the money is in a foundation. If a foundation earns $1 billion in investment returns over the course of a year, there is a modest excise tax on those returns, but for all intents and purposes, those investment gains are untaxed. There’s no capital gains tax applied.

Does charity make our society more equal? If one aim of philanthropy is the redistribution of wealth, how well is it succeeding in the United States?

This was one of the surprises to me in doing research for the book. The word charity calls to mind assistance for the poor or disadvantaged. But studies have shown how little charity actually goes toward that purpose. Even if you make very generous assumptions, at best one third of charitable giving is redistributive. And that’s assuming that arts museums use donations so that low-income children can visit and universities use donations on financial aid for low-income students.

Are tax deductions for charitable giving justifiable?

No, the tax advantages for charitable giving in the United States are indefensible from the standpoint of democracy and from the standpoint of justice. I can imagine alternative forms of tax advantages that would be defensible but these wouldn’t be minor tweaks on the current system. The United States defines the nonprofit sector in the most permissive terms of any democratic society. In most other countries, tax incentives for charitable giving are available only if you're giving to an organization that fights poverty.

In your book, you point to scholarly work that suggests that “everyday libertarianism” leads people to believe that their pretax income is their money.

Many people have the impression that philanthropy is the exercise of the liberty of an individual to do what he or she wants with his or her own money. In most countries, including the United States, that’s untrue. People receive tax subsidies to possess a liberty that they already possess. George Soros’s attitude is typical. At the final meeting before his foundation unveiled itself publicly, Soros was at the table with his senior staff, and there was some disagreement about what the final list of program areas would be — what causes the foundation would support. Soros allegedly pounded his fist on the table and said, “This is my money, we will do it my way.” A junior staff member raised his hand and said something like, “If you hadn’t placed this money here, roughly half of it would have been in the US Treasury.” The staff member was fired soon thereafter. This story is from Mark Dowie’s book American Foundations. The point is that any gift is partially the donor’s money and partially the forgone tax revenues that would have been of some fractional benefit to every citizen.

Why doesn’t philanthropy receive more scrutiny?

I think it’s both mysterious and scandalous that there are entire sections of newspapers devoted to covering the activity of public officials and the marketplace — The New York Times has a reporter devoted to covering big tech — yet this other domain in which extraordinary power is exercised is left largely uncovered. So far as I’m aware, there’s no reporter at any major newspaper or magazine whose beat is big philanthropy. So donors get away with little more than gratitude and admiration. Journalists should help educate people to direct scrutiny at them. Scrutiny doesn’t have to be cynical. I’m talking about the same type of scrutiny that’s applied to corporate and political power.

Incredibly, the Fidelity Charitable Gift Fund now receives more donations than any other charity (yes, legally, it’s a charity). This is a “donor-advised fund” program, which are controversial. When philanthropists put money in these funds, they take a tax break like they would with any charitable donation even though the money can sit in a Fidelity account and doesn’t have to be distributed to charity anytime soon.

Donor-advised funds are scandalous. They are the kudzu of American charity — they’re growing quickly and choking off the funding of ordinary nonprofit organizations. Donor-advised funds are a convenient giving vehicle because they afford donors the maximum upfront tax advantage while still giving them control to disperse the money on whatever schedule they prefer. They are vehicles to warehouse wealth.

Are major philanthropists in the United States using donor-advised funds? 

They’re especially popular here in Silicon Valley, where younger people who have made a lot of money aren’t ready to devote themselves to philanthropy in any serious way. A “liquidity event” gives them a tax reason to create a donor-advised fund. They stuff the money into it for a long period of time and leave it until a future date to decide when to distribute the money.

How long can they leave it there?

They can leave it there forever. They can pass it on to their kids if they want.

Oy vey.

A further objection to donor-advised funds is that the Fidelitys and the Vanguards and the Silicon Valley Community Foundations of the world — the entities that house the funds — have perverse incentives. They earn management fees on the money, so they have a reason to keep the money under management rather than see it go out the door to charity.

So the US government, which effectively pays part of every donation, is subsidizing the likes of Liberty Financial?

Oh yeah, massively.  

In The Anti-Politics Machine, a seminal work on “development” in the Global South, anthropologist James Ferguson argues that the development industry reframes political questions about how resources should be allocated as technical questions, erasing issues of power and class, and indeed leaving many of the purported beneficiaries of development work disempowered. Do you see these trends in philanthropy as well? Is there any crossover between your work and Ferguson’s?

That’s a fair comparison. I agree with the argument in The Anti-Politics Machine that the power that’s exercised by development agencies or donors is not scrutinized enough. There’s definitely a parallel. I’d also say that there is a rising technocratic orientation to big philanthropy, especially on the West Coast, championed by the kinds of rich people who have made their money as engineers and who are turning their attention to philanthropy with a kind of assumption that social problems can be solved through technical mechanisms. The attitude is: “Let’s try to create the equivalent of a malaria vaccine for every social ill,” as if social ills were bugs in the software that could be fixed by engineers.

Can a charitable gift be apolitical? Should there even be a legal distinction between political and charitable giving?

While it’s true that all philanthropic activity has a political dimension, I do think it’s worth preserving a distinction between gifts to politicians for campaigning and gifts to organizations that are providing public benefits. Even while acknowledging that the latter has a political dimension.

I suppose I was suggesting that if a gift is “apolitical,” it’s inherently conservative, in that it does nothing to challenge the power structures of society or the laws that undergird those power structures. Does that make sense?

I see what you’re getting at. If you are giving your money to the soup kitchen, you’re right, that’s a conservative act in the sense that you are taking the organizational or institutional structure of society as a given. You’re just wanting to do something that brings about a benefit. And let’s be generous, it will bring about a benefit. It’s better that someone eats tomorrow than doesn’t. But it’s also possible to make a donation to a university or think tank that’s working on homelessness and trying to champion a different policy approach. That would be a potential challenge to the existing array. That would be less conservative, so to speak.

Some argue that charity is more efficient than government because state bodies are bloated and full of red tape. Should “getting shit done” take precedence?

There is something to be said for efficiency, but part of what public services are meant to do is provide stability so that people can build their life plans around them. If you get a handout from a donor today, but you have to wonder if you have to curry favor with the donor to ensure that you keep getting it, that can undermine an important dimension of the production of public services. With such strings attached, you get paternalism and dependence.

In theory, foundations should be able to take more chances than governments. In practice, they tend to be run by “establishment types,” as Gara LaMarche, the former president of The Atlantic Philanthropies, put it, and take few chances. What can be done about this?

Running a foundation is like having tenure at a university. Both involve near complete performance unaccountability. One long-standing complaint about tenured scholars is that they're risk-averse in their choices of projects. It’s strange because if you’re tenured, why aren’t you going after the most ambitious projects? At least scholars have peer review and critique. When I present a draft paper at a workshop, the point is for people to criticize me and tell me all the things I’ve done wrong. If you’re a philanthropist, you have your ass kissed in every social setting. Some element of the peer review that exists in academia would be helpful for philanthropy, and would increase the risk-taking appetite of philanthropists.

Let’s discuss one possible reform. In lieu of tax deductions for charitable giving, you’ve suggested a “capped tax credit.” How would that work?

As I mentioned, the wealthier you are, the more you are subsidized when you give to charity. This doesn’t make sense because Bill Gates shouldn’t have a greater subsidy to make his voice heard than we do. A “capped tax credit” would give everyone the same amount of money — $1,000, say — to give to our preferred charities. After which, of course, Bill Gates would be free to give money away, but no longer with a tax subsidy. There are lots of ways it could be structured, but the key idea is to give an equal voice and weight to every citizen.

Some people might object to such reforms by pointing to the great work that certain philanthropists have done.

What one person regards as a philanthropic good deed, another person regards as an enormous mistake. Philanthropy has to be seen as a political undertaking. If Bill Gates is the nation’s unelected school superintendent, some people will agree with his education policies, and others will disagree. Just as there are differences of opinion about what counts as a good politician, there are differences of opinion about what counts as good and bad philanthropy. So pointing to instances of good philanthropy is like pointing to one’s favorite politicians — disagreement is inevitable.

In a mid-February article, The New York Times was implicitly critical of the influence that Michael Bloomberg has been able to obtain through philanthropy (it did not, however, mention that the American people subsidized his giving). Does Bloomberg’s approach show the dangers of the revolving door between politics and charity?

Bloomberg is an interesting case because he has operated across all three domains of society in a way unlike almost anyone else. He intermingles the power of the capitalist, the donor, and the elected official in a way — I’m not sure there are any other such examples in recent history. Insofar as his philanthropic activities have been meant to support his political activity, as I think the Times article suggests, it’s just another example of the political dimensions of philanthropy. On the one hand, Bloomberg tells us that he will be immune from the political influence of wealthy people because he doesn’t need to take anyone else’s money, that he’s incorruptible in that sense. Yet he asks us to think that other people taking his money won’t have that effect, that his philanthropy hasn’t purchased for him any political support or influence. This seems to me self-refuting. There’s a catalog of mayors who endorsed him that have received money from his foundation. His philanthropic support has oriented people to think well of him as a politician.

Jeff Bezos’s recent announcement that he will give $10 billion to climate change initiatives leads me to another question. Most philanthropists come from the world of business and favor market-oriented solutions to social problems. Some decry big government at the same time their companies spend inordinate sums lobbying the government for favorable policies. To what extent does any conversation about philanthropy have to address the concentration of wealth, power, and influence in America today?

It certainly needs to. Some people say that philanthropy is a way to amplify the voice of the voiceless, a thumb on the scale of the disenfranchised. It’s theoretically possible. There’s nothing that prevents someone who made her money in the marketplace from suddenly, as a philanthropist, trying to undermine the very corporate power that served her. It’s just unlikely to happen frequently. I think the Bezos announcement revealed that we’re still at a moment when the general reaction to charitable giving is celebration instead of scrutiny. We can all agree that devoting a lot of money to climate change mitigation is an urgent priority. And yet he’s conducting his philanthropy via Instagram post with no explanation of what type of philanthropic vehicles he’s using, how he’ll make decisions, over what time horizon, what type of outside scrutiny there will be …

I want to ask a question about intellectual priorities. Among Marxists and leftists with a Gramscian bent, critiques of philanthropy are common. But the majority of Americans take a relatively uncritical view of charity. Most still regard giving away money as a morally upright private decision, and pay little attention to the issues of public morality — looking at the whole system — that you address in your book. How do you balance the two audiences? How do you push back against rigidly leftist thinking while getting across your key messages about the flaws in our current philanthropic system?

My intellectual orientation is not on the hard left. I defend a productive role for philanthropy, even big philanthropy, in a democratic society. I reject the idea that philanthropy would be unnecessary if only our society were just. I think that philanthropy, in a different type of system, can play a long-time-horizon discovery role.


Edward Carver is an American journalist based in London.


Banner image: "Bill & Melinda Gates Foundation, Seattle" by Marc Smith is licensed under CC BY 2.0.

LARB Contributor

Edward Carver is a writer based in Maine.


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