“Charitable Giving” Isn’t What You Think

Friends,

I want to start today with a warning about “charitable giving” and end with a primer on wealth inequality. The two are closely related, as I’ll explain.

We’re on the cusp of the biggest gusher of “charitable giving” in history. Beware.

We tend to think of “charitable giving” as unambiguously good because we equate “charities” with organizations that help the poor and equate “giving” with generosity. But both assumptions are wrong.

In fact, the “giving” is actually a giant tax loophole that provides the super-rich a means of dramatically cutting their tax bills while quietly funding their own priorities.

And “charities” under the tax code include elite universities, fancy opera houses, cultural palaces frequented only by the richest of the rich, and nonprofit “think tanks” devoted to right-wing causes.

The problem is that every dollar of “charitable giving” means substantially fewer dollars paid in taxes, because donors deduct their “charitable giving” from their taxable incomes. This tax loophole is especially big and lucrative for the super-rich.

According to the Institute for Policy Studies, up to 74 cents of every dollar donated to charity would have been paid as taxes. In 2022 alone, charitable giving resulted in $73 billion in lost tax revenue.

Here’s the thing. Taxes finance public goods such as public education, scientific research, roads and bridges, nutrition and healthcare for lower-income Americans, and clean water and clean air.

But the “charitable” tax deduction taken by the super-rich finances things that the super-rich want, such as Ivy League universities and culture palaces.

This means a lot of “charitable giving” results in more money for organizations that cater to or do the bidding of the rich, and less for things we all need. Behind the facade of “charitable giving” is a profoundly anti-democratic tax loophole that allows the super-wealthy to effectively substitute their priorities for what would otherwise be public priorities.

Which brings me to the upcoming gusher of “charitable giving” — the consequence of the AI boom and the largest IPOs in history.

Thousands of people with shares of Anthropic, OpenAI, SpaceX, and other AI-related companies have seen, or soon will see, the value of their shares soar into the stratosphere. That means gigantic capital gains.

You don’t need a degree in high finance to understand that these capital gains could also result in big tax payments. If you sell, say, $10 million worth of stock, you could easily face a tax bill exceeding $3.5 million.

Unless you reduce that tax bill through your “charitable giving.”

Hence, the upcoming gusher in charitable giving. According to some estimates, it could be more than $100 billion a year.

Consider: The seven founders of Anthropic, which is expected to have an enormous IPO as soon as this fall, have each pledged to give away 80 percent of their wealth, which is estimated to be about $90 billion. Anthropic also has a philanthropic matching program, which would mean another $60 billion in funds earmarked for giving. Nan Ransohoff, who heads public goods at the payment processor Stripe, estimates that these will generate between $37 billion and $100 billion to charities annually.

Add in the newly rich created by SpaceX, whose IPO has spawned an estimated 4,400 millionaires (and some 400 employees now worth more than $100 million), as well as OpenAI’s IPO, which is likely to create as many more millionaires and multimillionaires, and you’re talking really big money — and huge incentives for making tax-deductible “charitable contributions.”

Don’t get me wrong. I consider the nonprofit sector of the economy enormously important. I just don’t want the nation’s priorities to be set by the moneyed interests. Their massive political donations already give them extraordinary power.

One reform would be to limit the definition of “charities” — that is, the sort of contributions that warrant tax deductions — to places and institutions that actually serve the poor.

Another reform would be to reduce the tax deduction for “charitable contributions” and increase the capital gains tax rate on very high incomes. (At the very least, raise the capital gains tax rate to match the tax rate on ordinary income.)

And by all means let’s get rid of the “stepped-up-basis-at-death” tax rule, which now allows families to escape all capital gains by leaving appreciated assets to their heirs. For example, consider someone who got OpenAI stock for almost nothing and watched its value explode, and then contributed enough of it to charity to allow her to make a nice living off it without paying any capital gains taxes. She gave the remaining shares to her children when she died. The kids can then sell those shares for what they’re worth at the time of her death — say, hundreds of millions of dollars — yet pay zero capital gains on it.

These three reforms are, or should be, no-brainers. There’s simply no economic or political justification for allowing the super-rich — even the nouveau AI riche — to get giant tax breaks by financing things they prioritize.

Granted, reforms like these don’t stand a chance under Trump or his lapdogs in Congress. (And, sad to say, too many Democrats are also dependent on campaign donations from the moneyed interests.) But these are high on my list for what must be done.

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PS: That basic primer on wealth inequality in the U.S. that I mentioned at the start of this post is a video I’ll post this afternoon on this page. In it, I discuss why wealth inequality has gotten utterly out of control, why that’s a huge and growing problem for America, and what must be done about it.