On December 1, 2015 Mark Zuckerberg and Dr. Chan announced that they were donating 99% of their shares of Facebook to charity.' Wow, isn't that awesome? A guy literally giving so much to charity, how nice of him. If we had more generous people like him in the world, the world would have been a much better place.' This should be your initial reaction after seeing that. I think we all know that Mark is the founder of Facebook and is also a billionaire. Not just Mark, billionaires around the world are donating huge amount of money to charity. Take for example, William Henry Gates, I mean Bill Gates. He is actively involved in climate issues, epidemic control, malaria control activity in Africa etc. Who today doesn't agree that Bill has made this world a better place? I certainly did think so for many time. But before talking about the big philanthropy, first I want to come to the point that who are these persons and why are there even billionaires?
Why are there billionaires ?
Billionaires possess wealth in billions. Just to make you realize how big is billion, if you have 1 million dollars and you spend $1 per second, you will run out of money in less than 2 weeks and if you have 1 billion dollars and you spend $1 per second, you will run out of money in about 32 years. Let's take another analogy, if you stacked $100 dollar bills, a million dollar is roughly 3 feet high but if you did same with 1 billion than a billion dollar is twice the height of Empire state building. To summarize, a billion dollar is huge number. The fact that today's world has so many billionaire is because of the single reason, Capitalism. Roughly speaking, capitalist society is an ideology in which the firms, industries, corporations are owned by an individual with minimum government interference. USA is a great example of capitalist society. It is the sheer fact of these capitalist societies that people have gained wealth beyond any average person's comprehension. Now the 400 richest Americans own more wealth than the bottom 150 million adults. The system allows people to benefit from it and this is not just the story of people exploiting a system, it is a story of a system that can only survive because people exploit it.
Billionaire's philanthropy
Everybody loves philanthropy because you are doing something good for the others. If you give $10 to a homeless, you unselfishly helped someone so you earn their blessings but big philanthropy goes way beyond that. It is a complex structure of many systems. Have you ever seen Jeff Bezos just going to the street and giving money to homeless? No, because that simply doesn't happen. Big philanthropy is a tool that billionaires use to grow their wealth. Yes, you heard that right and I will explain why. Let's see some data, the number of Americans donating to charity has been falling for 15 straight years but the total shares of donations coming from the ultra rich is sky rocketing. In 2018, the total sum of money donated to charity was a staggering figure of 427.7 billion dollars, of which most came from the top 1%. 30% of the total donation in 2019 came from half of the top 1%.
Why do the ultrarich donate so much?
It may come to as a surprise but most ( not all, maybe ) billionaires donate for their own benefit. What would a billionaire do, if he gets accused of some wrong doings? He would donate million dollars to the charity through his foundation and that is a fact. Philanthropy is used by the rich people as a means of reputation cleansing. If you donate $1 million to charity, who cares that you said the f word during a conference meeting? In the eyes of people you are a hero trying to save the world. That is what philanthropy does, it makes people form a good image of them in public's eye regardless of something bad they did in the past. Philanthropy takes people, who initially people thought was monopolizing or had trust issues, to gain trust and become non recognizable regardless in the meantime their wealth grows more than they give.
The problem with big philanthropy
Here I present the reasons behind these big philanthropies and the problem associated with it.
1. Charitable tax deduction
This is one of the major reason why billionaire donate such huge amount of money. By donating the money to an approved charity, they can reduce the amount of tax to pay to the government by reducing the amount of money. It means that for every contribution you make to a qualified charity, you can reduce the tax amount. The receiving organization has to be qualified i.e., having 501(c)(3) designation meaning they file an annual information with IRS every year. The very fact that you can reduce the amount of tax is the major driving force for big philanthropy. I think many of you have read 'Rich Dad Poor Dad' by Robert Kiyosaki where he writes how he as a rich person pays less tax than a normal person and one of the reason behind it is CTD.
The problem with it is, if the government is not getting the tax, which it needs as a revenue for spending, the tax of a normal individual increases. In some sense we, the tax payers are actually subsidizing these donations in the form of lost tax revenue. The greater is the donation the less tax he pays which means that the more tax we pay to compensate. For every $1 a billionaire gives to charity, the rest of us chip in 74 cents in lost tax revenue. Between 2010 and 2014, the cost rest of us took was $246.1 billion.
2. The 5% rule
When the billionaires donate money to their own foundations, they're not even required to give it all away. Tax laws in USA require these type of charitable organization to spend 5 % of investment asset annually. US government expects foundations to use their assets to benefit society and it enforces this through section 4942 of the Internal Revenue Code, which requires private foundations to distribute 5% of the fair market value of their endowment each year for charitable purpose. This law was agreed upon to ensure that private foundations would be able to exist hand in hand with the society that benefits from it.
The problem with this it that only 5% goes to the charity, minimum required by the law. Then what happens to the rest 95% ? It goes to the foundations' investment into stocks or other things. Sometimes, even the 5% doesn't fully reach to the people.
3. The 'Democracy' problem
Less than 10% of the charitable contributions go towards addressing the basic public needs, 75% of the donations over 50 million go to the things like museums, schools, hospitals so that they can have their name on it. But is that what public wants? No, it is what the big man wants. He can give any amount of money for anything he likes. If the big man likes strawberries, boom Jonny the billionaire donated $2 million to train farmers to produce berries. They can do whatever they want with that money irrespective of actual public need. By playing with massive sums of money and deciding where that money goes by taking the money away from the government, billionaire decide on policies without getting democratic approval. A survey was conducted and it was found that a policy has a higher chance of being passed if the big guys want it irrespective of the normal people's will. Even if these foundations do help the public in some way, a questions arises whether that's how we really want our society to operate ?
4. The big guy wants it
The ultra rich guys heavily influence the social policies of the nation. They donate to change the laws and make them more favorable to them. The amount of billionaire's money put towards shaping the laws in US is around $10 billion every year. During the 2016 US presidential election campaign, the estimated total cost was $6.8 billion out of which $1 billion came from the billionaires. So the rich even get to decide which laws are to be implemented. A famous example of it is the Charter School policy. Despite the public voting against the policy, the policy was passed because Bill wanted it to. It's not what is needed, it's what the big man wants.
5. Donor Advised Funds
It goes like this, you put money in DAF, get immediate tax write off for full amount and donate money later I mean indefinitely later. That is why the DAF donations have tripled since 2007. Donations to civic groups 501(c)(4) promotes social and political causes while letting you keep your donation anonymous. So you can donate and go completely unrecognizable.
6. Reputation cleansing
As I explained earlier, the big guys donate to impart a good image in the public's eye. A famous example of it is the story of John Schnatter, the founder of Papa's John Pizza. He had to resign from his post in 2018 because he used the N word on a conference hall. Later he announced to donate $1 million to black college in Kentucky stating in a press that his purpose it to make other people's life better. Yes I too chuckled when I first heard this.
Here are some more examples,
- Go Pro company launched its IPO on June 26, 2014. Nicolas woodman, the founder of the company suddenly gained $3 billion. It also meant that his tax increased and reached in figure of millions. So he absolutely from nowhere announced to donate $500 million to the charity through his foundation(Jill + Nicholas woodman foundation), of course. But even after 4 years after the announcement, no traces of charitable work was actually observed. When he was asked about it in an interview, he simply replied that I did it because the system allows it and in that sense he is absolutely right.
- Coming back to the Mark's announcement of donating his 99% shares of Facebook to charity, he actually gave it to LLC that he owns and he can do anything with that money. LLC stands for Limited Liability Company which is a type of business structure. LLC structure gave Mark more flexibility in investing for profit social enterprise. The money was still his.
- In 2014, Gates foundation had 538 million dollars worth of shares in Coca cola. That same year one of its charitable projects was training 50,000 farmers in Kenya. What Bill really did was that he made his investment in Coca cola more profitable by training farmers to produce passion fruits destined for Coca cola company. What a mastermind, charity for profit.
What should be done ?
I know what you must be thinking, tax, tax and tax. Tax those rich guys be it on income or capital gains. Yeah it may be a good option but definitely not a wise one. Even if we increase the tax, the big guys will find other loopholes in the laws to overcome it. Taxing the rich won't solve the problem because the tax money is not used in government spending. I know It sounds very counterintuitive. I will try to explain but it requires some some understanding of Economics to capture the idea. This revolves around Modern Monetary Theory ideology. Putting in simple words, it says that a sovereign country that issues it's own currency, spends, take debts on its own currency, can never go broke. US, Japan, UK are these type of countries. The country can never run out of money because it can simply print money or transfer in the banks electronically. The government doesn't rely on tax for its revenue. Then why tax the people? It is simply done to control inflation. It may feel puzzling but you can learn more about it in the internet. Just watch lecture of Randall Wray, Bill Mitchell or Warren Mosler on YouTube. So taxing the rich can mitigate the effect but doesn't solve the problem fully. We shouldn't rely on the billionaire's money to solve the problem because they are the very creator of it. To solve the problems we must focus at the root level on the available resources. A country like US can have infinite sum of money but limited resources. Policies should be made and implemented targeting the middle class people not the rich. Hand more power to people, hear what people have to say. If we want to solve climate issues don't rely on Bill's donation rather invest on the resources.
Finally, I want to put forward my point of view in this. We cannot deny the good things they have done, like Bill's approach against malaria in Africa. I just think that the big guys shouldn't be the one deciding our policies. The problem solutions' should be according to the people's need. You may argue that it is immoral to be a billionaire but its is not much of a problem for me. It's just that we mustn't depend on these guys for a change. Trusting the billionaires to solve the problem is like appointing an arsonist as a firefighter.
If you have more interest in this topic, I highly recommend Anand Giridharadas' book Winner Takes All.
The 5% rule :- https://pfs-llc.net/resource/the-5-rule-explained/
Mark's 99% share donation :- https://www.nytimes.com/2015/12/03/technology/zuckerbergs-philanthropy-uses-llc-for-more-control.html
Modern Monetary Theory :- https://www.youtube.com/watch?v=7sd-ElKMbPI&t=996s
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