Charities in the US collect donations, don't help anyone and don't pay taxes

Americans gave half a trillion dollars to charity last year, a massive sum intended to pay for worthy causes overlooked by governments and corporations. Why not everything is so simple and how the rich take advantage of tax loopholes through charity, the publication told Yahoo!.

Photo: IStock

A huge portion of this money does not go to food pantries, scientific research, or even churches. Instead, the super-wealthy, including many billionaires who have pledged to give away their tech and stock fortunes, funnel their wealth through opaque financial instruments where it can sit tax-free for years without affecting charities, according to a new report from the progressive think tank Institute for Policy Studies. (IPS).

“There is a significant amount of philanthropic funds that are not being used, and donors have already received tax breaks,” said Chuck Collins, director of the Inequality Program at IPS.

More than a quarter of charitable giving in the U.S. last year went to charitable foundations, or DAFs, according to the National Philanthropic Foundation. DAFs are funds that provide the donor with an immediate tax deduction, but allow the money to potentially sit for decades without being used for actual charitable activity.

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According to Fidelity, DAFs are the fastest-growing type of charitable investment. They are the most popular among wealthy individuals, and many of the high-profile donations from billionaires in recent years have gone to DAFs.

In 2021, Bill Gates donated $15 billion, Elon Musk - $5,7 billion, Jack Dorsey - $700 million, Mark Zuckerberg - $700 million, but all these donations were sent not to individual charities, but to DAFs or donor family foundations, notes IPS. Last year, more than two-thirds of the billionaires who signed the Giving Pledge (a non-binding promise to give the majority of their wealth to charity during their lifetime) gave the money to either a charitable foundation or their family foundation.

Donate under name only

Proponents of DAFs argue that their structure encourages giving: tax deductions encourage wealthy donors to give money to charity even before they have decided which cause to support.

“Donors may have good reasons to delay making grants,” says an article published by Stanford Law School.

In one hypothetical situation, a tech company founder who "sold a startup for millions of dollars" might want to donate his proceeds but is too busy to immediately decide where to direct the funds, and a DAF is a good choice for such an individual, the article notes.

However, while DAFs can theoretically increase the size of the charitable pie, in practice they too often allow donors to create the illusion of charity while maintaining control over their funds, critics say.

Although a gift in a DAF is treated the same as a direct gift to the Red Cross or United Way, in practice it, as tax scholars Roger Colinvaux and Ray Madoff wrote in 2019, “effectively allows the donor to maintain ongoing control over the charitable disposition and investment of the donated funds.” . Moreover, “donors are neither required nor have any incentive to ever waive their advisory privileges in order to provide funds for charitable use.”

At the same time, ultra-wealthy donors receive significantly larger tax breaks than middle-class workers. According to Colinvaux and Madoff's calculations, 74 cents of every dollar given to charity goes back to the donor in the form of tax breaks, with the highest-income donors benefiting the most.

A person in the top tax bracket will save 37% in federal income taxes on every dollar given to charity, a similar amount in state income taxes, and, depending on what and when they donate, may even avoid capital gains taxes and taxes for inheritance. By comparison, a typical worker making about $60 who doesn't own stocks will save 22% of their cash contribution, in addition to saving on state taxes.

Moreover, because there is no way to track donations from specific DAF accounts, they act as "dark money" allowing donors to transfer huge sums, essentially anonymously, to a range of potentially unscrupulous organizations, including non-profits advocating specific political causes, or organizations classified as as hate groups, the think tank notes.

“This allows DAFs to be used to hide transfers, similar to how ultra-wealthy individuals use multiple shell companies to hide the movement of money between offshore accounts,” IPS writes.

All such strategies are completely legal, the think tank explains, as are other potentially questionable tactics used by family foundations. For example, paying family members to serve as trustees or fund managers, sometimes with salaries of hundreds of thousands of dollars a year. However, according to the IPS, they undermine public confidence in charities and the tax system as a whole.

“The fact that billionaires evade taxes, have these secretive family foundations, and can play God by deciding where the money goes is private power—unaccountable private power,” Collins noted. “At this point, philanthropy risks becoming a private power subsidized by taxpayers.”

Big tax losses

IPS experts believe that estimates of how much the tax system loses due to various charitable deductions are inevitably underestimated because only some philanthropic transactions are tracked. However, according to experts, taxpayer losses amount to billions.

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Last year, corporate and personal charitable tax deductions directly cost the United States $73 billion, according to IPS—substantially more than the budgets of the Department of Energy or the Department of Labor. When you factor in the investment returns of the charities themselves, which are also tax-exempt, the losses exceed $110 billion. And when you estimate the value of donations of special assets such as stocks, real estate, or art, they run into the hundreds of billions.

Given the extent of such government subsidies for ostensibly charitable causes, Collins argues that taxpayers deserve greater transparency from increasingly popular mechanisms such as DAFs, as well as stricter laws to ensure that their activities are truly charitable.

IPS advocates for tax law changes, including requiring DAFs to spend a certain amount of money annually, as private foundations must do, and improving reporting, as well as closing loopholes that allow funds to transfer funds to DAFs.

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