In his 2021 campaign for Senate, JD Vance, now vice-president-elect, minced no words in expressing his disdain for two of America’s largest private, philanthropic institutions: the Ford Foundation and the Gates Foundations.
Both are, he said, “fundamentally cancers on American society but they pretend to be charities, so they benefit from preferential tax treatment.” Their endowments, he continued, contain “hundreds of billions of dollars in ill-gotten wealth,” funding “radical left-wing ideology.” He advocated, in response, a dramatic corrective: We should seize their assets.”
Vance went too far in his language, but he was not wrong to identify the nation’s biggest foundations — including Ford, MacArthur and Soros — as left-leaning. And although it’s not likely that his radical prescription will pass legal or political muster, it’s well worth re-examining the tax advantages of private foundations he called out.
They have allowed them to grow dramatically, even as individual charitable giving — the beating heart of American civil society — is shrinking. Indeed, overall charitable giving adjusted for inflation and as a percentage of adjusted gross income is declining as we enter the holiday, end-of-year giving season.
As the next Congress considers whether and how to extend President-elect Donald Trump’s 2017 Tax Cuts and Jobs Act, it should set as a priority providing a tax benefit for those who do not itemize their tax returns so that those other than the affluent will have an incentive to make charitable donations.
It should compensate (a “pay-for” in Hill jargon) for the decline in tax revenues that would result by increasing the minimal 1.39 percent excise tax on foundation asset appreciation—capital gains of their investment portfolios — notably lower than the 4 percent set in the Tax Reform Act of 1969.
That super-low tax rate (especially compared to the standard 15 percent capital gains rate) has encouraged the tax-advantaged growth of private foundations to balloon.
According to FoundationMark, which relies on publicly available data, “U.S. foundation assets rose nearly $200 billion in 2023 to set a new record and top the $1.5 trillion mark for the first time.
Over the past five years, foundation assets have grown from $1 trillion in 2018 to the current high due to a favorable investment climate and strong incoming contributions.” The latter are also tax-advantaged, through their deductibility of up to 30 percent of income and totaled $80 billion in 2023.
Because foundations must devote at least 5 percent of their assets to grantmaking, their growth has meant that their grants are an increasing share of all U.S. charitable giving. Over the past decade, according to Giving USA, foundation giving has grown from 16 to 18 percent of all IRS-tracked charitable gifts, while individual giving has fallen off from 71 percent to 67 percent.
This is much more than a minor statistical trend. Foundation giving is, by definition, the province of the wealthy who create the initial endowments. It’s often directed, however, by staffs of “philathropoids” with their own agendas, including Ford’s emphasis on reducing income inequality or Hewlett’s focus on reducing climate change.
Individual gifts may support similar goals — but they are best seen as a vast, decentralized group of donations, many supporting local causes, whether churches or historical societies, which help bind American society together, rather than focusing on social change above all.
Keep in mind that even as major foundations focus on such matters as climate change (MacArthur), racial healing (Kellogg) or reducing incarceration (Open Society), donors overall, per the definitive Giving USA analysis, favor religious and human services far ahead of the environment and “public society benefit”.
Yet the tax code disfavors the small-dollar donor. The Tax Cuts and Jobs Act of 2017 arguably had many virtues. But by sharply increasing the “standard” deduction, it sharply reduced the number of taxpayers who itemize their returns. That means that all but the highest earners have reason to claim any specific tax deductions-including that for charitable giving.
Put another way, charitable giving, at least per the tax code, has become a luxury good. Or as the Congressional Joint Economic Committee has put it: “Only 9 percent of the charitable giving that avoided taxation because of the deduction occurred within the bottom four quintiles in 2018, while more than half came from the top 1 percent of Americans.”
A clear approach to correcting this imbalance is to include an “above the line” tax deduction, such that those who do not otherwise itemize their tax returns can still reduce their taxable income through charitable gifts. This was actually, albeit briefly, a part of the COVID-era CARES Act, which provided for an up to $300 deduction per taxpayer.
One cannot, of course, be certain that this will increase actual charitable giving; many taxpayers who don’t itemize their returns nonetheless leave money in the Sunday collection plate. However, there is a strong dimension of tax fairness involved in extending a charitable tax benefit to those of middle and low incomes.
The most significant barrier in Congress to doing so, however, is not whether an extended deduction will or won’t increase giving. Lawmakers, instead, worry about the revenue loss to the IRS that would result.
Indeed, the CARES Act incentive, now expired, has been estimated to have led to $4.8 billion in such losses. That leads those in Congress who, at this moment, are studying the issue, to look for ways to make up for that loss. That’s where they should turn their attention to the foundation excise tax.
Lawmakers contemplating expanding the charitable deduction must confront a difficult reality. An enhanced deduction will increase charitable giving — but that won’t show up in the federal budget. What will show up is a decline in tax revenue.
The Penn Wharton budget model group estimates that a non-itemizer charitable deduction could cost the IRS $151 billion over ten years; a tax credit (more valuable) could cost $267 billion.
This is where an increased excise tax on foundation asset growth could play a big role. If one assumes that increasing that tax from 1.39 to the top capital gains rate of 20 percent would increase revenue by a similar degree, that could mean increasing the excise tax take from $1 billion to $14.3 billion, a big step toward offsetting Treasury loss. This is obviously a rough estimate; the change would have to be rigorously modeled or “scored.”
Even limiting the increased tax to the largest foundations — those with assets of a billion or more, or roughly the top 50 — would be a significant “pay-for.”
This would have other benefits. Notably, it would serve as a step toward reducing the overall growth in these foundations, which have evolved from vehicles for those who have earned the funds being disbursed (e.g. John D. Rockefeller) to piggy banks for self-perpetuating boards and staffs with their own agendas.
Better to tax those foundations to make possible greater individual giving — and to push the big foundations toward eventually “sunsetting” or closing their doors, as the Gates Foundation has said it will do by 2047 — a good example for the field, Vance’s criticism notwithstanding.
The tax code, as it stands, stacks the deck against the small charitable donor. It’s time to restore a much-needed balance.
Howard Husock is a senior fellow at the American Enterprise Institute.
