The announcement by Mark Zuckerberg and his wife, Priscilla Chan, that, during their lifetimes, they will donate to philanthropic causes roughly ninety-nine per cent of their Facebook stock, which is currently valued at close to forty-five billion dollars, has already prompted a lot of comment, much of it positive. That is understandable. The fact that Zuckerberg, Bill Gates, Warren Buffett, and a number of other billionaires are pledging their fortunes to charity rather than seeking to pass them down to their descendants is already having an impact.
Last year, the Bill & Melinda Gates Foundation, which was founded in 2000, dispensed almost four billion dollars in grants. A big slug of this money went toward fighting diseases like H.I.V., malaria, polio, and tuberculosis, which kill millions of people in poor countries. Zuckerberg and Chan have also already donated hundreds of millions of dollars to various causes, including eradicating the Ebola virus. In their latest announcement, which they presented as an open letter to their newborn daughter, on Zuckerberg’s Facebook page, they said that the Chan Zuckerberg Initiative, the new philanthropic organization that they are setting up, would focus on “advancing human potential and promoting equality.”
It’s not just the size of the donations that the wealthy are making that demands attention, though. Charitable giving on this scale makes modern capitalism, with all of its inequalities and injustices, seem somewhat more defensible. Having created hugely successful companies that have generated almost unimaginable wealth, Zuckerberg, Gates, and Buffett are sending a powerful message to Wall Street hedge-fund managers, Russian oligarchs, European industrialists, Arab oil sheiks, and anybody else who has accumulated a vast fortune: “From those to whom much is given, much is expected.”
Speaking at Harvard in 2007, Gates attributed this quotation to his dying mother. (A slightly different version of it appears in St. Luke’s gospel.) In 2010, Gates and Buffett challenged fellow members of the ultra-rich club to give away at least half of their wealth. Since then, more than a hundred billionaires have signed the “Giving Pledge.” Some of these mega-donors, such as Buffett, are content to let others direct their donations. (In 2006, he signed over much of his fortune to the Gates Foundation.) Increasingly, however, wealthy people are setting up their own philanthropic organizations and pursuing their own causes—a phenomenon that has been called “philanthrocapitalism.”
That is the positive side. It is also worth noting, however, that all of this charitable giving comes at a cost to the taxpayer and, arguably, to the broader democratic process. If Zuckerberg and Chan were to cash in their Facebook stock, rather than setting it aside for charity, they would have to pay capital-gains tax on the proceeds, money that could be used to fund government programs. If they willed their wealth to their descendants, then sizable estate taxes would become due on their deaths. By making charitable donations in the form of stock, they, and their heirs, will escape both of these levies.
That’s not all. As Robert Wood, a tax lawyer and contributor to Forbes.com, pointed out on Tuesday: “This generosity is also incredibly tax efficient.” Under the federal tax code, Zuckerberg and Chan will receive credits equal to the market value of their Facebook stock on the day they donate it to a new charitable organization they are setting up. In subsequent years, they will be able to roll over some of these credits to shelter income that they haven’t earned yet, such as Zuckerberg’s salary from Facebook and dividend payments generated by the stock he still owns. (Right now, Facebook doesn’t pay any dividends.) While such deductions are capped, the sums involved can still be large.
The Chan Zuckerberg Initiative will be organized as a limited-liability corporation, rather than as a traditional charity. As far as taxes go, this doesn’t necessarily make much difference. In a post for Fast Company, Marcus Baram pointed out that philanthropic L.L.C.s are increasingly common. So long as they are devoted to charitable works and owned by a family foundation, they can obtain tax-exempt status. They also have more flexibility in how they can invest their endowments than regular charities, which may make a difference in how the new organization operates. But that won’t affect the U.S. Treasury.
If what Zuckerberg is doing were an isolated example, it wouldn’t matter much for over-all tax revenues. But the practice is spreading at a time when the distribution of wealth is getting ever more lopsided, which means the actions of a small number of very rich people can have a bigger impact. In 2012, according to a recent study by the economists Emmanuel Saez and Gabriel Zucman, the richest 0.01 per cent of American households—there are only about sixteen thousand of them—owned 11.2 per cent of all the wealth in the country, which is the highest share since 1916. (The richest 0.1 per cent of households owned twenty-two per cent of the total, which is more than the bottom ninety per cent of households combined.)
By transferring almost all of their fortunes to philanthropic organizations, billionaires like Zuckerberg and Gates are placing some very large chunks of wealth permanently outside the reaches of the Internal Revenue Service. As tax-exempt entities, these charitable enterprises won’t face any liabilities when they eventually sell the stock they receive. That means the country’s tax base shrinks. As yet, I haven’t seen any estimates of the over-all cost to the Treasury, but it’s an issue that can’t be avoided. And it raises the broader question, which the economists Thomas Piketty and Anthony Atkinson, among others, have raised, of whether we need a more comprehensive tax on wealth.
Arguably, there is another issue at stake, too: democracy.
Although organizations like the Gates Foundation portray themselves as apolitical, nonpartisan entities, they aren’t completely removed from politics. Far from it. The Gates Foundation, for example, has been a big financial supporter of charter schools, standardized testing, and the Common Core. (It has also given some money to public schools.) Zuckerberg, too, has also provided a lot of money to charter schools. They featured prominently in his costly and controversial effort to reform the public-school system in Newark, New Jersey, which Dale Russakoff wrote about in the magazine last year. In the letter posted on Facebook, Zuckerberg signalled that he isn’t done with such efforts. “We must participate in policy and advocacy to shape debates,” the letter said. “Many institutions are unwilling to do this, but progress must be supported by movements to be sustainable.”
My intention, here, isn’t to enter the education debate. It is simply to point out what should be obvious: people like Zuckerberg and Gates, by virtue of their philanthropic efforts, can have a much bigger say in determining policy outcomes than ordinary citizens can. (As Matthew Yglesias pointed out on Vox, one of the advantages of registering the Chan Zuckerberg Initiative as an L.L.C. is that it can spend money on political ads.) The more money billionaires give to their charitable foundations, which in most cases remain under their personal control, the more influence they will accumulate. And relatively speaking, anyway, the less influence everybody else will have.
Some Americans—not all of them disciples of Ayn Rand—might say that this is a good thing. I have already cited some of the Gates Foundation’s good works. Isn’t Michael Bloomberg, with his efforts to reform gun laws, promoting the public interest? Isn’t George Soros, through his donations to civil-rights organizations, lining up on the side of the angels? In these two instances, my own answers would be yes and yes; but the broader point stands. The divide between philanthropy and politics is already fuzzy. As the “philanthrocapitalism” movement gets bigger, this line will be increasingly hard to discern.
So by all means, let us praise Zuckerberg and Chan for their generosity. And let us also salute Gates, who started the trend. But contrary to the old saying, this is one gift horse we should look closely in the mouth.