What follows is my response to an open discussion about the role and social value of philanthropic foundations. It is my response to the lead article by Dr. Rob Reich, which can be read in its entirity at the URL below.
BOSTON REVIEW
http://www.bostonreview.net/BR38.2/ndf_rob_reich_foundations_philanthropy_democracy.php#c5t_form
Lead Essay:
What Are Foundations For?
Rob Reich
This article leads off our debate on philanthropy, with responses from Stanley Katz, Diane Ravitch, Larry Kramer, and others.
Graham Smith
Judge Richard Posner, one of the foremost American jurists outside the Supreme Court, once observed, “A perpetual charitable foundation . . . is a completely irresponsible institution, answerable to nobody. It competes neither in capital markets nor in product markets . . . and, unlike a hereditary monarch whom such a foundation otherwise resembles, it is subject to no political controls either.” Why, he wondered, don’t we think of these foundations as “total scandals”?
If foundations are total scandals, then we have a massive problem on our hands. We are now living through the second golden age of American philanthropy. What Andrew Carnegie and John D. Rockefeller were to the early twentieth century, Bill Gates and Warren Buffett are to the early twenty-first century.
The last decade of the twentieth century witnessed the creation of unprecedentedly large foundations, such as Gates’s. The assets of the Gates Foundation and a separate Gates Trust, which holds wealth donated by the Gates family and Buffett, together total more than $65 Billion. If the combined entities were a nation, it would be 65th on the world GDP list. And it’s not just billionaires and their mega-foundations that command attention. Record wealth inequalities might be a foe to civic comity, but they are good for philanthropy. The boom in millionaires has fueled unprecedented growth in the number and assets of small foundations as well.
So foundations have seen explosive growth. But why are they a scandal? Read the Full Article. http://www.bostonreview.net/BR38.2/ndf_rob_reich_foundations_philanthropy_democracy.php#c5t_form
My Comments:
In setting up his essay on philanthropic foundation in this “second golden age”, Reich offered the following: “Let us dismiss quickly one common and intuitive thought: that foundations exist because they are remedial or redistributive, responsive to the needs of the poor or disadvantaged.”
He goes on to identify public goods this way: “It has long been understood that the commercial marketplace does not do well at providing what economists call public goods. These are goods that, like a well-lit harbor, are available to everyone if they are available to anyone; and that, like clean air, do not cost more when they are consumed by more people. “
After three decades in the field of child welfare, this was a startling and insightful dismissal. In debating whether America’s philanthropic foundations are worthy of the tax exempt status conferred on them in 1937, Reich excludes consideration of their value relative to public services that reduce human misery but carry a cost per use. In other words Reich’s definition of public goods includes only passive public services, like street lights, but not active public services, including child welfare. This certainly explains why foundational giving for public needs is so small a percentage of their activity. Yet we are asked to judge whether their social contribution is worth their $53 billion in tax exemptions each year? How much good could that revenue do to support and strengthen our most vulnerable citizens? Don’t ask!
To characterize social services as remedial “or redistributive” of wealth, is offensive to me. When used to characterize government spending on the general welfare, “redistribution” is a code word to frame partisan arguments in our muffled debate over distributive justice. Taxing the more successful citizens to promote the general welfare, except for military spending, is considered an unfair redistribution of wealth, yet any discussion on the fair distribution of profits between workers and business owners is considered out of bounds.
The context for this discussion on foundations is the social value of philanthropy at a time when wealth disparity has never been greater. When a growing number of wealthy foundations are extracting ever more revenue from an already dwindling federal revenue stream, excluding consideration of their impact on public services makes this discussion itself a plutocratic exercise.
The pros and cons of whether foundations generate valuable diversity and innovation were well explored by the forum’s other contributors, but none of their essays addressed underlying assumptions. Foundations actually do play an outsized and often deterious role in how community social services are structured, funded and distributed. None of the contributors picked the scab off this wound to consider the broader picture. Financially speaking, foundations are in direct competition with public social services and the vulnerable populations served. I was disappointed.
Data Driven Viewpoints 
I am not in a position to determine economically whether Foundation money, where it provides services, does so to the advantage of the vulnerable. I see a far more insidious problem with Foundations and that is that so many of them now are mere masks for political organizations which provide no tangible social benefit at all. (Indeed, to the extent that they spread political messages without having to disclose their financing sources (and thus objectives) they actually undermine the political rights of the disenfranchised, and do so subsidized by their tax exempt status.
I completely agree with you that foundations should not engage in any political activity. During my career I was always supprised at how little foundation money went to support ongoing service needs or our neediest families when the foundations were so wealthy. They would, on rare occasions, fund some pilot projects or experimental treatements for a brief period of time, the expect the hosting non-profit service agency to aquire their own funding, from donors or government, to either continue or scale up the programs if the pilot was a success. It turns out that this is the extent to which foundations support active social services. They hold out specialty grants for which non-profit community social providers or governments compete to suppliment their meger revenues. Once the grant is over, governments and non-profits often lack the resources to continue, let along scale up the programs. Foundations are not in the business of supporting ongoing services. Meanwhile, the nations is awash in good ideas to fix some of our most intractable problems but lack the resources to implement them on a meaningful scale. We don’t need foundations offering any more innovation grants.
Funding active social services falls to taxpayers mostly and to the donors who contribute to non-profit agencies. Foundations don’t help, but they do suck up a large share of federal and state tax revenue that could go towards scaling up more effective social service programs.
avwalters, if you are still there, I should clarify that charitable foundations are 501(c)3 organizations under IRS tax code and are prohibited from any political activity. The big issue currently with the IRS involved 501(c)4 organizations. Under the law these organizations are not supposed to engage in any political activity but the IRS, on its own, allowed some political activity by these organization, leading ultimately to the present problems. That said, foundations do clearly engage indirectly in politics by vitrue of what they promote and how they distribute their grants. Here is a useful discription of all of the 501(c) classes of tax exempt organizations:
According to the IRS Publication 557†, in the Organization Reference Chart section, the following is an exact list of 501(c) organization types and their corresponding descriptions.[1]
501(c)(1) — Corporations Organized Under Act of Congress (including Federal Credit Unions)
501(c)(2) — Title Holding Corporation for Exempt Organization[2]
501(c)(3) — Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations
501(c)(4) — Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
501(c)(5) — Labor, Agricultural, and Horticultural Organizations
501(c)(6) — Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
501(c)(7) — Social and Recreational Clubs
501(c)(8) — Fraternal Beneficiary Societies and Associations
501(c)(9) — Voluntary Employee Beneficiary Associations
501(c)(10) — Domestic Fraternal Societies and Associations
501(c)(11) — Teachers’ Retirement Fund Associations
501(c)(12) — Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, etc.
501(c)(13) — Cemetery Companies
501(c)(14) — State-Chartered Credit Unions, Mutual Reserve Funds
501(c)(15) — Mutual Insurance Companies or Associations
501(c)(16) — Cooperative Organizations to Finance Crop Operations
501(c)(17) — Supplemental Unemployment Benefit Trusts
501(c)(18) — Employee Funded Pension Trust (created before June 25, 1959)
501(c)(19) — Post or Organization of Past or Present Members of the Armed Forces
501(c)(20) — Group Legal Services Plan Organizations
501(c)(21) — Black lung Benefit Trusts
501(c)(22) — Withdrawal Liability Payment Fund
501(c)(23) — Veterans Organization (created before 1880)
501(c)(24) — Section 4049 ERISA Trusts
501(c)(25) — Title Holding Corporations or Trusts with Multiple Parents
501(c)(26) — State-Sponsored Organization Providing Health Coverage for High-Risk Individuals
501(c)(27) — State-Sponsored Workers’ Compensation Reinsurance Organization
501(c)(28) — National Railroad Retirement Investment Trust
501(c)(29) — Qualified Nonprofit Health Insurance Issuers (Created in section 1322(h)(1) of the Affordable Care Act)[3]
† 501(c)(20) and 501(c)(24) organization types receive scant mention in IRS Publication 557 and are not included in its Organization Reference Chart. 501(c)(20) organizations are no longer tax-exempt under Section 501(c)(20) after June 30, 1992, but they may request to become exempt under Section 501(c)(9) effective July 1, 1992.[4] 501(c)(24) organizations are described as Section 4049 ERISA Trusts; Section 4049 of ERISA has been repealed.[5]
Yes, I am aware of the Section 501 designations. It is the “Social Welfare Organizations” that are the sources of so much trouble of late. On a side note, I have seen foundation “innovation grants” that have done a good deal of good, by opening eyes to new ways to address old problems. Still, I understand your objections to the tax free status, especially when it’s so often abused.
I’ve always been astonished at the view of philanthropists – I think of Carnegie, who built his fortune to give away to ‘public works’ while paying his workers a pittance for unrelenting workdays –
Perhaps he wouldn’t have had so much to give, nor would their have been such a need, had he just payed his workers a fair wage for reasonable hours and hired the extra help needed to run his foundry 24 hours a day….
I stand with you on that point, TamrahJo. You can’t restore the human dignity you’ve stripped from your workers by erecting a public library with your name engraved over the entrance.
Exactly! When I first studied local currency and exchange systems, I found the fact that many of the native populations of South and Central America based their economic system on 1 hour of labor – – if we were do to that, those who actually build the products and provide the services would be considered more valuable…
🙂