Another mega-gift announced. Another article disparaging the gift and criticizing the donor and the recipient organization. We’ve seen this movie before.
It’s time to stand up against philanthropy-bashing.
Last week in the Los Angeles Times, columnist Michael Hiltzik published an opinion piece criticizing the recent $400 million donation by Nike founder Phil Knight to Stanford University, arguing that:
Knight’s gift and its tax consequences should reignite a dormant debate over how much the endowments of America’s richest universities cost taxpayers…These benefits arguably contribute to America’s rising crisis in income and wealth inequality.
Let’s start by looking at those “tax consequences.” Hiltzik calculates that Knight’s gift “costs” taxpayers $158 million, which is the amount of tax savings assuming he is in the top 39.6% federal bracket (a safe assumption).
This is a naive overstatement that neglects several key limits on the size of Mr. Knight’s tax break First, charitable gifts of cash to public charities are limited each year to 50% of the taxpayer’s adjusted gross income (AGI). For Mr. Knight to absorb the entire tax break in a single year, his AGI would need to be $800 million! Mr. Knight is wealthy, but I don’t know if his AGI is that high. If his gift is to be made using anything other than cash, like publicly-traded securities (which is very likely), his deduction would be further limited to 30% of his AGI.
Second, Mr. Knight’s charitable deduction is further curtailed by the overall limit of Schedule A itemized deductions imposed on top taxpayers, which would result in a further reduction of 80%. In other words, Mr. Knight can only take advantage of 20% of his already-limited-by-AGI charitable deduction.
Granted, even with these limitations, Mr. Knight will avail himself of a very useful charitable deduction – but not anywhere near the $158 million Hiltzik assumes.
Tax planning for large gifts is important, but research has shown that donors give for personal, emotional reasons and because of a belief in the mission of the organization. Tax savings consistently ranks low on the list of motivations for giving; according to the most recent U.S. Trust Study of High Net Worth Philanthropy, “To Receive a Tax Benefit” ranked 11th out of 14 motivations for giving (#1 was “When you Believe That Your Gift Can Make a Difference”).
Knight’s gift will fund a Rhodes Scholar-type of program at Stanford that was the dream of outgoing Stanford President John L. Hennessy. The program will annually admit 100 students, “with a wide range of backgrounds and nationalities,” and fully fund each student for three years to pursue graduate education “in leadership, innovation and other curricula designed to develop scholars’ capacity to lead ambitious change in a complex world.”
Some more math. Annual cost of graduate education plus living expenses at Stanford currently runs $60,311. For each scholar in the new program, the school is committing $180,933 over three years. Multiply that by 100 scholars per year, and the program runs over $18 million per year in today’s dollars just for the student expenses, not including other associated program expenses.
And this program is meant to last in perpetuity. In order to produce that much annual income at a conservative 4% rate of return indefinitely, you would need a corpus of roughly $450 million. While this is a simplified analysis, the point is that the size of Mr. Knight’s gift is not out of proportion to the assumed costs of the program.
Hiltzik goes on to state:
Nothing about the U.S. tax code’s deductions for charitable giving or exemptions for charities’ investments helps steer these activities to works that do the most public good — or any public good — which is the putative rationale for the breaks.
A history lesson may be in order here: the charitable deduction is one of the oldest tax breaks, dating back to World War I. No less than the New York Times editorial page argued in 1917 in favor of the charitable deduction, fearing that the newly-instituted taxes on the wealthy would cause private philanthropy to dry up without the incentive of a deduction.
Have we really reached a point in our society where someone’s philanthropic gesture is called into question? Where someone can claim that a gift — one that will impact the lives of thousands of students over many decades to come — could have been “put to better use”?
Hiltzik and other critics of mega-gifts to large university endowments are engaging in philanthropy-bashing, trying to make a point about social justice and income inequality from voluntary gestures of generosity. It is a heavy-handed, pretentious, invidious position to take in the face of such largesse, not to mention overly cynical in its presumption that charitable gifts to large universities are somehow contrary to the “public good,” which is nonsense.
Are there problems in philanthropy? Of course, just as in any industry (like the newspaper industry).
But that is no excuse for philanthropy-bashing, which is demeaning to the basher and serves no higher purpose.
Of course, I’m not so naive as to think that philanthropy-bashing actually will stop. Those with their opinions are free to voice them.
But those of us engaged in philanthropic planning should not sit silently while individual generosity, which I have been blessed to have witnessed and facilitated in my years as a fundraiser and financial advisor, is dragged through the mud.
Philanthropy should be praised, not ripped apart. Giving should be encouraged, not discouraged. Philanthropists should be thanked, not vilified.
Mr. Knight, on behalf of all advocates for philanthropy, thank you for your gift.
Questions or comments? Contact me on Twitter @juanros or LinkedIn.