In the last generation, entrepreneurs who have disrupted a sector of the marketplace have created vast fortunes and, in turn, have made great promises of eventual generosity.
In December, Mackenzie Scott announced that she had given away $4.2 billion to 384 nonprofit organizations since last summer. The announcement was newsworthy for many reasons: the recipients, the conditions, and the timing of the gifts.
The recipients (covering all 50 states) were organizations directly helping those most affected by the pandemic, such as food banks and homeless shelters (the Vermont Food Bank received $9 million). They also included many institutions of higher education, but not the usual well-endowed institutions backed by well-heeled alumni. Instead, these were mostly community and small colleges, in rural and poorer areas, where a large proportion of students are the first in their families to attend college and are destined to graduate with crushing debt.
These gifts were unusual in that they came without strings attached: their use was left to the recipient’s discretion. There were no labor-intensive and costly applications, no competition among the neediest; recipients were simply notified that their fortunes had changed. For most, it will be the largest largesse by a single donor, by far, in their history.
But the most striking aspect of these gifts was their timing, that is, their immediacy. They were not structured as multiyear pledges or payouts, nor were the funds gifted to a fund for future distribution. And in doing it this way, Scott is disrupting the charity sector and exposing a deep disconnect between theory—and intention—and practice.
By definition, free markets result in the unequal distribution of income and wealth, and we choose to tolerate that, for a variety of reasons, to some degree. We rely on two mechanisms to “correct” or compensate for the perceived inequities: public government and private charity. If enough of us feel that a good or service should be universally accessible, we create it as a public good. If not enough of us feel that way, but some of us do, we create a private charity to subsidize its availability.
Because private charities relieve a need that otherwise would become a fiscal burden, directly or indirectly, the government encourages charitable donations with a tax advantage to the donor. The donor, in effect, gives the money to a charity rather than to the government, and it is the charity that then provides the specific relief.
When given to the government, funds may be applied to all sorts of expenditures that the taxpayer does not necessarily approve of, to any one of the vast numbers of line items that somehow support the common weal, as such is the nature of a fiscal democracy.
When given to a charity, the gift can be controlled and targeted to specific relief: it can have those strings attached and can be earmarked for only those activities and for only those ultimate recipients that the donor approves of. Donors can retain absolute discretion by establishing a foundation or a donor-advised fund (DAF): a “charity” set up to distribute charity and/or manage the invested wealth until it can be given away.
Donors get the tax break immediately, but the foundation or fund can delay the distribution indefinitely, as long as it meets minimal requirements. So, in practice, the funds may not be distributed at all: more the $1 trillion currently sits in DAFs, which have even less strict payout requirements than conventional foundations. And those conventional foundations can use a distribution to the DAF to satisfy their payout minimums. And so a lot of money, which has already provided a tax break to its donor, never actually gets to a recipient in need.
Historically, much good has come of our public-private partnership; it has given us great social benefits and iconic institutions. If charity begins at home and with the spirit of all good intentions, it is helped out the door by its status as a tax deduction. But as currently practiced, we allow foundations to manage wealth in perpetuity but never distribute the charity. And ultimately, that places an added burden on the would-be recipients who go without, on the governments left to pick up the slack, and on the taxpayers who make up the difference.
Mackenzie Scott has drawn attention to these dysfunctions by simply, directly, and immediately giving, a lot. Perhaps others will note, and this disruption of the “giving” will ultimately be as profound as the disruption of “getting” that created this vast wealth in the first place.