King Barac's War on Philanthropy

April 8, 2015

Obama Wages War On Philanthropy In Bid To Expand Government

By HOWARD HUSOCK
INVESTOR'S BUSINESS DAILY

The Obama administration has consistently made clear, through its annual federal budget proposals, that it's willing, in the name of tax fairness, to countenance decline in the amount that Americans donate to charity.
The White House has pushed for a reduction in the value of the charitable deduction (from 39 to 28 cents on the dollar) — a change that could reduce charitable giving by up to $9 billion.
The implicit assumption: that government can spend that money more effectively.
Americans have begged to differ and signaled their continued enthusiasm for such giving, which has nearly fully recovered since the 2008 financial crisis.
Among the major but underappreciated reasons for such stability has been a sharp increase in the use of a once-obscure means of charitable giving: the personal donor-advised fund (DAF). As we are reminded this tax season of the complexity and distortions of the tax code and the need for its reform, personal donor-advised funds should be seen as a rare piece of good news.
At their most basic, donor-advised funds are not much more than a convenience. Donors can make fund deposits and no longer have to write individual checks to charities that they want to support. The organization administering the fund will do so at a donor's direction.
Historically a minor part of philanthropy, used mainly to direct funds to community foundations, which disbursed them at their discretion, personal donor-advised funds have taken off. Their numbers have grown from 161,941 seven years ago to 217,367 today, and their disbursements to charitable organizations have risen from $6.47 billion to $9.66 billion.
Driving the growth is a potent combination: 2007 IRS guidance and the funds' being offered by some of the nation's largest personal financial-service firms.
DAFs offer incentives, beyond convenience, to increase the extent and value of charitable giving overall. Donors can claim a tax deduction for the contributions made when their income and tax liability is high and slowly parcel out donations in the years to come. Such fund balances increase in value over time but can be used for only one purpose: charitable giving.
According to the National Philanthropic Trust, DAFs have balances of more than $32 billion — a sum that I project may grow to $495 billion (in nominal dollars) by 2035.
Indeed, if their growth continues at its current pace until that time, overall charitable giving in the U.S. will grow from 2% to 2.2% of GDP — a change that would mean $125 billion in additional charitable giving.
In effect, donor-advised funds serve as a new means for mass philanthropy, allowing affluent-but-not-super-rich donors to set up their own small foundations, with limited administrative expense (less than 0.6% of assets).
The sharp growth in donor-advised funds has prompted criticism, chiefly from those concerned that payouts from the funds may drip out slowly, denying charities funds that they may need at the time the monies are first deposited.
But not only would such a requirement be a bookkeeping nightmare, it also ignores both that undisbursed DAF funds can be put to work only for charitable ends — and that they can serve as a counter-cyclical source of charitable support during lean times.
Indeed, that's exactly what happened in 2008, when charitable giving from all sources except DAFs declined — while overall DAF payouts increased by nearly $1 billion. They even remained above their 2007 level in 2009.
What's more, the wave of new, individual DAFs supports organizations in addition to the ones that local community foundations support. Since the 1930s, those foundations have, like DAFs, administered charitable funds for individual donors.
In a new study for the Manhattan Institute, I find that funds donated through Vanguard, Fidelity and Schwab accounts in three major U.S. metro areas — Chicago, Dallas and Denver — have overwhelmingly been directed toward organizations distinct from the ones that the cities' community foundations support.
The new donor-advised funds, in other words, complement, rather than compete with, established charitable-giving vehicles. What's more, major financial firms have taken steps to organize their DAF account holders to direct funds en masse in the wake of natural disasters and disease outbreaks.
The possibility exists, in other words, that this new vehicle for philanthropy can serve as an individually directed counterweight — and complement — to government.
Of course, that may be the real reason why its growth dismays its critics. But America has historically benefited from the imagination and unconventional approaches that philanthropy has supported — and donor-advised funds hold the potential to provide even more of both.
• Husock is vice president of research and policy at the Manhattan Institute and author of the new report, "The Potential of Donor-Advised Funds ."