Taxes, Inequality, and the Public Good

Can wealthy Americans use philanthropy to fend off Democratic proposals for progressive, much-needed tax reform? That certainly seems to be what tech billionaire Michael Dell had in mind on a panel at the World Economic Forum in Davos a few months ago. Confronted with the idea that the United States should adopt a 70 percent marginal tax rate on annual incomes of over $10 million — something it last saw in the 1960s under the Kennedy and Johnson administrations — Dell said he would be "much more comfortable" giving back to society through his private foundation "than giving…to the government." Other superrich donors have expressed similar feelings, with some actually having the chutzpah to equate the civic obligation of paying taxes with charity.

It's evident to anyone paying attention that private philanthropy can never replace the almost three trillion in budget cuts included in the Trump administration's 2020 budget or the trillions in deficits that the 2017 Tax Cut and Jobs Act is likely to create over the next decade.

Trump, Michael Dell, and other members of the 1 percent club — who now control as much wealth as the bottom 95 percent of Americans — are going to need a better argument if they hope to convince the large majority (70 percent) of registered voters who believe that the superrich should be paying higher marginal rates.

And the very rich will need more than a preference for philanthropy over taxes to convince the 61 percent of Americans who favor a "wealth tax" of 2 percent on those with more than $50 million in assets and 1 percent on top of that for those with more than $1 billion. To the consternation of Dell, the 25th richest man in the world, an even larger percentage of Americans believe that government should pursue policies designed to reduce the huge and growing wealth gap in America — policies that go beyond just raising tax revenue.

Politicians are catching on to the fact that inequality has grown too stark in the U.S., and that Americans are not happy about it. And they can no longer ignore the fact that the wealthiest four hundred Americans — the top 0.00025 percent — own more than the 150 million adults who fall into the bottom 60 percent of income — or that their share of wealth has more than tripled since the 1980s.

Inequality has gotten so extreme that Ray Dalio, the billionaire founder of the world's biggest hedge fund, thinks the president should declare a national emergency. Dalio is not alone; Greg Jaffe reports that from Davos to the Harvard Business School there is a sense that the capitalist system that made America the envy of the world in the twentieth century is now responsible for "the inequality and anger that is tearing the country apart," leaving "America's billionaire class fearful for [capitalism's] future."

What has this got to do with nonprofits and charities? It turns out that tax policy and tax revenue matter a lot.

For starters, and with some notable exceptions, it seems the rich really do want to hold on to as much of their wealth as they can. Not only are they fighting against higher marginal tax rates on their wealth, their generosity does not seem to be keeping pace with increasing concentrations of wealth.

MarketWatch reports that "In 2015, the most recent year for which data was available, 51.6 percent of charitable donations came from households with annual incomes of $100,000 and above," while an analysis of IRS data indicates that those households accounted for 60 percent of earnings in that year. Other IRS data shows that in 2015 taxpayers with the lowest incomes (under $25,000) gave a higher percentage of their dollars to charity than the wealthy.

Recent evidence — from 2010, when the estate tax was no longer in effect and charitable bequests dropped 37 percent on a year-over-year basis, only to jump 92 percent in 2011 after the tax was restored — has shown that the level of charitable contributions increases when contributions can be used to reduce one's tax obligations. In the wake of tax law changes that effectively raised the level at which itemizing deductions make sense, one recent analysis found that more than a third of the people making donations of $1,000 or more were doing it for the first time — most likely to raise their charitable giving enough to qualify for a tax deduction.

The wealthy, like Dell, believe we should rely on free markets and private philanthropy rather than on government and its more democratic public policy processes to fix what ails us. But a working paper issued by the Institute for Policy Research at Northwestern University suggests that "in this respect the wealthy tend to differ markedly from less affluent citizens."

Indeed, while the wealthy's preference for charitable giving probably strikes many nonprofit leaders as a good thing, they should understand that the tax cut passed by the Republican-controlled Congress at the end of 2017 is starting to starve essential government programs of the resources they need to be effective and is increasing economic inequality.

As the Washington Post reports, the federal budget deficit is growing so quickly that the administration felt compelled to go back on promises made by Donald Trump while he was campaigning for the presidency and is proposing cuts to Medicare ($845 billion), Medicaid ($1.5 trillion, with only a portion of that replaced by state block grants), and Social Security ($25 billion).

The administration also has proposed cuts to safety-net food programs totaling $220 billion and of more than $207 billion to federal student loan programs. And all that on top of slashing the budgets of the Environmental Protection Agency by 31 percent, Housing and Urban Development by 16 percent, and Energy by 11 percent.

Of course, the impact of these cuts will be dramatically exacerbated if the Trump administration and Republicans in Congress are successful in getting rid of the Affordable Care Act. Some 8.5 million Americans are currently covered under Obamacare, and more than 100 million people with pre-existing conditions are protected by it. But the Republicans want to repeal it and have no plan with which to replace it.

Those government agencies and programs provide a critical lifeline to the most vulnerable among us and are a crucial source of support for tens of thousands of charities. The new wealth and income tax proposals that have been floated by Democrats could help restore vital funding for them without impacting the vast majority of Americans.

Rep. Alexandria Ocasio-Cortez's (D-NY) proposed 70 percent tax on income above $10 million, for instance, would affect about 16,000 households — a tiny fraction of those who pay taxes — but would generate $720 billion in new revenue over ten years. The "wealth tax" proposed by Sen. Elizabeth Warren (D-MA) would impact about 75,000 households, less than one-tenth of the top one percent of earners, but  would raise $2.75 trillion in new revenue over the next decade.

At Davos, Michael Dell tried to portray these and other proposals as radically excessive and terrible for economic growth, daring participants to "Name a country where that's worked. Ever." He was answered by an expert, panelist Erik Brinjolfsson, who replied, "The United States."

From the 1940s through the 1960s, the top marginal rate in the U.S. was as high as 94 percent and never dropped below 63 percent. And those "were actually pretty good years for growth," Brinjolfsson noted. It wasn't until Ronald Reagan's presidency that the top rate dropped from 70 percent to 28 percent.

Nonprofit leaders may argue that advocating for more progressive tax policies is not a mission-critical activity for their organizations. Many also are uncomfortable being on the other side of a tax policy debate focused on wealthy donors — the same people who, in many instances, support their organizations. Such a stance serves neither the common good nor the fundamental interests of the charitable sector, which benefits from well-funded and -run public programs.

It is in the interest of every nonprofit organization to work for a more equitable and just nation, one in which the concentration of wealth in the hands of a tiny group of elites who often choose to ignore the interests and preferences of the majority is a cause for concern rather than celebration. We cannot continue to allow our elections and the operations of government to be influenced by massive and secret infusions of money designed to thwart the people's will.

To a significant degree, good government is a function of an adequate level of tax revenue. Our economic system depends on people having confidence in its fairness and equity. Nonprofit leaders should do what they can to join with the majority of Americans who want to see wealthy Americans pay their fair share of taxes in service to both.

(Illustration credit: donkeyhotey/Flickr)

Mark Rosenman is a professor emeritus at the Union Institute & University. To read more of his commentary, click here.