In 1981, when Bernie Sanders was serving as mayor of Burlington, Vermont, the current front-runner for the Democratic presidential nomination shocked the crowd gathered to kick off the annual Chittenden County fundraising drive for the United Way when he declared, “I don’t believe in charities.” The mayor, according to a New York Times account, went on to take issue with the “fundamental concepts on which charities are based,” asserting that government should instead be the provider of social services.
What was then a fringe view (in a country that would give more than $400 billion to charities in 2018) would take on the force of tax law, were a Sanders administration to prevail. That’s thanks to the candidate’s proposals to hike tax rates on the affluent and, crucially, to impose for the first time a tax on assets (a “wealth tax”) in addition to one on income. The combination would deeply wound charitable and philanthropic giving, which is dominated by the well-off. It would not only leave less income for potential charitable gifts but would tax wealth that has been pledged but not yet transferred to foundations, universities, or any other nonprofit organization. Like so many other Sanders proposals, it would make the United States look more like Western Europe, where charitable giving (as in Germany) is less than a third of that here. And it’s premised on a false equivalency — that government can and would do the same things and do them as well as charitably funded civil society.
To understand the impact of the Sanders income tax and wealth tax proposals on charity and philanthropy, one must understand that the wealthy are disproportionately the source of both. Williams College economist Jon Bakija has found (in 2009) that those earning more than $200,000 comprised just 2.6% of the population but accounted for more than 29% of charitable giving. The 2018 tax reform law has likely concentrated such giving even more — since only 13% of households now itemize their tax returns and can avail themselves of the charitable tax deduction. Before tax reform, more than 30% itemized. But the rich are different here: Among the wealthiest 5% of people, 72% itemize — and, in light of the limitation of such deductions as that for state and local taxes, may see in charity a still-unlimited tax break.
But a Sanders wealth tax would be a game-changer, especially on top of higher tax rates which will limit the amount of discretionary income available for all purposes, including charitable giving. (One wonders whether he’d even try to get rid of the charitable deduction entirely, in keeping with his 1981 remarks.)
An excellent new National Taxpayers Union Foundation research paper analyzes the Sanders wealth tax, which would range from 1% on assets starting at $32 million to 8% for assets of more than $10 billion. In finding that the wealth tax “would have massive implications for American altruism,” economists Andrew Wilford, Andrew Moylan, and Jacob Plott note especially the potential for the assets of foundations to be taxed because of the link between pledged wealth by such donors as Bill Gates and Warren Buffet and the link with the direction of such donors — such that the foundation assets might be lumped together with the overall Gates’ billions. Their research estimates that the Gates Foundation could face a wealth tax of $3.8 billion per year, compared to the total of $4.5 billion in grants it made in 2018. The paper sees similar implications for the Dell Foundation, (Ray) Dalio Philanthropies, and the Omidyar Foundation, based on the eBay fortune.
As the paper puts it, “A wealth tax,” whether that of Sanders or Elizabeth Warren, who has her own version, “would throw a wrench into the worlds of any foundation or donor seeking to maximize charitable impact” and “would introduce a layer of tax planning that would significantly distort their incentives.”
All this for a revenue increase characterized as a “drop in the bucket” compared to current and potential federal spending, especially the eye-popping new totals for “Medicare for all” and free college, child care, and pre-K, as per Sanders.
One has to believe that all this is worth it because the monies that federal government “loses” to the charitable deduction and related giving incentives could be put to better use by government, no matter how much it is. But this is the fundamental error of the Sanders worldview.
Philanthropically supported efforts by superdonors such as Gates or Peter Thiel can be seen as a sort of national venture fund, allowing a small percentage of GDP to be used for ideas that don’t have to pass a political test. What’s more, civil society groups (small and local) are more likely to focus on shaping values than on providing social services. In my book, Who Killed Civil Society?, I call this an emphasis on the “formative” rather than the “reformative.” This is the difference between the YMCA and the Boys and Girls Clubs (both of which are locally funded) and the Department of Health and Human Services. In addition, there is value for the social fabric in the local organizations that bring together volunteers — such as those who no doubt were in attendance at that 1981 Burlington event where Sanders spoke.
Perhaps Sanders went on to say that charity was necessary prior to the arrival of the socialist utopia. But that is a day that will never come. Government simply can’t replace charity — and that which charity supports.
Howard Husock is a senior fellow at the Manhattan Institute, where he directs the Tocqueville Project and is the author of the new book, Who Killed Civil Society?
