Is the Glitter Gone?

In 1929, in the grip of a global depression, Americans flocked to theaters to escape the harshness of their lives and catch a momentary peek at the glittering one percent doing well. F. Scott Fitzgerald’s bleak outlook on the concept, “Let me tell you about the very rich. They are different from you and me. They think, deep in their hearts, that they are better than we are,” did not keep people from enjoying the fantasy life of their favorite celebrities. They lifted spirits in hopes of a better time.

But something in the last 100 years has shifted. Accounts of billionaires using clever schemes to pay a pittance in taxes or eliminate them altogether, while a growing percentage of the world slides further into desperate poverty, hunger, and disease, only reinforces the growing perception that the rich are woefully impoverished in character. The promise of the Giving Pledge has faded, and we are greeted daily with the excesses of the rich having given up any sense of responsibility for the poor.

Instead, the rich are caught up in the thrill of literally leaving the planet and the masses behind them. Partly as a reaction to that – and the sense that the rich are simply stockpiling their wealth in private foundations and donor-advised funds – an international coalition of organizations working together as Global Citizens and Give While You Live are challenging the wealthy to step up their giving. Senators Charles Grassley and Angus King have introduced the Senate Bill “Accelerating Charitable Efforts Act” that would establish several changes in the rules governing donor-advised funds, private and community foundations.

Some say we have brought this on ourselves by creating methods for sheltering astounding sums of money through private foundations with minimal payout rates that enable the wealthy to create financial dynasties in perpetuity. Some have attacked the increasing emphasis of donor-advised funds providing tax-deductions creating financial returns on resources that are not distributed to charitable causes. Rather, they sit idle for years in donor-advised accounts. Proposed solutions are worth our attention, and while there are a number of smaller changes that ought to be made, here is a brief description of the main provisions:

Private foundations will no longer consider salaries paid to relatives as part of their administrative expenses, nor have them counted toward their required 5 percent payout. They may no longer sweep non-distributed funds into donor-advised funds and they would be required to make all their annual grants to charitable organizations other than donor-advised funds.

Donor-advised fund providers would experience more serious changes. To get the full tax benefit funds being opened would be required at inception to name a final recipient in the event that all the funds are not expended in 15 years. Alternatively, a donor could continue to receive capital gains and estate tax benefits for up to 50 years upon donation but would not receive the income tax deduction until the donated funds are distributed to the charitable recipient. All funds would be required to be distributed outright to charities no later than 50 years after their donation. Individual funds with less than $1 million in assets would have no payout requirement and those with over $1 million in assets can get full up-front tax benefits by agreeing to a 5% annual payout rule. To avoid inflated valuation by donors of non-cash gifts no tax deduction would be given until the property is sold and proceeds are either paid in full to another charitable organization or the proceeds of the sale are deposited in the donor’s fund. Gifts made to a single non-profit from a donor-advised fund identified with a particular donor would be counted as individual support and not as public support for an organization.

A Moral Crusade

How should we frame our thinking? In some cases, we have been snared by our own successful innovations; we’ve created funds that allow for immediate tax deductions, yet have too few firm expectations that those contributions be given to charity within a reasonable amount of time, which heavily affects incentives for community foundations. While there is ample evidence community foundations, on the whole, exceed the mandated giving percentages of private foundations, there is also abundant media coverage of those who use donor-advised funds as savings and investment accounts.

Accumulation has trumped giving. Many community foundations now tout their investment returns on par with their serving the community in order to attract new large funds. As for private foundations, many have done admirable work focusing on areas of interest that cannot attract significant funding otherwise. However, it too often appears this is born completely from personal and private interest and not relevant to a broad audience.

Lastly, the number of clever ways around paying a “fair share” in taxes have only increased in their sophistication and often involve the flagrant misuse of tools meant to benefit people saving for retirement. For instance, Peter Thiel was brilliant in his use of a Roth 401(k) to shelter the increasing value of his millions of shares from PayPal and Facebook, worth $2,000 in 1999 and now worth about $5 billion-plus, the funds are non-taxable when withdrawn.

In 1919, the Volstead Act was passed, prohibiting the manufacture and sale of alcoholic beverages. Drafted by a single individual, it began as a small movement of lobbyists and activists who used the abuses of alcohol to inspire and mobilize public opinion in favor of a dry nation. They lobbied at all levels of government and won the support of not only the grassroots but also powerful legislators who saw the groundswell of support and recognized the political potential of the growing sentiment and religious fervor.

True, the Volstead Act was repealed in 1933, but it proved that a small and committed group of people can take advantage of a shift for major change that may, like Prohibition, do more harm than good. We should realize this is not simply a proposed tax amendment. It is a powerful moral crusade for its supporters and will have broad appeal to many looking for one. It will not be about donor-advised funds exclusively, but about wealth and poverty; good and bad; moral and immoral.

Perhaps we are no longer dazzled by the rich. They no longer entertain or relieve our anxieties about tomorrow. They are boring in their pursuit of one thing only: increasing their personal wealth and power. In the end, we are not amused, scandalized, or mesmerized, and that is a dangerous change. We resent them and our world is the poorer for it. In the past, there was always something of value that both sides brought to the relationship; the rich needed us as an audience and we needed them to fill a void. They were flawed but not hollow. Different but not alien. No longer it seems. Is the glitter gone for good?

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