Inequality and Philanthropy –

Wealth and philanthropic power is concentrating in fewer hands, posing an immense risk to the autonomy of the nonprofit sector — not to mention our democracy.

As we wrote in our 2022 Gilded Giving report, American charities are experiencing a transition from broad-based support across a wide range of donors to an increasing reliance on a small number of very wealthy individuals, a trend we call “top-heavy philanthropy.” Donors are diverting greater proportions of charitable dollars into wealth-warehousing vehicles such as private foundations and donor-advised funds instead of giving directly to working charities that serve immediate needs.

Charitable giving is meant to benefit the common good, which is why taxpayers subsidize philanthropy. For every $1 dollar a billionaire donates to charity, taxpayers chip in up to 74 cents in lost tax revenue. Yet our current system lets our wealthiest opt ​​out of paying taxes under the guise of charity while still preserving and controlling their wealth, which isn’t very generous at all.

As Inequality Rises, Everyday Americans Are Giving Less to Charity

America’s Richest Are Gaining Increased Influence Over Charities

Wealth-Warehousing Vehicles Are Popular With Wealthy Givers and Tax Avoiders

As Inequality Rises, Everyday Americans Are Giving Less to Charity

The latest research from the Lilly School of Philanthropy’s Philanthropy Panel Study revealed that the percentage of US households giving to charity had slipped below 50 percent for the first time since the study began twenty years ago. The PPS, which is a part of the Panel Study of Income Dynamics at the University of Michigan, surveys the same set of more than 9,000 households every two years to learn about their giving behavior. In 2008, 65 percent of the households surveyed had given to charity. In 2018, just ten years later, that had dropped to 50 percent. The declines in donor participation showed up consistently when controlling for all socio-demographic characteristics.

As economic times get tougher for ordinary Americans, they can’t afford to give as much of their spending money to charity. The Philanthropy Panel Study researchers acknowledged this in their latest analysis, writing that a good portion of the dip in giving participation could be explained by “declines in income, wealth, and home values.”

Target Analytics plotted the donor counts in their 2015 Index of Charitable Direct Marketing Performance against the US labor force participation rate, and found that the two had an extremely close +0.80 degree of correlation. “While we do not have enough data to say that this is causative,” Target Analytics concluded, “these trends make intuitive sense; when people are not employed, they are likely to have less disposable income, and will not be as disposed to give to charity.”

In our own analysis, we found that Target Analytics’ donor declines are also closely correlated to another key indicator of economic security: the rate of home ownership. The two had a close-to-perfect 0.99 degree of correlation from 2005 to 2015. This is further evidence that harmful economic conditions undermine lower- and middle-income donors’ sense of financial security — and thereby their capacity and willingness to donate to charity .

America’s Richest Are Gaining Increased Influence Over Charities

As charities face a loss of broad-based support, they become increasingly reliant on smaller ones numbers of major donors to stay afloat. These major donors thus gain increasing influence over charities’ activities and even their core missions. And this endangers not only the charities themselves, but also those who depend on their work.

According to IRS datahouseholds earning $200,000 or more accounted for just 23 percent of itemized contributions in 1993. That share had grown to 67 percent by 2019, the most recent year available, accelerated by changes in the 2018 Tax Cuts and Jobs Act. This growth means, as the Chronicle of Philanthropy wrotethat “nonprofit groups have become more dependent on the wealthy in general.”

Households at the very top of the income scale have been stepping up their use of the charitable deduction at an even faster rate than those of merely moderate wealth. The share of itemized contributions claimed by households with incomes over one million dollars increased from just 10 percent in 1993 to 40 percent in 2019.

In other words, the top 1 percent of US households have rocketed from just one-tenth to two-thirds of all charitable deductions in just 26 years — allowing them to disproportionately reduce their tax burdens while giving them an outsized voice in what happens to charities .

Mega-donations create a big splash when they are bestowed on one or another lucky nonprofit. And mega-sized gifts to charity from some of the wealthiest among us have become more frequent in recent years. According to data from the Chronicle of Philanthropygifts from individuals of $1 million or more added up to just $1.2 billion in 2010, but that had risen to more than $17 billion in 2020.

Ultra-enormous mega-gifts — gifts that Giving USA defines as those large enough to require an adjustment to their econometric estimates — have grown even faster. In 2010, the threshold for mega-donations was $30 million, and mega-donors gave a total of just $300 million. By 2021, the mega-gift threshold jumped to $450 million — more than the entire amount given by mega-donors ten years earlier — and ten mega-donors alone gave just shy of $15 billion.

These estimates do not even include the record-smashing $10 billion pledged by Amazon CEO Jeff Bezos to his Bezos Earth Fund in late 2020, nor the $15 billion dollars pledged by Bill Gates and Melinda French Gates to their eponymous foundation. (And in 2022, not yet over, Bill Gates pledged another $20 billion — continuing the trend.)

For the past several years, the favorite cause of wealthy donors has been their own private foundations. Slightly behind foundations, but rapidly growing in popularity, are the donors’ own donor-advised funds. And when wealthy donors do give directly to charity, their gifts tend toward causes that the wealthy disproportionately prefer: higher education and medical centers.

In early 2022, the Chronicle of Philanthropy published its annual list of the fifty top philanthropists in the United States. Of the $25 billion in identifiable gifts that the group donated to charity in 2021, 69 percent of it — more than $17 billion — went to private foundations. The second-largest chunk, worth more than $2.6 billion, went to donor-advised funds. Colleges and universities, the top category of working-charity recipients, received nearly the same amount as donor-advised funds, leaving the remaining 11 percent of gifts to be distributed across all other nonprofits.

Wealth-Warehousing Vehicles Are Popular With Wealthy Givers and Tax Avoiders

Private foundations are charitable giving vehicles that are generally available only to the affluent, since establishing and maintaining one usually requires a significant financial investment. Over the past three decades, wealthy philanthropists have been directing more and more of their charitable giving towards foundations, creating them at a rapid clip and endowing them with increasingly large donations. According to the US Census and Candid, the number of foundations in the United States grew from 32,401 in 1990 to 127,595 in 2020 — nearly tripling over thirty years. The amount of assets held in those private foundations has increased more than twice as fast, growing a whopping 693 percent from $145 billion to $1.2 trillion over the same period.

As quickly as the wealthy have adopted private foundations, their embrace of donor-advised funds, or DAFs, has been even quicker. DAFs have been the fastest-growing charitable sector in the US in recent decades. According to the National Philanthropic Trust, donations to DAFs increased from $9 billion in 2010 to almost $48 billion in 2020 — 412 percent growth over just ten years. In contrast, giving by individual donors grew by just 56 percent.

DAFs have seen such phenomenal growth that they now house over $160 billion in assets, and some DAF sponsors are now among the largest single charitable recipients in the country. A commercial DAF sponsor, the Fidelity Charitable Gift Fund, became the ball recipient of giving for the first time in 2016, edging the United Way out of the top spot. By the following year, six commercial DAF sponsors had broken into the top 10 and have never looked back. Fidelity Charitable alone held nearly $50 billion in assets in 2021.

DAFs offer wealthy donors a convenient way to offload appreciated assets without incurring capital gains taxes and, at the same time, to get a tax deduction for their donation. But there is no legal requirement for DAFs to pay out their funds to working charities — ever — so the civic benefit from these publicly-subsidized gifts can be delayed indefinitely. And since DAFs have lac reporting requirements, it is nearly impossible to determine how quickly individual DAF accounts are paying out, or whether their grants are going to qualified charities at all.

Charitable giving in the US has remained remarkably constant at 2 percent of personal disposable income — the income that is left over for people to spend once taxes are taken out — for more than forty years. But, over that same time, donations to private foundations and DAFs have grown many times faster than donations to working charities.

Not only have foundations and DAFs grown in sheer volume — they have also grown significantly in the share of charitable dollars they receive from America’s donors each year. Meanwhile, working charities receive less.

Data from Giving USA shows that giving to private foundations increased from 5 percent to 15 percent of all charitable giving since 1991. And data from the National Philanthropic Trust shows that giving to DAFs has increased from 4 percent to 15 percent of all charitable giving since 2007. Combined, these two intermediaries now soak up almost a third of all US donations — more than quintupling their share of the charitable pie in less than thirty years.

According to tax and philanthropy experts James Andreoni and Ray Madoff, this shift towards intermediaries has resulted in an estimated shortfall of $300 billion to working charities over just the past five years. Charities look to major giving to compensate for declining broad-based donor support. But the nature of that major giving disproportionately lifts up less-than-charitable intermediaries — and, in many cases, the ultra-wealthy donors themselves.

We think it’s time to reform the system. Money earmarked for charity should actually serve the common good.

Learn more about our Charity Reform Initiative and join us.

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