The Danger of Comparing Different Types of Giving

By VINCE STEHLE

A growing chorus of complaint about foundation giving has emerged in recent years — especially over the issue of whether foundations give away enough each year to justify their privileged tax-exempt position.

For months, a new twist on that critique has been rippling throughout conversations in and out of the non-profit world.

In a Harvard Business Review article arguing that foundations need to operate more efficiently, two authors contrast the efficiency of charities and grant makers in redistributing society’s resources — and charities come out well ahead, in their view.

Writing in the November-December issue, Mark R. Kramer and Michael E. Porter contend that “when a donor gives money to a social enterprise, all of the money goes to work creating social benefits.”

They add: “When a donor gives money to a foundation, most of the gift sits on the sidelines. On average, foundations donate only 5.5 percent of their assets to charity each year, a number slightly above the legal minimum of 5 percent. The rest is invested to create financial, not social, returns.”

According to their calculations, because foundations pay out a small portion of their total assets each year, their financial contributions to society do not equal the taxes forgone.

“When an individual contributes $100 to a charity, the nation loses about $40 in tax revenue, but the charity gets $100, which it uses to provide services to society,” they write. “The immediate social benefit, then, is 250 percent of the lost tax revenue. When $100 is contributed to a foundation, the nation loses the same $40. But the immediate social benefit is only the $5.50 per year that the foundation gives away — that is, less than 14 percent of the forgone tax revenue.”

Those numbers seem compelling at first. But the comparison of foundations versus public charities is a red herring — and a dangerous one that could call into question the very legitimacy of foundations.

It may be true that most foundations give away a small portion of their total assets each year. But it is not equally true that, as the authors say, “when a donor gives money to a social enterprise, all of the money goes to work creating social benefits.”

In fact, endowments are a large — and growing — source of income for charities of all types. Churches, environmental groups, social-service organizations, and cultural institutions have all come to understand the importance of developing an endowment to sustain them through periodic droughts. There is no reason to think that endowments for foundations are any less sensible than endowments for charities.

Higher-education institutions have long appreciated the importance of endowments, a fact that should not have been lost on Mr. Porter, who holds the endowed C. Roland Christenson chair at Harvard Business School. Neither should the role of endowments be ignored by the editors of the Harvard Business Review, whose parent institution sits on a $15-billion endowment, the largest holdings of any educational institution.

It might equally be asked why Harvard needs such a vast and ever-increasing endowment of its own. It could certainly be argued that this fund might provide greater social returns if it were spent on more scholarships for needy students. For that matter, some of these riches could be devoted to dealing with urban problems in Cambridge or Boston, where the university is essentially exempt from local taxes.

But Harvard is not alone. The National Association of College and University Business Officers reports that roughly 500 institutions held endowments that collectively totaled nearly $200-billion last year. Needless to say, all contributions to higher education are fully tax-deductible, whether the funds go to support current expenses or to build up endowments.

The simple fact is that endowments play a key role in sustaining many types of non-profit institutions. And none of them are required to demonstrate the immediate social benefits to society to justify the tax deductions that encourage donors to contribute to those endowments.

If the endowments held by private foundations produce too little immediate social benefit to warrant exemption from taxation, at least foundations are required to distribute a minimum percentage of their assets each year. Charities, on the other hand, can build up endowments without making any distributions.

Mr. Kramer and Mr. Porter, who have recently started the Center for Effective Philanthropy, a for-profit consulting company that advises foundations, clearly intended their comments to bolster their case that grant makers need to do a better job of marshaling their resources for the greater good.

But, unfortunately, many readers may fix on the provocative premise that foundations are warehouses of wealth, and ignore the other, more valid, argument that those warehouses should develop more effective and efficient systems of inventory and distribution. More important, they may have inadvertently played into what is becoming an unhealthy practice in philanthropy.

It is becoming increasingly common for people to criticize one form of giving or another for being self-rewarding, inefficient, or unjust.

While the most common complaints lately have had to do with the amount foundations distribute, other criticisms abound. For some years, alternative funds heaped scorn upon United Ways for keeping social-change groups out of on-the-job-giving campaigns. And since the mid-1990’s, community foundations have criticized efforts by Fidelity Investments and other financial-services companies to set up new charitable-giving vehicles that are closely linked with their commercial enterprises.

Each of these debates when taken to extremes threatens to undercut a fundamental element of American philanthropy: diversity.

Donors are encouraged, under the Internal Revenue Code, to give to a variety of institutions through a wide range of approaches. Taxpayers may deduct contributions through foundations, trusts, bequests, or straight gifts of cash. A great strength of our system is the freedom of each donor to find the right approach for his or her particular circumstances.

Serious talk about philanthropy should not exaggerate the benefits or drawbacks of one form of giving over another. Unfortunately, that line of argument could backfire, calling down on philanthropy new restrictions that would make charitable giving less appealing. Charity gadflies should consider their complaints well, or they may provoke unintended consequences that would result in fewer philanthropic resources for everybody.

Vince Stehle oversees the Nonprofit Sector Support Program at the Surdna Foundation, in New York. This article is adapted from a version that appears in the summer issue of the Grantmakers in the Arts Reader.