This review, republished with permission, originally appeared in American Affairs on December 12, 2022.
The 1969 Tax Reform Act that established—and remains—the basic legal structure of American philanthropy was a “Grand Bargain,” according to Brooklyn Law School professors Dana Brakman Reiser and Steve A. Dean in their impressive forthcoming book For-Profit Philanthropy: Elite Power and the Threat of Limited Liability Companies, Donor-Advised Funds, and Strategic Corporate Giving. “Key to the Grand Bargain’s success was constructing the regulated—albeitlightly—private foundation form in which to conduct elite philanthropy,” Reiser and Dean write. Philanthropists who opt into the bargain and create a private foundation accept three basic strictures on targeting, timing, and transparency, in exchange for significant tax benefits.
First, “[t]argeting requirements limit the purposes to which purportedly philanthropic funds” of a private foundation may be directed, which cannot include helping the giver’s for-profit business or making political contributions. Second, “[t]iming requirements impose a schedule for putting philanthropic assets to active use,” precluding “foundations from merely hoarding wealth to magnify the power and influence of their donors.” And third, “[t]ransparency requirements force elite philanthropy into the sunlight, where media and the public can test its claims of public benefit.
This Grand Bargain, in the analysis of Reiser and Dean, has engendered enough public trust in establishment philanthropy to protect it against attack, allowed it to flourish for decades, and greatly benefited charities and thus the country. Essentially, it’s been a good deal.
Nevertheless, Big Philanthropy is now on the defensive. Increasingly aggressive critiques of it often, though not always, focus on alleged violations of the Grand Bargain. These critiques are cross-ideological. Many progressives and activists think the bargain’s terms have come to allow too much latitude for anti-democratic oligarchs, for example. Meanwhile, some populist conservatives think establishment philanthropy is an overly politicized progressive monoculture that foists elitist, top-down policy solutions on a citizenry forced to subsidize it. In some sense, these are left and right versions of the same critique.
Reviving, revising, or outright replacing the now fraying Grand Bargain may or may not sate the growing appetite for reform among these critics. But For-Profit Philanthropy helps lay a solid foundation for the intelligent consideration of what, if anything, should be done about Big Philanthropy and the bygone Grand Bargain. In the book, Reiser and Dean suggest some thought-provoking options that should be discussed seriously—whether to affirm the bargain’s original terms, or potentially to improve it.
For-Profit Philanthropy explores three recent major philanthropic trends that arose after, and in large part beyond the bounds of, the Grand Bargain. Their informed examinations of these trends—which underlie “a crisis now loom[ing] over the future of the philanthropic sector itself”—could increase appreciation for the original deal and/or inform the beginning of a new, better one.
“[W]here for decades elite philanthropy was the province of private foundations, today it is likely to be practiced within philanthropy LLCs, commercially affiliated donor-advised funds [DAFs], and strategic corporate giving programs,” according to Reiser and Dean. “Each operates outside the foundation model, unwedded to the Grand Bargain’s terms. No longer walled off from the influence of American capitalism by philanthropy law, for-profit philanthropy deploys the arsenal of business in service of charitable goals.”
Regarding philanthropy LLCs, Reiser and Dean quote a December 2015 Facebook post by Mark Zuckerberg explaining the newly created Chan Zuckerberg Initiative. “By using an LLC instead of a traditional foundation, we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively.” As Reiser and Dean then properly explain,
for ultra-rich donors like [Priscilla] Chan and Zuckerberg, the LLC improves on conventional philanthropic platforms. A generation before, creating a philanthropic vehicle without securing a tax-exemption for it might easily have been legal malpractice; tax-exempt foundations represented the obvious choice. By the time of the Chan Zuckerberg Initiative’s founding, the philanthropy LLC had become a proven alternative. . . .
LLC adopters cite its operational versatility as the key to its appeal. And employing a philanthropy LLC undoubtedly eliminates countless burdens the traditional foundation format imposes. Since 1969, a series of excise taxes have served as lighthouses marking hidden shoals—entanglement with business or politics—perceived as existential threats to philanthropy. Philanthropy LLCs blithely ignore those risks and the safeguards built to guard against them. Their funders accept a moderately higher tax burden in exchange for freedom to pursue their vision of the good unfettered by foundation law’s limitations.
Forget about any good or bad Grand Bargain in the LLC case, in other words. There’s really no deal at all here.
When defenders and promoters of donor freedom decry existing or proposed government mandates on private foundations, they’re really only decrying government conditions on the deductibility of donations to and/or the tax exemption of those foundations. Government cannot condition those tax benefits on the waiving of a constitutional right, but that does not preclude any and all conditions; there are permissible ones, and there has been and will be more litigation about what is and isn’t allowed.
The growing popularity of philanthropy LLCs shows that an increasing number of donors well understand this. There are bounds to the Grand Bargain’s reach; the desired extra donor freedom is actually achievable, though at some cost. As For-Profit Philanthropy shows, some donors are willing to incur it.
Second, commercially affiliated sponsors of DAFs “qualify as public charities under federal tax law but do no charitable work” in and of themselves, as Reiser and Dean accurately characterize them. “They hold donated assets” in accounts for those who open them, who get a tax deduction for the donation upon their opening. The assets then “await future distribution to operating charities” upon direction by those who open them, labeled advisors. There is no time limit on how long these assets can stay there.
“In the meantime,” these DAF sponsors “invest those assets in return for fees. They are independent from their affiliated for-profit companies but share their names, customers, and platforms and contract with them to provide investment and administrative expenses for the funds they hold.” The largest of them are with Fidelity, Vanguard, Schwab, and Goldman Sachs. They are among the largest recipients of charitable funds in the country, and they are only getting larger.
While the philanthropy LLC rejects the Grand Bargain’s “rigid framework and the tax benefits the law offers in exchange,” according to Reiser and Dean, “[i]n a sense, the DAF does the opposite, seizing the tax benefits available to charitable entities without fitting neatly into any of the law’s categories.”
And third, corporate giving programs “increasingly align their charitable giving as closely as possible to their giving models,” as For-Profit Philanthropy puts it, before offering several specific examples. “Philanthropy no longer represents a counterweight to the usual profit-maximizing modus operandi but instead becomes part of the core business strategy.”
For-Profit Philanthropy examines and analyzes what could perhaps be done in the midst of these three post-Grand Bargain trends. Essentially, Reiser and Dean ask whether to keep, change, or supplant the ’69 bargain and its three trust-strengthening strictures. They offer a thoughtful menu of options, which should be deepened and widened by others, including conservatives.
First—seeing “for-profit philanthropy as equal parts opportunity and threat”—Reiser and Dean suggest “tailored regulatory interventions” that would require DAFs “to clearly and publicly name recipients of dormant assets,” carefully ease “strictures targeted at ‘self-dealing’ by foundations” to allow them to better pursue beneficial for-profit philanthropy, and make corporations issue “benefit reports” to document how their charitable giving “serve[s] stakeholders.” These interventions, they write, would “rebuild trust between elites and the public by nudging for-profit philanthropy toward closer alignment with today’s values.”
Second, what Reiser and Dean call “private ordering solutions” would “reject conventional regulation” and allow “wealthy elites to blaze their own path” while avoiding the threats that arise from negative popular and policymaker reactions to for-profit philanthropy. “The disruptive entrepreneurs embracing for-profit philanthropy can act strategically to reinforce the trust the Grand Bargain once secured, even in the absence of government intervention.” They provide examples of some private, voluntary solutions to recover some of the targeting, timing, and transparency that the bargain at least intended to introduce, and they urge more.
Third, Reiser and Dean present what they call a “More Perfect Bargain.” Its “systemic public solutions,” they write, would be “an innovative complement to the Grand Bargain . . . that could make today’s private funding of public benefits accountable in ways alternatively quite similar to and quite different that the compact Congress delivered half a century ago.”
Proudly progressive, with a sizable dose of populism, their More Perfect Bargain would “seek to restore philanthropic balance by turning up the heat on the wealthiest Americans. Higher tax rates, more potent policing, and even an entirely new form of taxation endeavor to turn the clock back to 1969,” as they describe it. It “would also create an opportunity to do more—incentivizing, for example, philanthropic efforts that address the deep inequality at the heart of our nation’s growing sense of crisis. Even if the Grand Bargain’s magic could be recaptured, the results would be disappointing if they served only yesterday’s priorities rather than today’s.”
It requires a little conceptual creativity to “turn the clock back,” of course, and while Reiser and Dean admirably make the attempt with their More Perfect Bargain, it is debatable whether they are successful, or whether any such proposal ever could be.
They specifically present “three visions for systemic reform,” though reform of exactly what—philanthropy or the economy or society—may be an open question. Their proposed reforms are: first, a “return to steeply progressive mid-century tax rates combined with tempering the myriad loopholes and structural deficits that favor wealthy taxpayers”; second, a “wealth tax paired with incentives for philanthropy that target inequality,” to “not merely reinforce the crumbling Grand Bargain but build it back better”; and third, “requiring a dramatic uptick in accountability for corporate philanthropy programs.”
Their “final proposal turns in an entirely different direction,” they honestly acknowledge. “Leaving to one side the question of whether a weakened Grand Bargain—and the private foundations at its heart—should be preserved or dismantled, it looks elsewhere for a solution to the challenge of transforming private wealth into public benefits.” Seeking “a very different compromise between elites and the public,” the idea would
not rely on tax law at all to shift incentives, instead targeting elite power directly. Corporate law reforms demanding participation by workers and other stakeholders in corporate governance could, for example, be made preconditions for corporate political spending. . . .
Such an approach would lean in to for-profit philanthropy rather than attempting to recreate the imagined perfection of the Grand Bargain.
It is clear—and Reiser and Dean don’t pretend otherwise—that the More Perfect Bargain doesn’t really seem designed to appeal to what might otherwise have been receptive conservatives, of either the traditional small-government type or the currently ascendent populist variety that is as fervently anti-elite as the More Perfect Bargainers. In fact, For-Profit Philanthropy’s concluding pivot from its lengthy treatment of tax law related to philanthropy to much larger questions seems quite abrupt, foreshadowed only slightly by the earlier call for “benefit reports” to detail corporate philanthropy’s effects on “stakeholders.”
The book does, however, raise important questions for conservatives and conservative philanthropy moving forward. Conservatives, too, need ask whether the Grand Bargain and its strictures should be preserved, modified, or somehow be made anew, or whether its obsolescence ought to be ignored, as well as the new trends chronicled by Reiser and Dean.
Even the Philanthropy Roundtable, one of the foremost conservative defenders of philanthropy and a leading promoter of donor freedom and privacy, recently published a paper calling for improved enforcement of “current laws on the books” regarding the charitable sector.(1) Curiously, such enforcement would, in fact, constitute a “reform” of the status quo. It would be an actual revival of and return to Reiser’s and Dean’s Grand Bargain. Calling for it is consonant with a traditional respect for the “rule of law” that some have argued should be a central pillar of conservatism. Intra-conservative arguments about its application would and should focus on the degree to which original legislative intent should bind our understanding of and the use of various canons of statutory construction and interpretation to determine it. Let them begin, including discussions informed by Reiser and Dean.
Others have proposed different reforms that could easily be considered conservative versions of “tailored regulatory interventions,” predictably ranging from modest to aggressive ones.(2) Concerningly to Big Philanthropy and defenders of its freedom, for example, high-profile conservative populist and Senator-elect J. D. Vance of Ohio has even proposed that “any charitable organization with an endowment over $100 million must spend 20 percent of its endowment each year, or else it loses its 501c3 status and the preferential treatment of its income.”(3) Intra-conservative arguments about many of these reforms likely would and should center on the degree to which existing or new conditions on the statutory Grand Bargain’s tax incentives for charity infringe on constitutional rights, or whether they are permissible “refusals to subsidize” particular activity. Let them begin, too, again informed by others.
It is difficult to even conceive of, much less construct, what might be a conservative version of Reiser’s and Dean’s More Perfect Bargain. Nevertheless, some conservatives should at least try, perhaps even, however warily, with unorthodox allies—which not all conservatives, especially the energetic populist ones, find automatically off-putting.
For-Profit Philanthropy thoughtfully frames the 1969 Tax Reform Act’s Grand Bargain and its strictures. It also intelligently describes and analyzes the “for-profit” philanthropic trends since then that explicitly or implicitly violate the bargain’s terms and/or spirit. The book’s contemplated reforms are worth exploring. They do not seem at all tailored for conservatives or populists, however. This does not make them entirely useless, of course—but it unfortunately might limit the work’s appeal and usefulness.
At the core, after all, Reiser and Dean are worried the erosion of trust in philanthropy and all nonprofitdom caused by the trends they discuss. Thus anything done in response to those trends should look to engender that trust by appealing to a wide array of citizens and taxpayers, including conservatives—and even populist ones—a wider array, in other words, than their proposed reforms would presently allow.
It must be the case—unless it’s just a hope—that liberals and progressives could find at least some areas of mutual concern, without compromising the principles of their own worldviews, in engaging in the common pursuit of true charity. Let us begin to look for this spirit—a good bargain, not just a grand one.