Corporation
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Vol. 3/No. 1
Fall 2004
Literacy Coaches: An Evolving Role
Philanthropy in Russia: New Money Under Pressure
The International
Reporting Project:
Giving Journalists A New Perspective On the News
Also in this issue:
The PASS Act Would Fund Literacy Coaching and other Literacy Efforts
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What Are Foundations For?
The American propensity for forming extra-governmental associations, famously noted in 1835 by Alexis de Tocqueville—a radical idea in a world where the State was almost synonymous with society—has always generated worries about the power such groups could have. As the number of smaller foundations ballooned, possibly in response to rising income-tax rates, abuses began to crop up. “Charity has not always been the sole motive for creating foundations,” Holcombe observes with some understatement. “Donors have used foundations to maintain family control of corporations, to aggrandize their family names, and to pass power and status on to their heirs by placing them on foundation boards.”
Exorbitant salaries and dubious philanthropic activities at some foundations provided additional ammunition to critics, and finally in 1969 Congress enacted some new rules to govern them. Among other things, the law required foundations to give away a minimum proportion of their assets (now 5 percent annually) and imposed a 4 percent excise tax on investment income. It also barred foundations from owning more than 20 percent of any one business and improved transparency by increasing disclosure requirements. Although greeted at the time with dismay among foundation executives, the 1969 act is seen today as a perfectly moderate approach to keeping foundations on the straight and narrow, and at this late date it’s worth noting what Congress considered but ultimately rejected: moves to strip away the tax preferred status of foundations and impose a sunset provision requiring them to spend themselves out of existence after a fixed number of years.*
It was during the 1970s, after this “traumatic encounter with Congress,” as Frumkin calls it, that foundations transformed themselves more fully into something like public institutions. Reflecting the rise of larger, more specialized staffs, in the 1970s and 1980s administrative expenses as a percentage of grant outlays rose sharply, reversing the falling trend that characterized the 1950s. (In 1957 the figure was 9.9 percent, but by 1989 had reached 17.6 percent.) Foundations also became much more self-aware. Today most large foundations view themselves firmly in the context of America’s massive web of nonprofits, the vital organizations that are neither businesses nor government. They inhabit what Frumkin describes as “the contested arena between the state and the market where public and private concerns meet and where individual and social efforts are united.”
This arena has always been an essential one to Americans, and while it has long been contested, recent commentators such as Robert Putnam, author of Bowling Alone: The Collapse and Revival of American Community (Simon and Schuster, 2001) have worried more about its decline than its power. Foundations are one component of this third sector that are indisputably on the rise. But their wealth, visibility and independence make large American foundations in particular stand out from other nonprofits, and their special tax status brings special obligations. “Philanthropies bear heavy societal responsibilities by virtue of their wealth, their central role in our civil society and their power to help or, unintentionally, to harm,” says Carnegie Corporation president Vartan Gregorian, who adds that, “I see foundations as stewards of public trusts. After all, philanthropies have historical, legal and moral obligations to society as well as to their founders.”
The critics—nowadays at both ends of the political spectrum—tend to see foundations the same way. Foundations in recent decades have come under fire from the left for enabling the wealthy to avoid taxes, to maintain power over social spending that properly should rest with the electorate, and for giving Uncle Sam an excuse to shirk responsibilities to the poor. As more foundations were formed at ever higher “tax cost,” moreover, critics were emboldened in their claims that foundation assets weren’t entirely private and in fact had been diverted from their proper redistribution by government.
Teresa Odendahl makes the argument in her 1990 book-length attack, Charity Begins at Home: Generosity and Self-Interest Among the Philanthropic Elite (Perseus Books Group, 1990). “Elite American philanthropy serves the interests of the rich to a greater extent than it does the interests of the poor, disadvantaged, or disabled,” she writes, contending that voluntary organizations of the wealthy “divert decision-making in the arts, culture, education, health and welfare from public representatives to a private power elite.”
Foundations, moreover, “may actually reduce the extent to which basic human services are provided on a democratic basis.” And she decries the “frequency with which philanthropy is invoked by its proponents as an argument against redistribution of wealth by the government. Public policy, enacted through the tax codes, allows and encourages a relatively small group of rich people and their advisers to hold much more power over the shape of society than the vast majority in the middle and lower classes.”
Odendahl’s is a strangely seething book, replete with descriptions of her visits to rich people whose Teflon graciousness makes them no less transparent to her. Giving by these people is, in her view, about self-interest, status, social climbing, networking, reactionary politics and tax avoidance. Society is selling them indulgences, she seems to say, at bargain basement prices.
Other foundation critics on the left come not to bury foundations but to upbraid them. Pablo Eisenberg, for example, who was for 23 years executive director of the Center for Community Change, a low-income advocacy group, has criticized foundations for not treating grant recipients like equal partners and for failing to give enough to liberal activist groups. “The reluctance of most American foundations to support advocacy and activism flies in the face of American history,” Eisenberg wrote in 2002, adding: “If poor and working-class people are to fight successfully for social and economic justice, they must receive the support they need to level the playing field.”
Conservatives, meanwhile, suffer from a degree of split personality on the whole subject. On the one hand, they accuse foundations of veering sharply to the left, as the Ford Foundation undeniably has done since its founding by the automobile-making family. In an open letter to then-novice philanthropist Bill Gates, conservative education guru Chester Finn went so far as to warn Gates that, “Big philanthropy in this country has had little if anything to do with good works as that term is generally understood and still less to do with buttressing the institutions and values of a free society. Instead, much philanthropic activity...is engaged in subverting these institutions and values.” On the other hand, conservatives applaud foundations as exemplars of private initiative in the service of the public good. As the conservative thinker Michael Novak put it, “One of the most overlooked characteristics of a free society is the principle that it is not necessary—it is even dangerous—to serve public needs solely through the state.”
For all their willingness to embrace the idea that they are public trusts, the ultimately private nature of foundations and their assets is precisely what sets them apart—and what gives them the unusual opportunity to do the good that they do. Critics over the years on the left and (more surprisingly) on the right seem to have missed this essential point about American foundations, which is that it’s their money. It was given freely by their donors, for whom the cost was always greater than the value of any tax deduction. (Carnegie and Rockefeller, among others, gave before there were any income taxes, although their foundations have since earned income sheltered from most taxes.) David Hammack, a historian at Case Western Reserve who has studied nonprofits, says: “Foundations fit in the American system, which emphasizes private property and individual initiative.” That’s precisely what makes foundations special. Peter Frumkin recognizes this when he writes, perhaps idealistically, that “foundations can perform a distinctive role in society because they are free from the influence of organized constituencies and shareholders.”