Philanthropic endowments are designed to protect the financial interests of the 1 percent. They should be taxed.

We are wrapping up yet another tumultuous year in which wars and disasters have ravaged communities across the world. These misfortunes have added to the misery of those who are already facing the ravages of harsh inequality, climate chaos, dispossession and marginalisation.

As in the past, part of the global response to these crises included the “generous giving” of various philanthropists. Indeed, their representatives joined heads of state, CEOs, celebrities, royalty, and government officials for the annual United Nations General Assembly in September and then for the UN climate conference (COP28) in November to seek “solutions”. Many of them will meet again for the World Economic Forum in Davos later in January under the same guise.

Yet, every year, nothing seems to change as the outcome of these events. This is partly because the very way elites see problems and solutions are limited by their gaze and worldview, which create and perpetuate the crises in the first place. But they are also ineffective because that is their purpose: They are structured to uphold the status quo, not to create deep systemic change.

The philanthropic sector was also not created to address the root causes of systemic problems, but to protect private financial interests.

It is time for the world to realise this. The sooner we do so, the sooner we can find more relevant ways to truly bring philanthropy into the important and messy work of real social change.

How the rich get richer

We all know the rich are getting richer, controlling a huge percentage of wealth across the planet. According to Oxfam’s recent Global Wealth Inequality Report, since 2020, the richest 1 percent have captured almost two-thirds of all new wealth, nearly twice as much as the bottom 99 percent of humanity.

Rich people pay virtually no tax (often 3 percent or less of their income) and their billions just keep on growing through the application of compound interest. In the next 20 years, most of this wealth will move between family members in the wealthiest 1 percent. In the US alone, it is estimated that between $36 trillion and $70 trillion in wealth will be transferred from one generation to another.

Calls to tax the rich are growing globally, and will be even more pronounced as this massive generational wealth transfer takes place. One of the key ways the rich address this pressure is through philanthropy. Philanthropic contributions are commended and perceived as a form of “giving back”.

Currently, the estimated global value of philanthropy is $2.3 trillion, or approximately 2 percent of the world’s GDP, with most of those funds held in endowments. This is larger than the annual GDP of countries like Canada and Brazil.

If philanthropy is inherently good, and more philanthropy is going to happen, what is there to worry about? Let us look at how philanthropy actually works in practice.

For example, in the US, one aspect of philanthropy is the 5 percent payout rule which was put into US tax law in 1976. According to these legal provisions, a charitable foundation has to give just 5 percent of its overall endowment in the form of grants or programme-related investments annually in order to maintain its not-for-profit status.

In practice, this rule has become the ceiling for giving grants rather than the floor. The other 95 percent of the endowment is treated as tax-exempt investment money, which most foundations continually grow.

Let us break this down further. In 2020, the average rate of return for foundation endowments was 13.1 percent. If we take a $100m foundation as an example, it would be required to give away just $5m over the course of the year, but its endowment would have grown to $113m minus $5m for a year-end sum of $108m. The following year, this expanded pie of $108m would become $122m minus roughly $5.4m it would give away for a total of roughly $117m. So, the $100m becomes $117m in just two years and continues to grow.

These endowment funds – or rather untaxed investment capital – are then funnelled into the usual engines of extractive capitalism: stock markets, bonds, real estate, fossil fuel companies, etc. This results in further wealth accumulation.

While this 5 percent rule payout started in the US, it has been exported around the world and continues to be promoted as the global model for philanthropy: keep growing endowments, while foundations grant the minimum amount required. Their wealth and power grow while they trickle-down grants to those doing the hard work.

It does not take an accountant or an economist to understand the implications of this model. Only a fraction of tax-exempt philanthropic funding is actually used to address social and ecological issues while the majority is reinvested in life-destroying activities via the extractive markets with high, ongoing returns on investment.

Philanthropy as redistribution

In most countries, any individual or corporation that makes a philanthropic donation receives a direct tax break against their income for the donated amount. As a result, philanthropy is an important part of a larger tax minimisation strategy, further concentrating wealth.

A recent investigative report by The Nation magazine estimated that Bill Gates may have received more money back in the form of tax breaks than he has given in philanthropic grants through the activities of the Gates Foundation.

Another example involves MacKenzie Scott, one of the largest philanthropic donors in the US. Over the past couple of years, she has been celebrated for the size, type and speed of her grants. According to Bloomberg’s Billionaire Index, in 2023, her wealth continued to grow, even though she gave away significant funds.

Despite receiving huge tax benefits and doling out the smallest fraction of their endowments as grants, philanthropists are elevated in our society as benevolent, generous, and magnanimous individuals.

It is time to drop the hero worship of philanthropists and go beyond simple declarations to tax the rich. We need to start taxing endowments.

Consider what a tax on these massive philanthropic endowments could do. For example, democratically run citizens’ funds created with the proceeds from taxing endowments could redistribute billions of dollars to front-line communities, Indigenous peoples, climate refugees, and even ecologies who have suffered the most from the extraction of resources and wealth.

This can be the starting place for deeper structural change in philanthropy. What is needed is nothing short of a shift in worldview, a commensurate alternative approach based on a life-centric economy and a genuine desire to address the global poly-crisis.

It is time to move from systems protecting individual and institutional entitlements to ones that are rooted in redistributing wealth for the collective entrustment of futures worth living.