
The Super-Rich Are Stockpiling Wealth in Black-Box Charities - petethomas
https://www.bloomberg.com/news/articles/2018-10-03/the-super-rich-are-stockpiling-wealth-in-black-box-charities
======
andrewla
This article makes my head hurt, as do so many discussions of charitable
giving. The only reason to give to charity is to benefit that charity.

Yes, donors get a deduction for charitable giving. But they are _ALWAYS_
better off (in terms of money received in their bank account) by _NOT GIVING
TO CHARITY_. There is no way to give money to charity in such a way that you
end up with more money than if you had not given to charity.

The article points out that there can be some hedging; the assets donated can
be managed and management fees paid to a manager before liquidation. And the
particulars of the valuations mean that they can sometimes get a larger
deduction than if they sold the asset and then donated the proceeds to
charity. And there are loopholes that allow them to claim a larger deduction
than the maximum deduction allowed in the tax code.

But no matter what, if they just sold the damn asset and kept the money, they
would have more money at the end of the day than they would having gone
through this rigmarole.

~~~
cowkingdeluxe
This is not true for assets that change in value and illiquid/non-marketable
assets.

Example:

Rich person buys asset for $10m. 3 years later gets it appraised for $75m,
knowing full well that no one would actually buy it for that.

Rich person then donates the '$75m' asset to charity. Rich person made more
money via charity rather than trying to sell the asset for $75m.

This is a very common strategy.

~~~
andrewla
This is indeed a very common strategy. It is also very commonly caught and
detected, and doing so is straightforward. At some point the asset get
liquidated. If the appraisal was done in good faith, then the taxpayer has to
pay the back taxes without penalties or prejudice. If the appraisal was
deliberately manipulated, then there is a strong possibility of criminal
charges and fines for evasion.

If the article genuinely depreciated in value, then the burden falls on the
taxpayer to prove this, and in illiquid markets this is very difficult to
establish.

~~~
guelo
The GOP already took care of that for them:

I.R.S. Tax Fraud Cases Plummet After Budget Cuts
[https://news.ycombinator.com/item?id=18115729](https://news.ycombinator.com/item?id=18115729)

~~~
masonic
Look at the charts in your own link, spanning 2007-17. Audit rates were
increasing under GWB, then plummeted over the course of the _Obama
administration_ into 2017.

~~~
guelo
The Republican congress got serious about attacking the IRS after the fake IRS
Tea Party scandal.

~~~
sosense
Fake scandal? No, that's re-writing history. Obama suggested the IRS target
his enemies, mostly conservative groups, and the IRS did exactly that. The
only thing fake about it is the news reports calling the scandal "fake."

~~~
pas
Do you have sources on Obama suggesting that?

Otherwise it's just a very baseless claim about an otherwise well documented
problem about a few IRS bureaucrats. (
[https://en.wikipedia.org/wiki/IRS_targeting_controversy](https://en.wikipedia.org/wiki/IRS_targeting_controversy)
)

~~~
masonic
Obama _appointees_ , yes, thanks to discovery pursued by Judicial Watch:

[http://www.breitbart.com/irs/2017/03/13/fitton-obama-irs-
sca...](http://www.breitbart.com/irs/2017/03/13/fitton-obama-irs-scandal-
continues-judicial-watch-forces-irs-disclose-new-documents/)

------
chottocharaii
For a great book on how these 'charities' are corrupting American politics,
and the specific tax loophole that enables them; check out the book 'Dark
Money' by Jane Meyer

Reforming this law would cause outrage among the non-profit and charity
sector, because it would instantly dry up alot of US philanthropy. It still
seems like a necessary reform however.

~~~
bilbo0s
> _It still seems like a necessary reform however..._

Why? (Serious question. As a matter of full disclosure, I've read 'Dark
Money'. To my mind, DAF's don't seem any more evil than any of the other much
larger pools of concentrated wealth out there. eg-corporate lobbying money. In
fact, the rules seem to make DAF's a good deal _less_ evil.)

~~~
Eridrus
[https://qz.com/1092737/us-tax-reformers-should-get-rid-of-
th...](https://qz.com/1092737/us-tax-reformers-should-get-rid-of-the-
charitable-deduction-too-bad-they-wont/)

~~~
bilbo0s
This link concerns the overall _idea_ of a charitable deduction, it's not
really about the funds.

My question was, "Why do _DAF_ s need to be reformed?"

Even if you got rid of the charitable deduction, you would still have things
like DAFs and Foundations.

Think of it this way, WRA came into being in 1917. But if you take, say, the
Carnegie Foundation, that's been around since 1905 at minimum. So even without
a charitable deduction, these foundations and DAFs would exist. So the
question is, why do they need to be reformed? (Or, more precisely, why do
_DAF_ s need to be reformed?)

You linked to an article explaining why you believe WRA to have been a bad
idea. (Or maybe why you believe that WRA has _become_ a bad idea? But either
way, it's about the reforms introduced by WRA, not specifically about DAFs.)

~~~
Eridrus
We should get rid of all charitable tax deductions, and then these funds would
simply cease to exist, because they only exist to capture these tax deductions
while preserving the donors' power.

I don't have any beef with the foundations, I have a beef with our tax policy.

~~~
bilbo0s
> _because they only exist to capture these tax deductions while preserving
> the donors ' power..._

That's just not the case. The reasons that a donor might choose a DAF are
legion.

Again, I won't go into them all, but let's take an example that is more common
than people realize. A donor who has passed on. _Sometimes_ in life, a
couple's children need encouragement to be kindly and generous. Let's put it
that way. DAFs are part of a somewhat complicated legal framework that can
have the effect of actually _obliging_ heirs to share the family's resources.

And of course there are a million _other_ reasons that one might be motivated
to use a DAF.

Point being, DAFs are not _solely_ used as a tax dodge. And the donors are not
seeing the benefits from the tax dodge in any case, the vast majority of that
benefit is going to the charities and the financial industry. (Heck, many of
the donors have even passed on, so of course they don't care about any tax
benefit. They made those arrangements for other reasons.)

~~~
Eridrus
I don't really believe that these other reasons are a major driver, but it
also doesn't matter one way or the other, we can get rid of the tax benefits
and let people keep the rest if they want.

I agree that the benefit is largely not accruing to the people claiming the
tax deduction, but it is a subsidy coming out of the public purse that we
should get rid of.

[EDIT]: Actually, I take that back, once you take into account the fact that
the amount people donate is not significantly impacted by the tax situation,
it seems clearer that the people getting the deduction are the ones getting
the benefit/subsidy.

~~~
zip1234
It's not coming out of the public purse. Those are not the public's funds to
begin with. The law was democratically decided to allow charitable donations.

~~~
Eridrus
And we can democratically repeal the tax deductions.

------
usaar333
I find it odd to blame DAFs rather than the absurd tax laws that enable them.

There are several oddities in our tax laws:

\- extremely generous treatment of donating long term appreciated property.
You deduct the FMV and also avoid paying capital gains tax. I have yet to
understand why we think it is good policy to offer both advantages. Allowing
only basis to be deducted (as is case for short term) seems much more
reasonable.

\- our tax system has a standard deduction that itemizations must go over to
see benefits

\- we have a progressive tax system that doesn't smooth over multiple years of
unsteady income.

I've been a big user of one myself, contributing heavily in a year of an IPO
(abnormally high income plus lots of highly appreciated stock). Using a Daf
allowed me to have more time to vet target charities; if they didn't exist, I
would have still donated heavily in the IPO year (because the tax benefits are
leveraging my donations), just less efficiently (less vetting).

Point being, the way our tax system handles charitable donations is what is
"unfairly" benefiting the rich; DAFs are just a symptom.

------
karmajunkie
It seems like a relatively simple fix for this is to set the same minimum
distribution requirements that private foundations have. The article mentions
5%, which seems like a safe level.

~~~
CompelTechnic
I don't think 5% is a safe level. There are many charities that intend to
operate in perpetuity, and this practice would eliminate this possibility.

~~~
bluGill
Seems like a good thing in general. I don't want a 1850s charity whose purpose
is to stop women from voting to still have money. (I doubt such a thing ever
existed)

Maybe a charity with the sole purpose to preserve some specific artifact (a
piano) or the like, but somehow I want it to not get more money than is
required for that purpose.

~~~
CompelTechnic
Seems to me like you are throwing the baby out with the bathwater.

Remember that the total amount of charitable giving is not a fixed pie. People
are more likely to give, and give more, when the are free to organize their
giving as they see fit.

~~~
logfromblammo
We should also not be indulging the whims of dead people at the expense of the
living.

------
qubax
This isn't new. It's been going on since the end of gilded age with wealthy
tycoons setting up family run charities and foundations. Rockefeller,
Carnegie, etc all did this. Gates is the most famous one to do this in recent
times.

It's a great way to shelter money from taxes and governments. It has been used
to fund worthwhile enterprises. But it could also be used to give wealthy
families political/institutional power for generations.

~~~
dahart
> This isn’t new.

Well, something here is new since the sum total of DAF contributions tripled
in 6 years. Are you referring to charities in general, or DAFs specifically?
This article is less about charities as a whole and more about a specific
style of donation where the funds accrue interest and are locked up and not
usable by the charity until later.

------
dumbfounder
If you can setup a non-profit like this they can theoretically give forever.
That is what the philanthropists are going for. They want their gift to keep
giving and be their legacy. Preventing that is not a good idea in my opinion.

~~~
petermcneeley
Western society is historically opposed to your "good idea"
[https://en.wikipedia.org/wiki/Rule_against_perpetuities](https://en.wikipedia.org/wiki/Rule_against_perpetuities)

In essence, the rule prevents a person from putting qualifications and
criteria in a deed or a will that would continue to affect the ownership of
property long after he or she has died, a concept often referred to as control
by the "dead hand" or "mortmain".

~~~
dumbfounder
This seems like a very narrow point directed at wills controlling real
property.

Harvard has a very large endowment it uses provide free tuition and much more,
but I would think the overall sentiment is positive about their actions. What
about the Norway's sovereign fund? Why would it be different for an individual
who wants to setup an organization to impact the world in some way in
perpetuity?

~~~
softawre
Because times change.

Would you want the "Keep the blacks as slaves" foundation to still be ticking
along these days?

A charity should have to get money from each generation to survive.

~~~
dumbfounder
There are a lot of charities I don't want, but I don't think I should have the
right to say what charities exist. Also, charities need people to run them,
they aren't soulless automatons that execute on whatever evil plan was
concocted by its benefactor. They are generally given broad direction and have
the ability to change over time.

~~~
petermcneeley
Yes but if you're a libertarian you dont believe in the enlightenment values
anyway. This law is to reduce the power of the dead over the living and to
allow them to chose their own path. This concept is similar to democracy where
the monopoly of physical power rests in the hands of a majority of the
populous.

~~~
dumbfounder
While we abide by the rules of government established by a document that that
is hundreds of years old?

~~~
petermcneeley
Even in the USA the reality is much more nuanced.

The USA of 1776 is quite different from today. I think one of the big breaks
was about states rights causing the civil war and effectively reconstituting
the country. Even something like free speech (probably one of more unique
things about USA) actually has its formulation in the 20th century. There are
more obvious things like constitutional amendments or changes in
interpretation.

Finally of course the USA is a creation of not abiding to the rules and
traditions of the UK.

The laws of the past are not a tyrant over us and should not be.

------
petermcneeley
Tax deductions for charities are anti democratic. Simply because it redirects
collective money which would be directed through a democratic process and puts
its control back into private hands. One can talk about potential corruption
with an individual charity, but the real sin is the very idea of privately
redirecting public funds.

~~~
prostoalex
The implicit social contract is that some charities (churches, Habitat for
Humanity, various food banks) pick up the slack where the government blind
spots are - food for the poor, housing, etc.

It also feeds into Americans' general belief of government's inability to deal
with local issues swiftly - democratic process sounds fine and dandy, but it's
pretty unrealistic to require extensive legislative processes to address one-
off issues in every town - families losing income, escaping abusive
significant others, needing help while transferring jobs, etc.

~~~
petermcneeley
These situations are also handled by government in many northern European
countries. (unemployment insurance, government housing, social work, free
school, free medicare)

~~~
prostoalex
The cost-benefit analysis of providing such services through centralized
government would look different for the US than European countries.

E.g., 20% of Swedes live in Stockholm, so a government-run hospital or food
bank there would be accessible to a larger share of Swedes than a similar
institution in NYC or LA.

------
jacobush
IKEA is famous for having an incredibly obfuscated control and ownership
structure with many foundations and charities.

~~~
RanInt1111
The topic of IKEA has always fascinated me because of the bizarre
contradiction between IKEA's public image of social responsibility and do-
goodery that is in stark opposition to it's dark financial, corporate, and
business practices. Between the nested dolls of corporate shell companies and
offshore accounts to basically pay zero taxes anywhere while claiming a mantel
of social responsibility is intriguing to me, not just for the way in which
they are so easily able to deploy dark patterns to fool people.

IKEA has been exposed as having used that shell game of corporations and
foundations to obscure illicit wood sourcing practices ... all the while
people feel good about buying furniture amidst a whirlwind of diversity and
social responsibility and environmentalist PR propaganda. It's utterly
fascinating to me, it's like observing how a cult leader operates to snare and
psychologically rope in their members and then brain wash them so thoroughly
that they can't even operate without anchoring everything in the cult. If you
were to strip away all the social justice, diversity, environmental
responsibility, social do-goodery propaganda, you are left with a corporation
that by all indications that are only available in a gleaning fashion, is
quite devious and malevolent. It's very existence as a company that produces
what is essentially throw away furniture alone, by itself, when you think
about it, is in stark contrast to the very notion of environmentalism and
ecological responsibility, even without examining their sourcing and
manufacturing practices.

It's all just such a fascinating exposition of the gaslighting nature of the
European corporate culture in general where the facade of social
responsibility that is projected outward to the commoners is in direct and
stark opposition to the nefarious activities and behaviors of the ruling elite
that remain obfuscated behind their now legal and tax and accounting walls,
where they would have remained hidden away behind castle walls in the past.
It's very much at the core of the subject article; where these "charities"
that serve to boost an image of benevolence, are actually far more self-
serving tax avoidance malevolence. I am all for lowering and doing away with
taxes whenever we can, but what is worse is dishonest and insincere taxation
and charity that are far more fraud and theft than the benevolent do-goodery
they are touted as being by the psychopathically dishonest.

Why should lower taxes only be something for the elite that saddle the middle
and lower classes with the costs of their exploitation? ... well, because
nothing has really changed from the aristocratic elite of the past, even
though the methods have shifted and the labels for them have been revised and
rebranded. All hail the king and our lords.

------
patrickg_zill
This is not really that new... as the 1954 Reece (Congressional) investigation
into charities showed:
[https://en.wikipedia.org/wiki/United_States_House_Select_Com...](https://en.wikipedia.org/wiki/United_States_House_Select_Committee_to_Investigate_Tax-
Exempt_Foundations_and_Comparable_Organizations)

Also, Wright Patman's report on Family Foundations and Charitable Trusts:
[https://openlibrary.org/works/OL11465104W/Tax-
exempt_foundat...](https://openlibrary.org/works/OL11465104W/Tax-
exempt_foundations_and_charitable_trusts_their_impact_on_our_economy)

------
kayhi
Looks like donating to charities to get a tax break, which seems fine. Is
there a way that they are controlling how these monies are spent?

~~~
kareemm
That's a fairly simplistic way of looking at it. Here's another way of looking
at it: taxpayers are subsidizing tax breaks for the rich.

Guy puts $1M in stock or some other non-cash asset that can change in value
into a DAF. Gets a tax receipt for $1M and uses it to reduce his taxable
income (this is where the subsidy happens).

The $1M may sit in the DAF for years, not going to work in the charitable
sector. It may depreciate in value. In this case when liquidated and moved
from the DAF to some charity actually doing charitable work, it may be worth
substantially less than $1M. Which means although taxpayers subsidized the $1M
donation, it's actually a lot less money that's actually put to work in the
charitable sector. Of course, it could also appreciate in value.

Source: I built an online DAF for 8 years that's taken in $410,000,000+ in
donations.

~~~
andrewla
> taxpayers are subsidizing tax breaks for the rich

I commented about this elsewhere in the thread. This is a ridiculous point of
view because there is no net tax break for the individual.

If instead of donating $1M in stock, they sold the stock and kept the money,
they would have more money than if they donated the stock and claimed the
deduction. They get to deduct the $1M, but they don't get to keep it as well.

> Which means although taxpayers subsidized the $1M donation

This is true, but seems like a net benefit. They get to give a gift of $1M
that only costs them $600k. But that's still $600k that they could have kept
and spent on gilded washing machines and penguin-egg omelets (I'm assuming
that this is what the rich spend their money on). Instead, that money, plus a
"matching" donation from the government of $400k, goes to a charity that can't
really directly benefit the donor.

~~~
kareemm
>> taxpayers are subsidizing tax breaks for the rich

> I commented about this elsewhere in the thread. This is a ridiculous point
> of view because there is no net tax break for the individual.

How is there no net tax break? In one scenario they keep the stock and pay
more tax, in the other they donate the stock and deduct the charitable gift.

> If instead of donating $1M in stock, they sold the stock and kept the money,
> they would have more money than if they donated the stock and claimed the
> deduction.

Unless they don't sell the stock. Or can't (yet) sell the stock (private
companies).

> They get to deduct the $1M, but they don't get to keep it as well.

Unless they control the recipient charity where the money ends up.

> This is true, but seems like a net benefit. They get to give a gift of $1M
> that only costs them $600k. But that's still $600k that they could have kept
> and spent on gilded washing machines and penguin-egg omelets (I'm assuming
> that this is what the rich spend their money on). Instead, that money, plus
> a "matching" donation from the government of $400k, goes to a charity that
> can't really directly benefit the donor.

You're missing my point. Often the money doesn't go to a charity doing
charitable work for years, if ever. Many DAFs only let you allocate the GAINS
on the principal to charity (in this case, the gains on $1M). DAFs are another
investment vehicle to minimize tax and maximize gains.

------
gumby
The unasked question here is why we even have the idea of special treatment
for nonprofits? Nonprofits pay the same as for-profits for their utilities,
computers, payroll and the like. Yet their existence permeates and distorts
the tax code.

------
lealephx
Just like the Clinton Foundation paying for Chelsea's wedding. Or paying for
the personal expenses of the family.

~~~
rconti
I had not heard of this because I don't live in that particular bubble.

I looked it up, and it is rated as 'Unproven'; appears to be likely untrue,
and based on who's pushing it, it's even less likely to be true.

[https://www.snopes.com/fact-check/clinton-foundation-paid-
fo...](https://www.snopes.com/fact-check/clinton-foundation-paid-for-chelseas-
wedding/)

------
newyankee
It is the same with most 'NGOS' in India

------
abuckenheimer
Really I think the specific the problem here with DAF's is just misaligned
incentives, the DAF values the donors donation but the government is the one
that has to pony up the tax rebate. Obviously there is some auditing mechanism
here where the valuation can't be too far from reality otherwise the
government would come down on it but in practice it seems like that is one of
their benefits. I think the more interesting and subtle problem though is that
the rebate is awarded at donation time instead of when the money actually gets
put to use which lets the DAF accrue fees on government money.

in a highly stylized example:

1\. A donor gives the DAF a $10m yacht

* DAF gives a donor $10m donation receipt

* Government gives donor <donor tax rate> * <donation receipt> rebate i.e. .30 * $10m = $3m

2\. DAF liquidates yacht into $9m cash and invests it

* the DAF charges .006 management fee on this for 5 years with a 5% return

3\. At the end of 5 years the DAF liquidates its investments and puts all of
that money to work on a cause.

* ~$11.2m goes to work on a charitable cause

* DAF has collected ~340k in fees

This is more or less the description the DAF in the article but now but we've
simplified to assume a conservative consistent return and that the whole
donation gets put to work at once at the end of a set term whereas more likely
it would be slowly liquidated over time. Now let's assume that instead of the
government paying up the tax rebate when the donation is made that it is paid
out when the money left the DAF and went to work on a cause.

1\. donor gives a DAF $10m yacht

* DAF values it at $9m and gives the donor <donor tax rate> * <donation receipt> rebate i.e. .30 * $9m = $2.7m

2\. DAF liquidates yacht into $9m cash, covers their $2.7m rebate outlay and
invests $6.3m

* the DAF charges .006 management fee on this for 5 years with averages a 5% return

3\. At the end of 5 years the DAF liquidates its investment and puts all of
that money to work on a cause.

* ~$7.8m from the DAF goes to work on a charitable cause + a $2.7m from the government to match that original rebate for a total of ~$10.5m

* DAF has collected ~238k in fees

What's the difference here?

1\. The government saves $300k on a rebate because the DAF has to liquidated
the yacht to come up with the money to pay the rebate so the valuation is
based on something the reflects the actual cash

2\. The government keeps <rebate amount> ($2.7m in this case) in its bank
account for the 5 years while is in the DAF. This means the government can use
it for it's own operations over that time period rather than it sitting in the
"warehouses of wealth". It also means the DAF can't collect fees on this money
because it is not managing it.

I'm not trying to make a statement on if the government should or should not
subsidize donations to charity, just point out how that subsidy seems to be
leveraged by the introduction of DAFs against its original intent.

sorry for the terrible formatting

------
anon49124
Silicon Valley Community Fund has an endowment of between Stanford's and
Harvard's, around $14 billion USD. The reason is that backers can pledge funds
and get tax advantages now, while deferring transfer of funds/assets until
later. It's also under no obligation to help anyone, and donors can put
strings attached to realize their own pet projects. IOW, the whole thing is a
tax-dodge.

~~~
URSpider94
That’s not correct, you can not take a tax benefit until you actually turn
over control of the assets to the fund. “Pledges” do not generate tax
deductions.

------
pacoWebConsult
Everyone is mentioning Gates but the same thing was done by the Clintons and
McCains

~~~
epmaybe
This is a technology focused website, hence why Gates is mentioned more than
political figures.

------
readhn
Interestingly this is apparently how some corrupt russian government officials
like to hide/park their dirty cash/bribes etc. funnel money/bribes/transfer
assets into "charities", then have charities buy/own the assets you are
interested in owning... houses, yachts etc. Then they have interesting
situations where on paper a charity owns a villa ... but in reality a high
profile politician lives in it.

This is charity abuse taken to the extreme, but i have a feeling russians have
copied the approach from their western counterparts.

[https://themoscowtimes.com/news/prime-minister-medvedevs-
sup...](https://themoscowtimes.com/news/prime-minister-medvedevs-supposed-
secret-empire-is-russias-biggest-charity-group-57820)

