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Private Foundations and their Child-Like Customers

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by Jennifer K. Thompson

As we do with many institutions, we tend to think of nonprofits monolithically: nonprofits, we are likely to say, are tax-exempt organizations that benefit the public. We often understand philanthropy in much the same, one-size-fits-all way: philanthropy is giving (whether in time or dollars) that is "other-oriented," as Professor Reich puts it in the first few minutes of this EconTalk conversation on Foundations and Philanthropy.

The reality, however, is that the landscape of nonprofits and donors in the United States is diverse and extensive. Depending on how they are measured or defined, there are 1.5 million entities that qualify as tax-exempt organizations in the United States. You may wish to debate this figure, and, if you do, you'll find plenty of resources and material to assist you. Multiple organizations like Guidestar and Charity Navigator (both nonprofits themselves) collect, review, and analyze data about nonprofits.

Increasingly, institutions of higher learning (most of which are also nonprofits) dedicate considerable time and talent to the study of philanthropy and nonprofit entities. In 2008, Indiana University awarded the nation's first PhD in philanthropic studies. The number of academic departments and centers dedicated to philanthropic studies (like the Center on Philanthropy in Civil Society at Stanford where Professor Reich is faculty co-director) has increased dramatically since the early 1980s when the first nonprofit concentrations were established. New research on nonprofits and philanthropy is being produced every day.

This level of attention is hardly surprising since, according to data from the Bureau of Labor Statistics, more than ten percent of the U.S. workforce is employed by nonprofit organizations of one sort or another. Twenty five percent of the adult population volunteers for those organizations. Then there's the money: in 2016, charitable giving in the United States continued to grow, inching closer to $400 billion.

Whether one believes, as Professor Reich does, that "philanthropy constitutes an exercise of power," it seems fair to assume that those in the nonprofit sector can expect a healthy dose of the scrutiny he demands. With this kind of scale and significant involvement on the part of so many in the country, nonprofits will, for the foreseeable future, surely be subject to increased attention by the government, the academy, and the general public.

It is important to note that Reich and Roberts' conversation does not cover nonprofits generally. The IRS currently lists more than twenty types of tax-exempt organizations. This EconTalk episode focuses on private foundations, one sub-class of one of those many types.

Of the 1.5 million nonprofit entities in the United State, only about seven percent are private foundations. Those seven percent, however, accounted for about fifteen percent (or nearly $60 billion) of charitable giving in 2016, and, if one believes that the philanthropic distribution of funds is an exercise of power, this means private foundations are the most powerful institutions in terms of charitable giving. (Note that individual giving still dwarfs all other kinds of giving combined.)

The episode suggests a number of interesting and important questions, among others: What role does the tax code play in the formation of private foundations? Should wealthy individuals be allowed to preserve that wealth in perpetuity in order to pursue their own, idiosyncratic interests as long as those meet the IRS's definition of an exempt purpose? Shouldn't we be wary of so much power (in the form of philanthropy) wielded by institutions characterized by an "almost complete lack of accountability"?

Reich and Roberts spend some time debating this last question. Reich notes that private foundations are not held accountable by the ballot box or the marketplace as government and for-profit institutions are. Roberts disagrees, arguing that the ballot box doesn't provide as much accountability as Reich believes it does and, provocatively, that the potential grant recipient can, like a dissatisfied customer refusing to shop at a for-profit, reject the foundation's gift. Reich acknowledges this possibility, posits that "it happens with extraordinary infrequency," and goes on to draw an analogy between "needy nonprofit recipients" and the children of wealthy people.

Though I also lack the data to prove it, as one of the 11.4 million Americans employed by a nonprofit entity, my experience suggests that Professor Reich properly estimates the low likelihood of a potential grant recipient turning down a foundation's offer or funds. The explanation for that, however, has less to do with the fact that public charities are "needy" or that they are somehow analogous to the children of the wealthy. In my experience, private foundations seldom offer contributions to unwitting potential recipients (though I would welcome evidence to the contrary [particularly the contact information of the program officers employed by the foundations that distribute these unsolicited grants]).

Instead, the "needy" public charities spend many hours and dollars working to convince private foundations that a) their own activity meets the foundation's mission, b) they can carry out this activity efficiently, economically, and better than the other needy organizations with whom they must compete for dollars, and c) they will be able to demonstrate all of this through some measurement of the activity's impact.

Public charities will seldom be driven by need to take the offer of powerful, idiosyncratic private foundations with whom they disagree because, long before that offer has been tendered, the potential recipient will have decided whether or not to invest the resources in pursuing a grant from the foundation.

Many private foundations will not accept proposals unsolicited, and, in those cases, it is true that the private foundation may approach a public charity. But that approach generally comes in the form of a proposal solicitation, and the potential grantee will still have to choose to invest resources in the completion of that proposal, the execution of the grant, and reporting on the activity.

Jennifer K. Thompson is the executive director of the Center for the Study of Liberty. She began her career teaching philosophy, and later joined Liberty Fund, Inc., a private operating foundation in Indianapolis, Indiana. At Liberty Fund, Dr. Thompson served as fellow, founding director, and vice president of co-sponsored programs. In 2011, she became senior director of programs at the Institute for Humane Studies at George Mason University.


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CATEGORIES: EconTalk




COMMENTS (2 to date)
Thaomas writes:

My complain about charitable contributions is why we subsidize this through the tax system at a higher rate for high marginal rate taxpayers than for low or zero bracket taxpayers? Why not subsidize it through a partial tax credit?

Todd Noebel writes:

As a fellow worker in this realm we call "the non-profit sector", I agree with your assessment. And this could be the best comment I've read all year:

"In my experience, private foundations seldom offer contributions to unwitting potential recipients (though I would welcome evidence to the contrary [particularly the contact information of the program officers employed by the foundations that distribute these unsolicited grants])."

Being in HR, I don't recall ever having the ED or CEO poke their head in my door and say, "We just got an unsolicited windfall, we should staff up to create a project."

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