Giving money away isn't easy.

Photographer: Andrew Harrer

Philanthropy Should Be Controversial

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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When steel magnate Andrew Carnegie tried to get Pennsylvania towns to build public libraries in the 1890s by offering them matching funds, 20 of the 46 local governments he approached turned him down. When John D. Rockefeller Sr. asked Congress to grant a federal charter for his proposed Rockefeller Foundation in 1910, then Attorney General George W. Wickersham denounced it as “an indefinite scheme for perpetuating vast wealth” that was “entirely inconsistent with the public interest.” In 1925, the regents of the University of Wisconsin voted to reject all contributions from private foundations.

Wisconsin’s regents changed their minds five years later, Rockefeller got his foundation chartered by New York state and Carnegie’s public libraries, which began to spread across the country after 1900, are now often cited as the uncontroversial epitome of what private philanthropy can accomplish.

But these examples, all lifted from Olivier Zunz’s history, “Philanthropy in America,” are useful context after last week’s discussion and debate about Facebook founder Mark Zuckerberg’s plans for his fortune.

Zunz is a historian at the University of Virginia. His book was published three years ago and had sat on my shelf unread until I picked it up this weekend in the wake of Zuckerberg’s big announcement. It’s very much worth a read.

One important lesson it imparts is that, as described above, the first wave of American mega-philanthropy in the late 1800s and early 1900s was hugely controversial. There’s nothing new, or untoward, about people turning a gimlet eye toward billionaire givers such as Zuckerberg and Bill Gates (there’s a highly critical new book out about the Gates Foundation). If these guys want their philanthropy to affect the course that the world takes, it’s only right that the world weigh in.

Another lesson is that the form that America’s nonprofit sector has taken is contingent on political and legal decisions made in those days. It wasn’t fated, or necessarily right, and there’s no reason why it should forever remain the same.

In the 1800s, the big conflicts were between givers and their heirs, with judges often called in to determine whether a gift to a charitable cause trumped obligations to family. The most famous case was that of Samuel Tilden, the New York lawyer and politician (and, before Al Gore Jr., the only person to have won the popular vote for president yet lost the election) who wanted his fortune to go to the creation of a New York Public Library. After his death in 1886, Tilden’s nephews and nieces (he had no children) challenged this bequest as impermissibly vague. They won in court, but Tilden’s law partner was still able to squeeze some money out of them for the library, and the New York legislature followed up in 1893 with the Tilden Act (subsequently imitated by other states), which made it far easier to create charitable trusts that would stand up in court.

The tax treatment of non-profit organizations, now seen as such a central issue, was not much of a factor in those early days, given that the federal income tax didn’t come into (permanent) being until 1913. Carnegie, Rockefeller and the lot were already giving away tons of money before there was any tax benefit to it. And when the Treasury Department began seriously enforcing the new rules on deductibility in the 1920s, the result was to favor, as Zunz puts it, “noncontroversial educational causes that could not be construed as remotely political or even ideological.”

One early target of Treasury’s enforcement zeal was Margaret Sanger’s Birth Control League, which later evolved into Planned Parenthood. Since then the rules have loosened up a bit -- Planned Parenthood has 501(c)(3) status and so do lots of other organizations that espouse potentially controversial causes. But the distinction between permissible tax-exempt aims and impermissible political activity remains a fuzzy and possibly counterproductive one. Mark Zuckerberg’s attempt to ignore it by putting his fortune in a limited liability company rather than a tax-exempt organization seems more like an experiment we should encourage than some kind of a scam. Yes, it does give him and his wife, Priscilla Chan, the freedom to change their minds and not give any money away at all, but given their record of giving so far that seems awfully unlikely.

A redeeming virtue of private foundations, Stanford political scientist Rob Reich wrote in a useful 2013 review of their negative and positive points, is that they promote public goods in a more pluralistic, long-term way than governments can. Public goods are things such as schools, parks and the national defense that, in Reich’s words, “are available to everyone if they are available to anyone.” When a democratic government provides them, it tends to focus on middle-of-the-road goods that appeal to the median voter. Private donors are able to pick less popular targets, and stick with them for decades.

Sometimes they will be misguided in their choices, and sometimes they will fail. It is not obvious that the U.S. approach, where wealthy private donors play a key role in matters political, social and educational, is always going to work out better than that of Western Europe, where labor unions, career politicians and bureaucrats wield more power. It’s not obvious that it’s worse either, though.

Consider America’s universities, now generally seen as the world’s best. It is well known that they owe much to the late 19th century magnates who bankrolled great new research institutions such as Cornell, Johns Hopkins, Stanford, the University of Chicago and Carnegie-Mellon. A less-familiar story that Zunz recounts in his book is how the Carnegie Foundation for the Enhancement of Teaching used its wealth and clout to pressure existing private institutions to move away from their sectarian roots as training academies for ministers and shift to a more scientific approach.

To participate in the faculty pension plan created by Carnegie, which has since evolved into giant asset manager TIAA-CREF, colleges had to remove all requirements that administrators, trustees, faculty or students belong to a particular religious denomination. After much grumbling -- from Brown, Northwestern and Princeton in particular -- the colleges fell in line. This was a contentious and controversial use of private wealth. Maybe that’s what the best sort of philanthropy always is.

(Corrects ninth paragraph to say limited liability company, not corporation.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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