Let’s redefine philanthropy so that it means actually being altruistic

This weekend I read this great ProPublica story about Carlyle Group founder David Rubenstein’s combination of ‘patriotic philanthropy’ and lobbying to keep the carried interest tax exemption that has made him rich.

For over twenty years, thanks to this tax loophole, Rubenstein has paid about 20 percentage points less tax on performance fees earned by his private equity firm. Today he is worth an estimated $2.6bn.

At the same time, he has made some significant philanthropic contributions like giving $15m to repair earthquake damage to the Washington Monument, or buying a 700 year old copy of Magna Carta for $22m before loaning it to the Smithsonian along with a $13m gift to fund a gallery to store it. He also hosts a regular cocktail party and discussion for members of Congress, where they can mingle and hear presidential biographers discuss their subjects.

These, and other contributions, help the country in some marginal way. They also help Rubenstein build strong relationships with politicians like George H.W. Bush, Barack Obama and Hillary Clinton. Those connections then help his efforts to lobby agains closing the carried interest loophole.

In light of this, can we call what Rubenstein does philanthropy? Should we instead call it content marketing for a tax loophole? Or should we call it PR for Rubenstein’s personal wealth?

I want to propose a new definition of philanthropy

Today, we call basically any charitable donation philanthropy. That fails to capture the way philanthropy can be used to advance private interests at the expense of the public.

Under my definition, a person engages in philanthropy when at least two conditions are met:
1. They have no expectation of direct or indirect financial gain as a result of their gift. And,

2. Their giving plus their effective tax rate is at least equal to the ‘fair’ rate of tax on their income.

Let me unpack each.

1. No expectation of direct or indirect gain

When a person gives a charitable gift, they can deduct the value of the gift from their taxes. In other words, they take money from the public purse and give it to a charity of their choice. That means, I think, that unless they give for others, they are basically stealing from you and me for their own gain. Ideally, they’d give to the most effective causes possible. It’s also okay to give for others while enjoying the private pleasure or public adoration that comes from doing so. But sparing that, they should at least avoid self dealing.

So if your philanthropy involves building connections with Congresspeople you rely on to maintain your tax break, it probably doesn’t pass. Similarly, it probably doesn’t pass if you pay the Lincoln Centre an extra $15m so they can pay an estate for naming rights to a venue you want your name on. By the same token, it doesn’t pass if you make a $20m gift condition on a college renaming not a building but itself after you. And it likely doesn’t pass if you donate to a charitable foundation for your child’s school so they can have a great school without you having to pay higher taxes to support all schools in the district.

2. Pay a ‘fair share’ of tax

A person’s ‘fair’ rate of tax is, of course, a contested concept. But I think it’s relatively simple: the rate paid on ordinary income of the amount earned by that person. This is also captured in the Buffett-rule (proposed by Warren himself): a billionaire’s ‘fair’ rate of tax certainly shouldn’t be lower than his or her secretary’s.

Now when someone donates to charity, this reduces their effective tax rate. But if someone owes a fair rate of, say, 35%, and gives 10% of their income to charity so that they effectively only pay 25%, we can call that philanthropy. If you make $5bn in a year and pay 15% tax (~$1bn less than your fair share, and ~$250m less than if you paid the 20.6% paid by the average American), then later give $400m to Harvard, you don’t get a pass. That doesn’t make you a philanthropist: it makes you a tax evader with a good PR strategy.

This definition would exclude a lot of today’s celebrated philanthropists. That’s the point. Let’s stop celebrating people who withhold money from the public purse and then give some of the crumbs to their pet projects.

Let’s start celebrating people who pay their fair share and give on top of it to help others. That’s philanthropy.