Charitable Foundations Comment

I agree with Becker that the great strength of charitable foundations, and the principal justification for the tax exemption (though a secondary one is to offset the free-rider problem in charitable giving--if you give to my favorite charity, I benefit, and so the more you give the less I will be inclined to give), are that they bring about a decentralization of charitable giving, breaking what would otherwise be a governmental monopoly and thus reducing the play of politics in charity. In addition, however, to the extent that charitable giving substitutes for government spending, such giving (minus the tax benefits to the giver) represents a form of voluntary taxation, like state lotteries. Given the enormous skewness of incomes in today's United States, it is good to encourage voluntary taxation of the wealthy. But I would not place much weight on competition by universities and other recipients of charitable giving for foundation grants, since the recipients will compete whatever the source; universities compete for government grants just as they do for private grants.

A perpetual charitable foundation, however, is a completely irresponsible institution, answerable to nobody. It competes neither in capital markets nor in product markets (in both respects differing from universities), and, unlike a hereditary monarch whom such a foundation otherwise resembles, it is subject to no political controls either. It is not even subject to benchmark competition—that is, evaluation by comparison with similar enterprises—except with regard to the percentage of its expenditures that go to administration (staff salaries and the like) rather than to donees. The puzzle for economics is why these foundations are not total scandals. The solution to the puzzle seems to me twofold: the foundations are controlled by trustees, whose prestige is invested in the success of the foundation; and foundations are constrained by law, as well as by the limited benchmark measure that I mentioned, to give away most of their income, and this limits the ability of staff to appropriate the foundation's income for its personal benefit.

A deeper puzzle relates to the leftward drift in foundation policies that Becker discusses, a drift enabled by the perpetual character of a foundation. (I agree that foundation staff work is attractive to liberals and that the children of the founders tend to be more liberal than their fathers. In both cases the main reason is probably that while the creators of the major foundations invariably are successful businessmen, and business values are conservative, foundation staff are not businesspeople and many children of wealthy businesspeople do not go into business either.) The puzzle is why conservatives establish perpetual foundations. Don't they realize what is likely to happen down the road? The answer may be that the desire to perpetuate their name is greater than their desire to support conservative causes. In any event, a rule forbidding perpetual foundations would be paternalistic. If rich people want to squander their money on feckless foundations, that should be their privilege. Moreover, to the extent that foundation spending substitutes for government spending, the comparison is of two inefficient forms of enterprise, and the foundations may be the less inefficient form.

I agree with Becker that the fact that a person like Bill Gates or Warren Buffet is a great businessman doesn't give him any comparative advantage in doing good. I also question the appropriateness of American foundations' spending money abroad. A foreign aid program is an instrument of U.S. foreign policy that can be undermined by private expenditures in the amount now being spent abroad by the Gates Foundation. And I have trouble understanding why American taxpayers should (via the tax breaks for charitable giving) help finance foundations' contributions to foreign countries. At the same time, critics of the small percentage of U.S. GDP that the United States devotes to foreign aid ought in fairness to add in the foreign giving by our foundations in calculating that percentage.

There is a further question, given that Gates and Buffet remain active in business, how much of their charitable giving is actually in support of their businesses. This is a particular conern with regard to Gates because Microsoft operates worldwide and is a controversial company. The Gates Foundation helps to polish Microsoft's image. There is nothing wrong with corporate image building, but there is no reason to favor it with tax breaks.