The hazards of philanthropy and why its tax treatment needs a proper look

Last year, when Notre Dame cathedral in Paris was still smouldering from the major blaze that had engulfed it, France’s richest man Bernard Arnault rushed in to offer tens of millions of euros in support to help restore the historic landmark.

The act helped spark a frenzy of other donations. But while lauded for its generosity, it also triggered questions about why some corporate donors had offered so much so quickly, including speculation regarding tax break benefits. Some expressed their frustration that other humanitarian causes had not received similar support.

As Ollivier Pourriol, a French philosopher and novelist, summed up dryly on Twitter: “Victor Hugo thanks all the generous donors ready to save Notre Dame and proposes that they do the same thing with Les Misérables,” alluding to another of Hugo’s novels about the poor.

Though in Arnault’s case he said he would not benefit from tax breaks, the point is that the focus on philanthropy and taxation has increased significantly over the last decade, attracting more media attention as the rich get richer and an increasing number of families, entrepreneurs and corporations set up foundations or other entities for social investment.

Most governments across the world spend public funds on tax incentives to encourage philanthropy, or this idea of private assets being used for the public good. Switzerland alone, with its longstanding philanthropic tradition and advanced legal system for grant-making, has the fourth-most foundations of any country in Europe, standing at 13,169 at the end of 2018.

But for all the benefits it can bring, the relationship between philanthropic giving and taxation raises a number of fundamental questions.  For instance, is it justified to offer tax deductions as a “reward” for donations? Does subsidising philanthropy via taxes conflict with principles of democracy - and does it ultimately pay off for society?

These are some of the questions being addressed this week at a three-day conference organised by the Geneva Centre for Philanthropy (GCP) and open to experts and academics in the field.  The centre, which is part of the University of Geneva (UNIGE), will also present findings of an ongoing research project initiated earlier this year with the OECD and financed by the Swiss National Fund for Scientific Research.

Giedre Lideikyte-Huber, a lawyer and senior lecturer at UNIGE working on the project, said:  “The reason why we started researching this topic is that lately, especially in the United States, there has been a lot of criticism and some authors questioning why every taxpayer should contribute to private philanthropy, when they do not get to decide the goal of it? Is this compatible with a democratic decision-making system?”

If a state grants tax incentives, it means that it is giving up billions of dollars of tax income to enable a company or an individual to decide where to allocate these funds. Critics see this as problematic not only from a democratic standpoint but also because of the difficulty in assessing whether it’s the most efficient use of taxpayer’s money. The sheer scale of giving by some mega-donors can also skew spending in areas like healthcare, overshadowing decisions over allocations taken by democratically elected governments.

“When a state gives anything away, this has to be justified. The question here is whether it is right or wrong for a state to waive part of its ordinary entitlements to collect taxes. It can be considered to be right if, by giving that away, the state is doing something which is efficient, from the standpoint of the interest of society in general,” Henry Peter, a professor of law at the UNIGE and head of the Geneva Centre for Philanthropy said.

“But if a state waives part of its ordinary rights without this being efficient, then it shouldn't be doing it. This requires understanding whether it's efficient or not...but efficiency is very difficult to measure in that context. It's a fascinating topic, because you can look at it from a psychological or behavioural, or from a purely technical standpoint, and because in all cases there are indirect implications which are not easy to assess.”

With the Bill and Melinda Gates Foundation’s $4bn-a-year spend rate on charitable donations (the World Health Organization, the Global Fund and GAVI in Geneva to name a few)  and Amazon founderJeff Bezos this year establishing his $10bn climate foundation, it’s difficult not to single out the world’s biggest donors when weighing up the merits of philanthropy and the potentially distorting effect on public policy.

But we also need to be careful not to apply any assumptions about the world’s biggest donors to philanthropy as a whole, says Peter. “The bias coming from [a small pool of major philanthropists] in the United States might not be justified in the rest of the world.”

So assuming that tax incentives for philanthropic initiatives are effective and do benefit society - what is the best way to do it? As part of the joint-research venture, the OECD will release a report on Thursday exploring the different types of incentives practised by 40  countries that have taken part in the project. “The outcome will be, for the first time, a set of recommendations on the most efficient and equitable models," said Peter.

Two other major points of discussion will be cross-border philanthropy and the tax hurdles donations face when they leave a jurisdiction - and the booming growth of social entrepreneurship - or “B-corporations” that increasingly blur the lines between charity and business. "What we see that society has changed, and in a number of situations we can no longer say that businesses is business and philanthropy is philanthropy," Lideikyte-Huber

"These [hybrid] entities have in fact a growing importance and the question is whether it makes sense to favour and foster these behaviours through tax incentives as well? I think so, although this has not been yet very much explored," said Peter.

During the annual meeting of the World Economic Forum in 2019  Dutch historian Rutger Bregman, made a speech that went viral after blasting “stupid philanthropy schemes” on the grounds that taxation is the only real means of addressing the fundamental challenges posed by inequality.

Balancing the freedoms allowed to philanthropy with the requirements of justice and equality within society comes down to countries being able to create a fair taxation system.  By exploring this relationship between taxation and philanthropy Peter and Lideikyte-Huber hope to open up the debate on innovative approaches to tax incentives that can help deliver some genuine reform.