2003-2004 Essay Contest

First Place Essay - Advanced Economics

The 2lst Century: Gilded Age or Golden Opportunity?

Jed Glickstein
Edina High School
Edina, Minnesota


The Internet-fueled boom of the 1990s produced a stunning rise in U.S. productivity and gross domestic product (GDP). It also resulted in astounding stratification across class lines; according to Susan Stabile, CEOs saw their pay rise by 500 percent between 1990 and 2000, compared to just 40 percent for the average worker during the same period. By 1998, as reported in The Economist, the United States could lay claim to 4.8 million millionaires, 170 of them with fortunes totaling over $1 billion. Not since the Gilded Age, a century earlier, had so much new wealth been created in so short a time. Led by robber barons like Andrew Carnegie and John Rockefeller, the moneyed class of the 1890s turned to philanthropy as a way to meet social needs. The sudden acceleration of inequality, while troublesome, offers the opportunity to revive this time-honored instrument of wealth redistribution. One hundred years after the robber barons, the federal government would be wise to adopt policies that unleash the vast potential of charitable giving.

Although the benefits of the U.S. economic expansion have been weighted toward the upper class, aggregate earnings of the baby boomer generation provide a lucrative source of potential bequests. Alan Reynolds, director of Economic Research at the Hudson Institute, predicts that charities could be the beneficiaries of up to $10 trillion by 2040. Americans see themselves as a generous people, and rightly so—according to The Economist, they gave over $200 billion to charity in 2000, around 2 percent of GDP. Americans also become generous earlier in life, … giving chunks of their money away once they are worth around $20m, whereas in other countries the threshold is more like $l00m."Encouraging such giving would go a long way toward alleviating a number of fiscal and social problems.

Modern philanthropy offers several features which make it politically attractive. Primarily, it is a popular alternative to direct tax-and-spend measures. Faced with a soaring federal deficit and a mushrooming elderly population, the government will be under intense pressure to slash Social Security benefits in the coming years. Recent comments by Federal Reserve Chairman Alan Greenspan suggest that painful cuts may have to come sooner than expected." Charitable organizations can lessen the burden on government without the political risks of increased taxation or the bureaucratic wastefulness associated with government programs. Social issues are particularly well-suited to charities because their solutions require flexibility and a personal commitment that large bureaucracies fail to provide. Secondly, charity is a mechanism by which individuals who feel strongly enough can provide a service not yet demanded by the majority of citizens. Jane Mavity and Paul Yevisaker explain that charities thus act as decentralized laboratories of public policy, "carry[ing] on privately a function that is essentially the counterpart of what is done by the public legislatures." The historical record supports this claim. Almshouses, mental institutions, public libraries, higher education and scientific facilities are just a few of the services that first emerged through private finding.

The same social forces that shaped the philanthropy boom of the Gilded Age are stirring again today, but there are important differences. Changes in the size and scope of the federal government have created dependencies on government handouts for some charities. Scandals and a lack of accountability by certain institutions have dented the public trust in nonprofits. There is a growing stagnation in the sector, with most contributions going to the "old" charities of Rockefeller, Carnegie and Ford. Many charities suffer from the "free-rider" problem, since philanthropies produce positive externalities that an individual can benefit from even if they do not donate. Therefore, government initiatives to streamline the charitable process and increase the number of donors would be worthy policy objectives.

Promoting private philanthropy is a tricky business, however. A growing complexity in the regulatory environment has unduly burdened institutions and individuals with regulations and paperwork. Therefore one of the most straightforward suggestions offered to promote charitable donations is to simplify the tax code. Several other proposals have been floated to encourage giving, including offering federal grants or repealing the estate tax. But these proposals are problematic. Federal grants to charitable organizations may cause individuals to donate less as they are "crowded out" of the market—that is, they see no need to donate to local agencies which are already being partially subsidized by the government. Repealing the estate tax may simply cause a donor to give near the end of their life instead of throughout a lifetime. Indeed, Myron Frans, a local tax attorney, believes that giving patterns are already starting to change because of the Bush administration's tax cuts."

Tax reform offers the greatest promise for reviving philanthropy. Currently, tax law makes it not worthwhile for the non-homeowning public to itemize charitable donations, because without the tax benefits of homeownership it makes fiscal sense to claim the standard deduction. Studies by Martin Feldstein and Amy Taylor propose extending some form of a charitable tax credit to this segment of the population, resulting in a net increase in giving. For example, by allowing individuals to claim an optional 30 percent credit in place of an itemized tax deduction, the government could make donations from low- and middle-income families much more attractive. Extending the credit to non-itemizers would further augment contributions. Numerical modeling suggests the increase could be as much as 20 percent over current levels. Such a policy could create a fertile new base for charity.

Another avenue that shows promise involves changing tax treatment for corporate philanthropy. Certain provisions in the Internal Revenue Code favor corporate giving over individual donations by taxing income twice—once upon entry into the corporation and once upon distribution to shareholders. However, corporate gifts are often given without shareholder consent and, in the worst case, bear a striking resemblance to nepotism. To avoid these problems, Professor Linda Sugin has suggested that corporations instead institute company grant-matching programs, so tax law can treat contributions as a "fringe benefit" of employment. This should result in the twin benefits of increased accountability and efficiency in charitable giving; it could even "induce Congress to return to a more generous contribution deduction for non-itemizing taxpayers." These two proposals illustrate the interrelated nature of giving, suggesting further economic studies in both fields are in order.

Despite some uncertainties, the future looks bright for philanthropy. New technologies and financial instruments promise to ease the charitable process for all Americans. Philanthropies are expanding their activities overseas and offering exciting opportunities for international cooperation. By supporting philanthropy arid individual generosity, government can share the burden of helping those left behind by a boom in income growth with the sector that invented social welfare programs in the first place. With sound policy and creativity, this unprecedented windfall of the 1990s could become an equally unprecedented force for the greater good.

Endnotes

Stabile, Susan. "One for A, Two for B, and Four Hundred for C: The Widening Gap in Pay Between Executives and Rank and File Employees." 36 U. Mich.J.L. Ref. 2002.

"The Gospel of Wealth." The Economist. 28 May 1999.

Reynolds, Alan. "Death, Taxes And Giving: The Conventional Wisdom and Why It Is Wrong." Philanthropy Magazine, Winter 1997.

"Giving Something Back." The Economist. 14 July, 2001.

Testimony of Chairman Alan Greenspan. Feb. 25, 2004.

Douglas, James. "Why Charity: Towards a Rationale for the Third Sector." Program on Non-Profit Organizations Working Paper No. 7, July 1981: 81.

Frans, Myron L. Partner, Faegre & Benson LLP. Telephone Interview. 8 March 2004.

Feldstein Martin and Amy Taylor. "The Income Tax and Charitable Contributions." Econometrica, November 1976: 1201-1222.

See Blair, Margaret M. "A Contractarian Defense of Corporate Phi1anthropy" 28 Stetson L. Rev. 27 1998 for a particularly egregious example, in which Occidental Petroleum Corp. bequeathed a sum equal to 11.5 percent of pretax earnings to the personal art museum of a former chairman.

Sugin Linda. "Theories of the Corporation and Tax Treatment of Corporate Philanthropy." 41 N.Y.L. Sch. L. Rev. 835, 1997. Specifically, Sugin's argument concerns revising the traditional anthropomorphic concept of the corporate entity in favor of the "nexus-of-contracts" model, replacing the classical view of the corporation as a for-profit entity with a model composed of many aggregate, autonomous parties.

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