The Generous Loophole: Is Our Charity System Meeting or Missing the Moment?

We all love the idea of charity. Giving back, supporting good causes, and improving the world. What’s not to love? And in the U.S., the government encourages this generosity with a hefty system of tax deductions. Maybe we have found a  win-win that we can actually get behind. You give, a charity gets, and you get a tax break. But what if this "public subsidy"—our collective investment in private do-gooding—isn't always the fantastic deal for society it's cracked up to be? What if, instead of fueling immediate, impactful change, it's helping to create massive, tax-sheltered piggy banks that benefit from our dollars but delay the good?

The charitable tax deduction is a fantastic deal for society when it fuels philanthropic efforts that tackle problems now, especially outside the coffers of university endowments. But when it allows billions to be socked away in endowments or investment accounts, growing tax-free for some distant future while today's crises rage? That’s when the ROI for the average citizen starts looking decidedly negative.

Our Tax Dollars at Rest, Not at Work: The Real Price Tag of "Charity"

Let's be clear: when we talk about the "cost" of charitable deductions, it's not just the $50+ billion in federal income tax revenue that the public forgoes each year. That’s just the tip of the iceberg. The true public subsidy is a sprawling, multi-layered affair.

Think about it:

• State-Level Giveaways: Most states pile on their own charitable deductions, adding potentially tens of billions more to the national tab.

• Massive Untaxed Growth: Once money lands in a private foundation or a Donor-Advised Fund (DAF), its investment earnings, including capital gains, dividends, and interest, grow largely tax-free. This isn't chump change; estimates for this forgone tax revenue run into the tens, if not hundreds, of billions annually.  Not to mention the things this money is invested in are often at odds with the public good and the missions of the foundations that claim the money.

• The Appreciated Asset Advantage: Donate stock that’s skyrocketed in value? You can often deduct its full current worth and nobody pays capital gains tax on that growth. It’s a sweet deal for wealthy donors, but another way the public subsidizes the private philanthropic choices of a wealthy few.

• The Invisible Subsidies: Don't forget property tax exemptions for nonprofits (costing localities billions) and access to tax-exempt bond financing.

Add it all up, and we're talking about a public investment easily exceeding $100 billion, and potentially much more, every year. That’s a colossal sum of our money indirectly funding "charity." The question is, are we getting our money's worth, especially when so much of it isn't actually doing anything right away?

Saving Lives Now vs. Growing Fortunes Later: The Ticking Clock of Need

Imagine you have a cure for a disease that costs $5 to administer and saves a life. Every dollar spent today on that cure has an immediate, profound impact. Imagine putting that same $5 in an investment account and saying, "We'll use this to save lives... eventually. Maybe it'll grow to $7 first!"

This is the crux of the "time value of money" in philanthropy. A dollar deployed today for an effective intervention is often worth far more to society than a dollar (even a dollar plus interest) deployed tomorrow. Why?

• Compounding Good: Early interventions like childhood vaccinations (costing as little as $50-$100 per quality-adjusted life year, or QALY, gained) or deworming programs that boost school attendance and future earnings create ripple effects of positive change that compound over time.

• Preventing Escalation: Addressing problems like poverty or environmental degradation now can prevent them from becoming exponentially more costly and damaging later. Think of it as fixing a small leak before it floods.

• Urgency: Some needs simply can't wait. Malaria nets can save lives now for around $5,500 per life. Vitamin A supplements can do the same for about $3,500. These aren't abstract future problems; they are today's life-or-death realities.

When tax-subsidized charitable dollars sit on the sidelines, invested for growth rather than impact, we incur a massive opportunity cost. We forgo the chance to solve urgent problems, alleviate suffering, and unlock human potential today.

Billions on the Sidelines: The Great Philanthropic Parking Lot

So, where is all this generously subsidized money going? Increasingly, it's flowing into Donor-Advised Funds (DAFs) and private foundations, where it often sits, and sits, and sits.

The numbers are staggering:

• DAFs: Assets in DAFs ballooned to over $251 billion in 2023. That's up from $152 billion in 2020—a 67% increase in just four years! 

• Private Foundations: These behemoths held an estimated $1.48 trillion in assets in 2023.

We're looking at nearly $1.75 trillion in tax-advantaged charitable vehicles. And this figure is projected to hit $2 trillion soon. 

"But they pay out money!" you say. Yes, they do. Private foundations are legally required to pay out about 5% of their assets annually. DAFs? They have no legally mandated payout rate. While DAF industry reports often tout payout rates around 24%, independent analyses suggest the effective rate might be closer to 10% when accounting for DAF to DAF exchanges and other “payouts” that don’t actually reach communities.

Even with these payouts, the sheer volume of new contributions and investment gains means the total pot of money not being spent is still growing significantly. It’s like emptying a swimming pool with a teaspoon while a firehose refills it. (Except in this case you are intentionally growing a pool into a vast lake even though the government has given you a tax break to get that water out into the desperate world!)

The People's Investment, The People's Loss?

This brings us to the heart of the matter: when our tax system subsidizes the creation of these vast, slow-moving pools of capital, is it a good deal for society? We argue it’s often not.

• Public Subsidy, Private Timeline: We, the taxpayers, provide the upfront subsidy through tax deductions and the ongoing subsidy of tax-free growth. But the benefit to the public can be delayed for years, decades, or even indefinitely.

• The Opportunity Cost Bites Hard: Every billion dollars sitting in a DAF or foundation earning investment returns is a billion dollars not funding malaria nets, not supporting early childhood education for disadvantaged kids, not investing in clean water, and not tackling climate change with the urgency it demands. The fund's financial gain often pales compared to the societal good waived. Rather than meeting the moment (like the silver tsunami opportunity in employee ownership), these dollars are missing the moment.

• Fueling Inequality? Critics argue this system allows enormous wealth to be shielded from taxes and concentrated in the hands of a few, whose philanthropic choices may not align with society's most pressing needs. While the wealthy get a tax break, urgent community needs may go unmet.

When the primary outcome of a public subsidy is the growth of private fortunes earmarked for "charity someday," rather than the immediate betterment of society, the ROI for the average citizen looks pretty bleak. It can even look negative.

Let's Make Our Generosity Count—Now!

So, what's the alternative to this philanthropic slow lane? How do we ensure our collective investment in charity works for us, and works now?

The conversation is already happening. Ideas include:

• Real Payout Rules: The Accelerating Charitable Efforts (ACE) Act, for example, proposed time limits for DAF distributions and tighter rules for foundation payouts. If public money is involved, public benefit should follow—promptly.

• Transparency for Publicly Sacrificed Dollars: We need far more transparency, especially for individual DAF accounts, to see where the money is (or isn't) going.

• Challenge Perpetuity: The idea that foundations must exist forever is being questioned. Many are opting to "spend out" their assets to make a bigger impact now, recognizing that today's problems are too urgent to wait for "someday". Imagine if the Kataly Foundation, with its ten-year spend-out strategy to empower Black and Indigenous communities, or the Stupski Foundation who is “returning all of their resources to the community by 2029”, became the norm rather than the exception.

  
  

The Bottom Line: A Good Deal Demands Action

The charitable tax deduction is a powerful tool. But its power is squandered when it merely facilitates the hoarding of wealth, deferring societal benefit while immediate needs go unmet. A system that allows hundreds of billions in tax-subsidized dollars to sit on the sidelines, growing private philanthropic fortunes while the world faces urgent crises, is not a good deal for the citizens who ultimately foot the bill.

It's time to rethink what "charitable" truly means in the context of these massive public subsidies. True charity delivers a real return on the public's investment and is active, urgent, and focused on impact now. Let's ensure our policies and tax subsidies encourage a different world for the next generation, rather than an up and to the right assets graph for foundation staff to feel proud of.