Making us Poorer The Benefits and Costs of Donor Advised Funds James Andreoni Univ of California San Diego and NBER What is a donor advised fund why should you care What was the biggest Charity in America ID: 671128
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Slide1
Is American Philanthropy Making us Poorer?The Benefits and Costs of Donor Advised Funds
James Andreoni
Univ
of California, San Diego
and NBERSlide2
What is a donor advised fund? why should you care?What was the biggest Charity in America
in 2016 and 2017?Slide3
What is a donor advised fund? why should you care?
Rank
Organization
Mission
Private Support
1
Fidelity Charitable Gift Fund
Donor Advised Funds
$5,393,562,395
2
United
Way Worldwide
Social Service
$3,708,331,756
3
Feeding America
Social
Service
$2,149,634,703Slide4Slide5
$3.65
Bil
.
Since 2010.
380% increaseSlide6
Rank
Organization
Mission
Private Support
1
Fidelity Charitable Gift Fund
Donor Advised Funds
$4,076,302,537
3
Goldman Sachs Philanthropy
Fund
Donor Advised Funds
$3,190,157,926
6Schwab CharitableDonor Advised Funds$1,922,695,8818National Christian Foundation Donor Advised Funds$1,532,256,0009Silicon Valley Community FoundationDonor Advised Funds$1,383,888,00010Vanguard Charitable EndowmentDonor Advised Funds$1,278,868,23214National Philanthropic TrustDonor Advised Funds$1,006,225,727
DAF Providers are coming to dominate charitable giving.7 of top 20
From Chronicle of Philanthropy list of 400 biggest charities for 2017, top 20Slide7
More than 10% of all giving passes through dafs
DAF Accounts as % of all SOI
Filers 0.7%
In 2014
0.7
% of donors have DAFs.
But DAFs yield 10% of all
charitable deductions
.Slide8
If dafs are so popular, why have I never heard of them?
Grants from DAFS
$51,200
Average Tax Deduction $ 6,100
According to the 2014 SOI, a household with a charitable deduction of $82,000 has an AGI of about $2 million per year.Slide9
So What is a donor advised fund? Begin with general tax policy in toward charitable givingSlide10
Gifts of cash:Taxpayers who itemize deductions can deduct gifts to a 501(c)(3) organization.
501(c)(3) refers to the IRS designation of organization type as charitable, not-for-profit
An
itemizer
files a Schedule A,
non-itemizers
just claim the standard deduction.
Only about 1/3 households are itemizers: generally have mortgage, property tax, or simply high state income taxes
Example
:
Marginal tax rate is 35%.
A $1000 deduction saves $350 in taxes.So the net cost to the donor is $1000-350 = $650. (Note: Not counting state taxes: E.g. In California save an additional $110 in state taxes.)Slide11
Gifts of Non-cash AssetsIt is easiest to think of giving appreciated shares of stock, but gifts also include artworks, real estate, collectables, and life insurance, to name a few.
Taxpayers who itemize can deduct the
fair market value
of the asset given to a 501(c)(3) organization.
Assets worth more than $5000 must be appraised.
Most charities have a rule that any assets received, especially publically traded stocks, are sold immediately.
Since the donor never liquidated the
asset, the donor
owes no Capital Gains Tax.
Since the charity is a non-profit, it owes no tax either.
NOTE: The difference between the donor or recipient liquidating the asset is just a day, but it can mean extensive tax savings for the donor.Slide12
Gifts of Non-cash Assets, continuedExample: Marginal tax rate is 35%. Donate shares of stock currently trading for $1000.
Stocks were purchased in the past for $600, thus contain a $400 capital gain.
The donor deducts $1000 and saves $350 in income tax as before.
The charity receives the shares and immediately sells them for $1000.
Neither the donor nor the charity owes capital gains tax, currently 23.8%
Had the donor liquidated the stocks and given the proceeds, she would have paid an tax on capital gains of .238 x 400=$94.
Now giving $1000 in a appreciated assets cost $650-$94 =$556Slide13
Missing Market for Giving Appreciated Assets:Giving even $100 in stocks to a charity is difficult, and transfer and trade fees would eat up most of the cost advantages
Many charities
require minimums of $5000 of $10,000 to accept non-cash gifts.Slide14
So What is a donor advised fund?Wouldn’t it be wonderful if …There were a charity intermediary who would accept your contributions of capital gains assets, with a minimum initial contribution of $5000.
The intermediary is a 501(c)(3) and allows you the full tax deduction.
You can request the funds be liquidated by the intermediary, tax-free.
You can then send cash to your favorite charities in any amount over $50.
The intermediary allows saving & investing the money as you like (minor limits).
Unlike foundations, there are time limits for transferring money from the account to a charity that provides actual charitable goods and services.
That
is a Donor Advised Fund!Slide15
How people use DAFs?Saving for future gifts.
Tax Shifting.
“Managing” exposure to capital gains tax.
Using the new tax savings to give more to charity
.
A note on DAF vocabulary
“Contributions” mean deposits in DAF accounts
“Grants” means donations made from the DAF to other 501(c)(3) charities.Slide16
1. Saving upQuestion: Does it ever make sense for someone to save money in a DAF to give away later?This is a question about present value
.
What
is the present value in year
of putting $1000 into a DAF and giving the balance to charity in year
Notice that
if the asset is growing faster than the discount rate, the present value of your
tax savings
is growing as well. That is,
if
then PV increases.So in general it makes no sense to use a DAF to get the tax savings sooner. DAF saving must have another goal. Slide17
2. Tax shifting A. Abigail is self-employed and some years are lean while others are flush. She would like to give more when her tax rate is high and less or none when her tax rate is low, but she also wants to give about the same amount each year. B. Brian is looking to retire soon, at which point he will support himself by liquidating his capital
assets.
When he does, his MTR will fall from 39.6% to the LTCG tax rate of
23.8%.
He’d like to “pre-pay” his future giving now, when the price is lower.
C.
Cyrus
wants to make a major gift that will exceed the 30% of income cap. He can carryforward the donation for 5 years, or he can “pre-pay” and get the tax benefits sooner, which could be preferred.
DAFs help these three move
shift the timing and/or amount of taxes without
changing what the charity gets.Slide18
3. “Managing” Capital Gains Imagine Danielle planned to give $10,000 in cash to charity this year
Instead,
Danielle
finds the asset in
her
portfolio with
the greatest capital gains
and gives $10,000 of that stock to your DAF.
With the $10,000 cash
she
had ready to give to charity
she buys back that same stock.
Nothing real in
her portfolio has changed, but she now has a portfolio with lower capital gains burden. Economists call this Tax Arbitrage. This is very similar to what the IRS calls “washing” capital gains. Washing gains is illegal, but this use of DAFs is not. Slide19
Giving more to CharityThere are two ways DAFs can encourage more giving. Intensive Margin: Those who already give decide to give more. Extensive Margin: Those who never gave now become givers.
Unfortunately, the law does not require reporting on individual DAF accounts, only on aggregates.
There is no way to distinguish the two.
Slide20
Benefits and Costs OF dafSObjective of DAF Tax Policy: Encourage more charitable givingBENEFIT: New charitable giving that can be attributed entirely to the DAF policy.
COST:
New
losses in tax revenue due to
DAFs
Important: tax savings by the donor are a social cost, not a benefit, of DAFs.
It is what the government spends in order to get more giving.
If the costs exceed the benefits, then the government could have spent those tax dollars to greater effect by simply giving them to
charities directly.Slide21
Benefits and CostsExample 1: The donor has habitually given $10,000 in cash each year to charity. The DAF allows this same habit but by giving appreciated assets, the donor simply saves taxes about $100 per year extra but gives no more
to charity
ALL COST, NO BENEFIT
Example 2:
The donor above decides that
she
will instead increase
her
donation to give
her
whole tax savings to charity
in addition to the $10,000.
BENEFITS = COSTS
Example 3: The donor’s brother was on the fence about donating, but seeing the extra tax benefits of DAFs decides to become a donor. BENEFIT > COSTSlide22
What we need for Benefit-Cost Analysis(Most important is to measure the 3 main costs of DAFS: )Data: On DAF account holders and on a comparable set of givers without DAFs.Discount Rate
How much DAFs increase the use of non-cash
g
ifts.
Percent of capital gains contained in
non-cash gifts.
Return on investment on money saved in a DAF
The “shelf-life” of DAF’s “inventory” of charitable gifts. (
go
)
Amount of new giving encouraged by DAF tax policy. Slide23
1. Data DAFs IRS 990 information for 85 organizations that supply DAFs from 2008-2014. A subsamble of 13 DAF-only organizations, data verified and 2015 added
.
Reason: more reliable numbers on non-cash contributions.
While only 13 organizations, it
accounts for over 60% of the assets
in all 85 organizations
.
Non-DAFs
Statistics of Income
sample of tax filers with
AGI of $500,000 and above
.
“SOI High Income”Slide24
2. Discount Rate Government offices, like the EPA, use one of three discount rates. 1. Consumer Discount Rate: 3% Meant to capture long term economic growth rate.2. Financial Discount Rate: 7% Meant to capture the long run return in the stock
market
.
3.
Externality Discount Rate: 10%
Meant
for cases where the social return exceeds the
private return
, as
is likely in
charitable giving. What discount rate we should probably use:Since funds are invested in the stock market,
7
% is the conservative choice. But we will consider all 3.Assumption 1: We will evaluate at 3%, 7%, and 10% discount rates. 7% is favored Slide25
3. DAFs Increase non-cash Giving
DAFs on average tend to have about 15% more non-cash assets funding them than the SOI High Income sample does
.
Assumption 2:
DAFs increase the percent non-cash contributions by about 15%. Non-DAF contributions are 50% non-cash while DAF contributions are 65% non-cash.Slide26
4. Percent Capital Gains in Non-Cash Point here is to predict the highest fraction of capital gains in the portfolio, not the average.
Average DAF account is opened when the donor is 55.
Average age of DAF account holder is 65.
These people have had a lot of time to gather capital gains.
Buying the S&P 500 in 1987 would be 89% capital gains now.
Buying Apple in 2002 would now be 98% capital gains.
Assumption 3:
Non-cash assets
contain 50% to 75
% capital gains.
75% is preferredSlide27
5. Return on DAF savings Since we do not know when in the fiscal year contributions came in and grants went out, we make the unrealistic but necessare assumption that all contributions and grants happen on the last day of the fiscal year. Then assets change yearly as
Find the best fitting value of
Assumption 4:
Assets saved in DAFs grow at an annual rate of 5.9%.
Slide28
Shelf Life of DAF GrantsOne can think of contributions into DAFs as creating an inventory of grants that are waiting to be paid. Question: How long is a dollar contributed to a DAF today left “on the shelf”?Like a cost-accountant, we assume a First-In-First-Out accounting method: All dollars in inventory before today must be granted away before the dollars contributed today can be granted away. This analysis can be visualized…..Slide29
Contributions to DAFs begin to come “off the shelf” in the third year and finish coming off the shelf in the 4
th
year.
Assumption
5:
FIFO accounting.
DAF
contributions
stay
in inventory until year 3, when about 10% of initial contributions are granted, with the rest granted in year 4.
bSlide30
Benefit-Cost AssumptionsTwo types of assumptions:1. Capture features of the representative dollar
given through DAFs,
not the features of the average donor.
2. Counterfactuals that allow you to bound the best and worst cases.Slide31
Benefit Cost Assumptions
1. Real discount rates will be 3%, 7%, and 10%. Preferred is 7%.
2.
Infation
is 2% per year.
3. Non-DAFs gifts are 50% non-cash, and DAFs are 65% non-cash.
4. Non-cash assets contributed
contributed
to DAFs and non-DAFS contain 75% capital gains
in our favored assumption, and 50% capital gains in our conservative assumption
5. Assets in DAFs will increase in value by 5.9% annually.
6.
DAFs will have a "shelf life" of 4 years
. 20% of the initial contribution is paid in year 3, and the rest in year 4.7. $1000 is Contributed to a DAF at the end of Year 0. This represents the average dollar donated rather than the dollars of the average donor.8. Marginal income tax rate is 39.6%. Capital gains tax rate is 23.8%.Slide32
Benefit-Cost Assumptions
Counterfactuals
Case 1: Assume DAFs do not increase giving. This assumes DAFs only allow prior granting plans to be carried out while generating no new giving. This case sets a likely maximum loss due to the DAF policy.
Case 2: Here we presume DAFs do have a net benefit by creating new
charitable giving, and
ask how much of the DAF contributions we see
must represent new giving in order to meet benefit-cost criteria
.Slide33
Benefit-Cost Results: 7% Discounting
Lowest
Estimate
Preferred
Estimate
Discount
Rate
7%
7%
Capital
Gain as % of Value
:
50%75Worst Case: No increase in Giving From DAFs:Loss of DAFs as Percent of Contribution16.6%18.4%Best Case: Percent of New Giving caused by DAFs Needed to satisfy the Benefit-Cost Criteria16.7%21.0%Slide34
Benefit-Cost Results: 10% Discounting
Lowest
Estimate
Preferred
Estimate
Discount
Rate
10%
10%
Capital
Gain as % of Value
:
50%75%Worst Case: No increase in Giving From DAFs:Loss of DAFs as Percent of Contribution29.6%31.6%Best Case: Percent of New Giving caused by DAFs Needed to satisfy the Benefit-Cost Criteria32.9%42.3%Slide35
How did the 2013 Tax change affect giving?DAFs Increase non-cash Giving
DAFs Increase non-cash Giving Slide36
How did the 2013 Tax change affect giving?DAFs Increase non-cash Giving
DAFs Increase non-cash Giving Slide37
How did the 2013 Tax change affect giving?
Clear Change in Contributions to DAFs, but unclear whether the it is positive or negative.
The lack of a clear positive shift is troubling.
Grants from DAFs are far more stable. Slide38
How did the 2013 Tax change affect giving?
DAFs: 4.1% increase
SOI: 2.9% Increase
So 1.2% higherSlide39
How did the 2013 Tax change affect giving?
DAFS: 4.7 points increase
SOI: -3.8 points decrease
8.5 percentage point
bigger difference
At 50% capital gains, raises costs of DAFs by about 1%Slide40
How did the 2013 Tax change affect giving?
Nonetheless, a clear surge in demand for DAFs, beginning 2012.
The rate of growth of numbers of DAF accounts doubles or triples from 2012 to 2014.
The increase may begin in 2012 due to fiscal years of DAFs that include 2013 Slide41
What costs more, Delay in Giving or Lost Tax on Capital Gains?
No Policy
Change
Move all giving up from years
3 and 4 to …
Rather
than forgive 100% of Capital Gains Tax, forgive only…
Year 3
Year 2
80%
60%
40%
Benefit
of DAF per $1000 gift448457468472495518Benefit of No-DAF per $1000 gift494499504494
494494
Net Gain (Loss) of DAFS
-46
-42
-37
-23
0
24
The social costs of Delay and of forgiveness of Capital GainsSlide42
Corporate Compensation: Mostly Non-Cash
Company
Executive
Cash
$mil
Equity $mil
Other
Total
Non-cash
as
Pct
of Total
FacebookMark Zuckerberg0.00000105.85.8100%AmazonJeff Bezos0.0801.6
1.795%
Oracle
Safra Catz
0.95
40.0
0.0
40.9
98%
Adobe
Shantanu Narayen
2.35
17.6
0.1
20.0
88%
Chevron
J.S. Watson
3.96
14.6
0.2
18.8
79%
HP
Meg Whitman
4.58
30.7
0.3
35.6
87%
Walmart
Sam McMillon
6.13
15.2
0.5
21.8
72%
Google
Eric Schmidt
7.25
100.4
1.0
108.7
93%
Apple
Tim Cook
8.37
0
0.4
8.7
4%Slide43
The Price Elasticity of Giving for the RichPrice elasticity asks “if the government subsidizes your giving by spending $x in lost tax revenue, does society get at least $x in new charity as a result.If price elasticity is greater than 1, the answer is Yes.As Abigail Payne shows, the elasticity is above 1 for the poor, who tend to get no subsidy
And less than 1 for the rich, who get very big subsidiesSlide44
Fundraising costsOther undiscussed costs and benefits have to do with fundraising.DAFs are good for community foundations and investment houses as sources of profits.They could be good because they tell us where the money is.But if charities are all spending money competing for the same money, then most of that money will be wasted.
Abigail Payne and I estimated that the marginal cost of $1 of charity is $0.17
Marginal cost of raising and spending $1 of taxes has been estimated at $0.07-0.12.
The cost of fund-raising could be higher than cost of raising taxes for direct grants.Slide45
Other support for DAFsSlide46
DAFs make giving simple Fidelity Investments can offer the same services to Investment customers that it does to customers of Fidelity Charitable. This is not a benefit of DAFs. Slide47
DAFs “Democratize” GivingTwo-thirds of households do not itemize income taxesMedian household wealth is under $30,000Appears to be that DAFs allow the top1-2% act more like the top 0.1%Slide48
Other Criticisms of Subsidizing Giving by WealthySlide49
The Effect of Inequality on The Composition of Giving
Broad 1
Broad 2
Narrow
Rich
Poor
Rich
Poor
Rich
Poor
Arts,
Culture
X
YZInternationalXYEnvironmentXY
FoundationsX
Y
Religion
X
Y
Education
X
Y
Human
Serv
X
Y
Z
Health
X
Y
Public-Society
XSlide50
The Effect of Inequality on the composition of GivingThe
Dracmatization
of the provision of public goods. (One-coin-one-vote)
Charitable goods that serve primarily wealthy communities are growing faster than charities that redistribute from wealthy donors to poor recipientsSlide51
Can onE rich Person affect national Priorities?
Growth Rates:
All of NIH: 0.3%
NIH
fo
PD: -0.7%
Difference -1%
MJ Fox: 11.7%Slide52
Wealthy people give small fractions of wealth.
Bill Gates
4%
David Koch
2%
Jeff Bezos
2%
Larry Page
4%
Warren Buffett
1%
Sergey
Brin
10%Mark Zuckerberg2%Jim Walton5%Larry Ellison0.1%Robson Walton
2%Michael Bloomberg
1%
Alice Walton
0%
Charles Koch
2%
Sheldon Adelson
2%
People on both Forbes Most Wealthy People and the Philanthropy 50 biggest DonorsSlide53
Policy ChangesThe huge inventory of Grants is not itself a huge cost of DAFsMaking all the contributions paid out in year 2 or year 3 rather than year 4 generates only a tiny and insufficient improvement.Bigger effects result from more stringent application of the wash rule, and limiting the purely technical avoidance of capital gains tax
.
Example:
Allowing the income tax deduction on the full amount, but forgiving only, say, half of the tax on capital gains, still preserves the incentive to use DAFs for tax smoothing, but greatly increases their net benefits.
Note, forcing the deduction to be either income or capital gains tax, but not both, may not solve the problem. Slide54
ConclusionAn error in reasoning in the DAF debate: tax savings for individuals is a social cost of the tax policy, not a benefit.The benefit of DAFs is the new donations they generate.
It appears that the greatest use of DAFs is for shielding capital gains, and too few dollars of new charity are generated.
Adding to this is potentially greater cost of fundraising….
….And the loss of democratic control.
We live in a society in which dollars vote,
moreso
than people.
And were the benevolent voluntarily bear the greater burden for providing goods and services that benefit society. Slide55
The EndThank you.Slide56
ConclusionsDonor Advised Funds are a “charitable intermediary” that allows donors the ability to maximize their tax savings byGiving more in terms of appreciated assets, even for small gifts
Shift deductions from low tax times to high tax times
Deduct windfall gains in the year they are realized, but spread the charitable grants smoothly out for many years.
DAFs have other benefits, but most of these are easily duplicated without DAF tax advantages.
Because of their differing forms of wealth and the cost structures of DAFs, DAF users tend to be very high income, capable of contributions $80,000 per year to DAFs.
Median income households cannot take advantage of the capital gains saving, plus face higher proportionate fees
.
Fewer than 20% of tax filers itemize returns, that is, can even claim a charitable deductionSlide57
ConclusionsMost of the tax savings of DAFs, therefore, go to the top 0.7% of incomes. Compared to the SOI high income sample, the tax changes of 2013….Had a minor effect on the intensive margin where costs we slightly greater than benefits in terms of existing givers giving more (the intensive margin)
But say over 4 times as many new accounts in the three years including the tax increase, thus there was an large response on the extensive margin
Depending on whether these are new givers, or just tax-arbitrageurs, will determine the ultimate implications drawn on the benefits and costs of donor advised funds.