But there is a larger issue here, too, Madoff argues. While the tax system incentivizes people to set aside charitable funds, it does nothing to ensure that these funds ever reach charities engaged in charitable work. Philanthropists can get a big tax break for giving their money to their private foundations, or to donor-advised funds, charities that hold money that must be used for philanthropic purposes, but that have no requirement that the money ever be spent. But there’s no guarantee that the funds set aside actually end up making the world a better place. Private foundations are required to disperse 5 percent of their endowments per year, but they are allowed to put that money in a donor-advised fund. Each year, the majority of the money earned through capitalism is parked somewhere—not given to charity, or to organizations that help the poor or save the whales or give supplies to earthquake victims. Contributions to donor-advised funds reached $23.27 billion in 2016, an all-time high.
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“It’s very different to say you’re going to give away 50 percent of your wealth than to actually write the checks, make the transfers of wealth to the organizations,” Madoff said. “That’s where our charitable tax system is failing.” (Allen gave $2.5 million to one such donor-advised fund, the Silicon Valley Community Foundation, according to Forbes.) Six of the top 10 philanthropies in the country last year, in terms of the amount of nongovernmental money raised, were donor-advised funds, according to an annual ranking by The Chronicle of Philanthropy.
The kind of philanthropy that Allen did was also often very complicated, according to Maria Di Mento, a staff writer at The Chronicle of Philanthropy. He created a lot of his own institutes and initiatives, each of which requires time and lawyers and accountants. Thirty years ago, it was easier to just give away a lot of money, she said, but today it takes a lot of legal wrangling among tax advisers and lawyers and the nonprofit’s advisers.
And, of course, in Allen’s case, having money creates more money. The people at the top of Forbes’ annual list of billionaires are by and large the same people who have been there for years: Jeff Bezos, Bill Gates, Warren Buffett, Larry Ellison, David and Charles Koch. Anyone who earns a large amount of money has a wealth-management team whose job it is to put the money in a mix of investments that are all but guaranteed to grow the fortune. The wealth managers can invest in real estate, or in the stock market, or in tech, or just park all the money in a mutual fund and get smaller but steady returns. What’s more, labor is taxed at a higher rate than capital gains, so someone who earns money from investments, rather than from just a salary, receives highly favorable tax treatment that allows him to avoid high taxes. That was the bombshell that Thomas Piketty dropped when he published his massive book on inequality, Capital in the Twenty-First Century, in 2014. Wealth grows faster than income, he wrote, so in rich countries, a small elite will keep growing its wealth, while everyone else has to divide what’s left.