I recently published a post on the Stanford Social Innovation Review website outlining a theory of “why people give” that was centered on Maslow’s hierarchy of needs and the human desire for “self-actualization”.
The comments the post generated highlight a common set of counter arguments that I’d like to address.
“…I wonder if the wealthy individuals who create these foundations do so because they are self-actualized or need a tax break.”
The idea that people give because they “need a tax break” is widely believed, but is completely disingenuous. My professional expertise is in helping people structure the financial side of giving in the best possible way. The definition of “best possible” depends on the person’s goals, but limiting taxes is always a consideration. But let me state this clearly, you cannot legally structure a charitable gift so that the donor receives a net increase in their wealth. If you give away $1,000, you might be able to structure the gift so that you reduce your taxes by as much as $700. But at the end of the day you still have less wealth than if you kept your money and paid the taxes. The idea that wealthy individuals, who are sophisticated about money and taxes would give money away just to generate a tax deduction does not make any sense.
I do get plenty of phone calls from people who are interested in setting up some sort of charitable vehicle for the sole purpose of generating a tax deduction. But once they learn how foundations, charitable trusts and donor advised funds work, they are always disappointed and end up not setting one up.
All that being said, I do think that taxes drive the timing of donations. The decision to part with their money is a difficult one for most people. Even once they decide they want to make a donation, they often stall on actually making the gift. As the end of the year approaches, many donors decide to finally make the gift while it will still qualify for a tax deduction this year.
Comment: “Mother Theresa once said “give till [it] hurts you”. Only giving which hurts the giver in some way is supreme.”
This is another concept that I see a lot, which I simply don’t understand. The idea that Goodness comes from Pain, is deeply rooted in some religions. Personally I believe, as I wrote in my essay, that humans are hardwired to enjoy the act of helping others. Feeling happy and good about helping others is a sign of mental health. Needing to feel pain to feel good about yourself is called masochism.
But let me be clear that I don’t think that all donations are rooted in self-actualization. Certainly, many people (myself included) enjoy the social approval that comes from our peers when we make a gift. But this isn’t bad, this is part of the hardwiring that encourages humans to be social animals.
But there is one criticism of philanthropy that I find compelling; the idea that some gifts are motivated by a reciprocal benefit that is paid in non-monetary terms. For instance, a gift to a university with the hope that it will improve the donor’s children’s chance of acceptance. These kinds of gifts are absolutely real. But they are a small minority of philanthropic gifts. Since it is illegal for a donor to claim an income tax deduction for a gift made in exchange for something of value, these kind of gifts are a problem of our tax code, not a problem with philanthropy.