The Trouble With Billionaires

Those who make their living celebrating the lives of the rich were clearly delighted last month by the charity pledge from Bill Gates and Warren Buffet, since it showed what great guys billionaires really are.

So it wasn't surprising that Robert Frank, chronicler of the rich for the Wall Street Journal, took offense this week when we wrote a piece debunking the virtues of philanthropy.

Our piece was actually an excerpt from our new book, The Trouble with Billionaires, and philanthropy is just one of our targets.

But it's an important one, partly because the charitable givings of the rich help soften their image and convince the public that the rise of a new ultra-wealthy super class may actually be a good thing, since we badly need them to fund our universities and other public institutions.

Attacking The Trouble with Billionaires in his daily blog, Frank argued that good education costs money and "the wealthy are among the few that can supply that right now. Would universities be better off if the wealthy spent their money only on yachts and planes rather than global-studies programs?"

But why are yachts and planes the only alternative?

How about taxes?

Our point is that if the wealthy paid taxes at the rate they used to pay only a few decades ago -- in the prosperous early postwar years before the onset of the Reagan revolution -- public institutions and programs could be properly funded and wouldn't be so dependent on the largesse of the spectacularly rich.

There's obviously a huge difference between funding that comes through the private charity -- the favored method of the well-to-do -- and funding that comes through the tax system.

Private charity leaves the wealthy in control, allowing them to determine where the money will go, which causes will get funded and which won't.

The wealthy are notoriously uninterested in financing community centers and recreation facilities in poorer parts of town.

Instead they show a penchant for funding institutions and facilities where they'll win the attention and admiration of their peers -- with their names on glittering opera houses, concert halls, and buildings at elite universities and private hospitals.

And of course they're extremely generous with private think tanks, particularly ones that promote the interests of the financial elite and provide those interests with an air of academic legitimacy.

Indeed, philanthropy provides the rich with some significant benefits. The benefits to the public are less clear, once the lost tax revenues are factored in.

In our excerpt that offended Frank, we highlighted the case of the University of Toronto, which has recently received a $35 million dollar donation from Peter Munk, owner of Barrick Gold, the world's largest gold mining company, to establish a new school of global affairs within the university.

Under the deal struck between Munk and the U of T, Munk will have considerable influence over the new global affairs school, since the school's director will have to report to him annually and final payment will be withheld until after Munk has had a number of years to assess his satisfaction with the school. (It seems unlikely then that the university would appoint professors whose research might touch on the negative impacts of multinational corporations.)

Munk also stipulated that a right-leaning think tank (with an interest in bringing Canada more into line with U.S. defense priorities) be located within his global affairs school, giving this little-known organization the prestige of being associated with the University of Toronto.

And Munk is getting all this influence and prestige for a very good price. He enjoyed fawning front-page coverage in Canada's national newspaper when he made his $35 million donation last spring. But, once the tax deductions are factored in, his donation will only $19 million (paid out over a number of years) and could be a lot less than $19 million, if his donation is in the form of publicly-traded shares, as most donations are.

(The tax reductions for philanthropy are equally generous in the United States.)

Meanwhile, most of the cost of establishing Munk's new school will actually be borne by Canadian taxpayers, who will kick in $66 million, as well as paying for the school's ongoing operating costs. As a result, Munk's contribution will be much less than one-fifth of the total cost. The school however will be named after him in perpetuity, so that the thousands of people who daily pass by the handsome building on Toronto's swanky Bloor Street will be reminded of Munk's generosity and commitment to global understanding.

Thus, for $19 million (possibly a lot less), Munk -- whose company has come under attack from environmental and indigenous groups in developing countries -- has bought himself an impressive personal legacy at Canada's leading university. He's also getting to direct some $66 million in public money (with much more to follow) towards a global affairs school that he will ultimately shape.

Frank is right that "Good educations cost money." And if the wealthy were made to pay a larger share of the tax burden, universities could afford to provide them, without having to go cap in hand to billionaires.

In fairness to Gates and Buffett, both billionaires have also supported higher taxes for the rich. Best if they'd stick with that.