Giving Thanks for a Meritocracy Instead of Aristocracy

Although I appreciate all the good philanthropy does, I wish to alter the way supersized philanthropy operates in America as part of my commitment to keep America true to our founding freedoms.
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Thanksgiving Day was also my birthday this year. Like many of my philanthropic friends, I want to give back to this society that has done so much for me and for those in need, especially at this time of increasing inequality. This weekend I shuttled between friends and family surviving on food stamps and those whose spreads employed the best that florists and caterers had to offer.

It made me think that although I appreciate all the good philanthropy does, I wish to alter the way supersized philanthropy operates in America as part of my commitment to keep America true to our founding freedoms.

My admiration for philanthropy is taking a blow these days because of some hypocrisy upon which so much of philanthropy depends. I remember sitting in the audience in Los Angeles in 2007 when Julian Bond, a man whom I also admire greatly, gave his NAACP's Chairman's Award to Mr. Bono, the celebrity musician of U2. Much was said of Mr. Bono's philanthropic efforts to promote human rights. I stood with many in giving Mr. Bono several standing ovations. I have no doubt that Mr. Bono believes in human rights and personal philanthropy. But of promoting democracy, paying his share of the social contract and community giving? I am not so sure. For Mr. Bono has shifted his own assets out of the Ireland to avoid paying taxes -- a very odd and inconsistent behavior -- and for which he has provided no good explanation to date.

Because I like Mr. Bono, like I like Warren Buffett and Bill Gates, I also like to ask them the tough questions. I like Richard Parsons too, the former CEO of Time Warner and current Chairman of Citigroup. I remember when at last year's NAACP LDF's Equal Justice Awards dinner, Mr. Parsons was on the dais, being honored, and he made a moving speech about being the "last of the firsts." He talked about how far America has come in the struggle for racial justice. He is quite philanthropic also and this very month helped honor Estee Lauder's heir, Ronald Lauder, with the Carnegie Foundation's Medal of Philanthropy. Mr. Parsons called Mr. Lauder and his wife two of "the nation's preeminent supporters of the arts and civic causes."

Let me state upfront that I don't think I've ever met Mr. Lauder, though I have had hot chocolate with my friend Daniel at the Neue Galerie, one of Mr. Lauder's philanthropic efforts in New York City. At the time, I remember reading MoMA's curator Ann Temkin tribute to Mr. Lauder in the catalogue, "The Ronald S. Lauder Collection: Selections From the 3rd Century B.C. to the 20th Century/Germany, Austria and France," in which she tellingly states, "In his work as a collector he has nobody to please but himself (which he contrasts, with satisfaction, to the myriad obligations and opinions at an institution such as MoMA), and no requirement for fairness or objectivity." Ah so true.

So here I must question both Mr. Parsons' statements and the Lauder estate's noted extreme strategies for tax avoidance, which would have been anathema to Mr. Carnegie. Andrew Carnegie believed (as do Warren Buffett and Bill Gates) that wealth in estates should be taxed rather than be passed along from one generation to the next. Indeed, in 2005 Mr. Buffett, George Soros and Bill Gates Sr. lobbied -- but failed -- to have Congress raise the estate tax. Mr. Carnegie argued convincingly again multi generational transfers -- which create a kind of aristocracy that is by definition un-American.

The reverse is true of Mr. Lauder, whose family has set up the most creative tax avoidance schemes to escape funding the American community chest, and giving back under the American social contract. And they plan to do so for generations. A clever and telling NYT article two days ago notes how the Lauder "Family Billions, [are] Artfully Sheltered."

I hope Mr. Parsons and Mr. Lauder are questioned about how their recognition of and for personal philanthropy is sharply contrasted, and undermined, by these tax avoidance schemes. I hope they would commit themselves to my "Supersized Philanthropy Democracy Principle" (SPDP). By applying my principle, we would achieve more democracy while preserving philanthropy -- and we renew our commitment to meritocracy and against aristocracy.

The principle is simple: The super wealthy are still allowed to transfer their wealth to foundations and trusts but only with a date certain for termination and the eventual payment of taxes. And these foundations and trusts at a minimum must allow democratic input over that portion of their wealth that is equal to the taxes they avoided.

For many, this principle is not doing enough to tax the rich and enlarge the state coffers. And some of that is true. But I believe that private philanthropy offers a lot as well and allows for a better democratic society that includes a robust civil society, state and market.

In the last three decades however, we have provided a tax structure that over-compensates people like the Lauders but gives less and less a return to our meritocratic society. This has a deleterious effect on our democracy and our equality. The community is denied a proper return on our investment in the social contract because those who benefit the most from our support and investment -- billionaires -- find ways to avoid giving back and being accountable. Billionaires can avoid paying returns to the community chest that the rest of us -- the 99% -- have to give into, and don't have to be accountable to the community for their choices. And that is neither fair nor democratic.

Billionaires avoid paying the return on society's investment by transferring assets into their personal philanthropies and dynasty trusts. Billionaires keep a share of money in their absolute control that could be subject to community vote instead. This result is undemocratic and unbalanced regardless of how well-meaning supersized philanthropists are. Some people think that's OK-- after all, it is their money, isn't it?

Not exactly. Our community supported the creation of such extreme wealth, and we deserve a just return due on the social contract. Elizabeth Warren, the former White House finance reform advisor got it right when she said: "There is nobody in this country who got rich on his own -- nobody.

"You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory -- and hire someone to protect against this -- because of the work the rest of us did.

"Now look, you built a factory and it turned into something terrific, or a great idea. God bless -- keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along."

I add another component to Ms. Warren's reasoning -- it was through a democratic process that we paid for those roads, that education that trained our workers, from which these billionaires achieved outlier success and profits. I also want to open up the process that philanthropists use to spend some of that money that they are keeping -- so the community can have some input into how some of that money gets spent.

Part 2 Maximizing Democracy while preserving philanthropy

Let's look at how the supersized philanthropists -- and the wealthy more broadly -- circumvent paying their fair share into our democracy instead of paying it forward. Here is how it works:
The rest of us pay taxes on our income, capital gains, and estates and inheritance -- while the supersized wealthy can avoid it. The assets that are usually transferred to trusts are assets disproportionately owned by the wealthy. The wealthiest 1% have over 60% of their wealth in both financial securities and business equities, compared with the bottom 90% which owns around 2% and 7% respectively in these categories. And these are the categories where most of the capital gains of the wealthy are made and the taxes that are due are unjustly avoided.
When wealthy individuals have highly-appreciated assets, they can avoid paying capital gains taxes by forming a private family foundation. When they transfer those appreciated assets to a private family foundation the assets can be sold by the foundation with no capital gains taxes going back to society, since charities are tax-exempt. Ironically, these wealthy individuals actually also get an immediate tax deduction from their other income (!) for any money or property they transfer to their foundation. They can double dip the benefits.

Moreover, as the Lauder family has so effectively done, these bevy of foundations and trusts will benefit their children and grandchildren, and many generations of descendents after. Dynasty trusts provide for generations in perpetuity -- truly creating an American Aristocracy. This used to be illegal but several states have now repealed laws against perpetuities which used to limit the term of any family trust to about 90 years, after which time the family members would own the property outright, and thus finally have to pay taxes. Now superwealthy Americans can set property aside for their heirs forever. The following is a list of the states that have abolished their rule against perpetuities, enacted an opt-out rule against perpetuities or made further changes to their rules against perpetuities, in which Alaska, Delaware, Nevada and South Dakota are the most receptive to schemes that help the extremely wealthy: Alaska, Arizona, Colorado, Delaware, Idaho, Illinois, Maine, Maryland, Missouri, Nebraska, New Hampshire, New Jersey, Ohio, Rhode Island, South Dakota, Virginia and Wisconsin. In addition to these states, Washington, D.C. allows perpetual trusts, while the states of Alaska, Colarado, Wyoming and Utah allow a dynasty trust to last for 1,000 years. Florida allows a dynasty trust to last for 360 years and Washington allows a dynasty trust to last for 150 years. Nevada allows a dynasty trust to last for 365 years.

Some of these same wealthy would scorn many among us who today are relying on food stamps to feed their families because they earn wages that are too meager to support their families, if they can find a job at all. I take to heart what Warren Buffett contends of such wealthy inheritors who "might feel themselves perceptive in observing the debilitating effects of food stamps for the poor but would fail to observe that they themselves are the beneficiaries of an almost boundless lifetime supply of privately-funded food stamps bestowed upon them at birth."

This newly minted aristocracy is being provided unbounded welfare by society, and at severe costs to our American democracy and societal economic and social well being.

As Professor Ray D. Madoff of Boston College Law School writes in "Immortality and the Law: The Rising Power of the American Dead," an ordinary trust would dissipate as money is distributed to beneficiaries. A dynasty trust, though, can avoid depletion. Instead of making outright distributions, the trust buys assets in its name like objets d'art, private planes, vacation real estate, yachts, and even businesses--all for the use of future generations of beneficiaries. Because the trust retains ownership, the assets pass tax-free and creditor-proof to the next generation. Unlike the rest of us, these beneficiaries don't pay taxes on this property. The rest of us workers, the 99%, these benefits would be taxed. I know personally that when I received housing from one of my first jobs out of law school, I had to pay additional taxes for the housing benefit.

Billionaires don't have to pay these taxes though. Recent changes in some states tax laws now enable billionaires through dynasty trusts to provide their heirs with money and property largely impervious to creditors. In addition to tax breaks, dynasty trusts often include a "spendthrift clause" which provides that trust assets cannot be reached by a beneficiary's creditors. If a beneficiary incurs large debts (like from destroying property owned by someone else) the victim cannot be compensated with assets from the trust, even if they are the destroyer's only resources. The beneficiaries of the super wealthy can behave super recklessly, knowing that their money is forever protected for themselves and their heirs. This modern development stinks as undemocratic and un-American, but has been the result of lobbying of the richest Americans, bankers and trust lawyers for the least few decades!

Money siphoned into private foundations are spent at the whim of the family, if spent at all. The only legal requirement of these family foundations is that 5% of its assets be spent each year - on what eligible programs the family happens to like. That's nothing compared to the 46% percent tax on capital gains that the supersized billionaires would have paid back to the community for public use--if we didn't allow them to avoid this tax by putting this money into their private foundations and out of the community's reach. It's about more than the money though: our collective democracy has no vote over what billionaires want to fund.

Let me make clear that I like the idea of some level of individual participation in philanthropy and their ability to pass something on the next generation. I support providing incentives for the rich to fund civil society, like churches and nonprofits. I believe we need a robust and well funded civil society to counterbalances and complements the forces of the State and the Market for democracy to prosper.

However, private family foundations and trusts create a growing aristocracy because they fail to pay into the community chest to which that the rest of us contribute, which exacerbates they growing poverty and inequality that affects the majority of Americans.
But I have a remedy. If we allow the super-wealthy to avoid paying the taxes that the rest of us must pay, what if in return we got a say in how that money was spent -- and a time limit for the exemption? Why don't we democratize supersized philanthropy?

My Supersized Philanthropy Democracy Principle would calculate the value of the tax avoidance, and ensure community participation through a democratic process voting process.

We apply participation requirements in other areas of life. For example, the law often requires tenant and community participation for the approval of a real estate development. The same mechanism should be applied to philanthropy. If the wealthy seek to create foundations and trusts, they should have to comply with this principle to compel some democratic process for the spending of the funds.

Tax avoidance is democracy avoidance. Through the democratic process we all have a say in how the government spends our money. The rich should be subject to the same rules: if their money won't be taxed and added to the community chest, the public should not lose the right to determine how some of that money gets spent. The largest portion of supersized philanthropists' money still will be under the billionaires' total control. (Of course, my preference is that philanthropists will seek to exceed my SPDP.)

So this Thanksgiving and birthday week, as I reflect on Andrew Carnegie's legacy -- misplaced on Mr. Lauder -- and on the gallant efforts of Mr. Buffett and Mr. Parsons, my heart remains with the folks sleeping in tents around the country who call themselves "Occupy Wall Street" and those who are new to government subsidized food stamps. If you are American -- and believe this Thanksgiving in American values and democracy -- then you believe in meritocracy over aristocracy, and in equality over inequality and we can end this decline to Lauder like aristocracy together.

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