Philanthropy - the ultimate paradox

The rich, as the late American satirist Peter de Vries noted, are not like everyone else; they pay less taxes. Perhaps a more telling difference is that they are more willing to give their wealth away.

This is a striking paradox. The super-rich, and the companies they control, spend vast amount of financial and human resources on minimising their tax liabilities. Yet at the same time entrepreneurs are increasingly deciding to give much of their money away voluntarily, particularly towards the end of their working life.

Before trying to answer this puzzle it is worth looking at the reasons for the growth in private philanthropy. Most obviously the amount of wealth in the world is rising rapidly. More importantly the share of that extra wealth that goes to the wealthiest in society is growing.

In very crude terms, globalisation has created more wealth and allocated it to a smaller band of people. This year’s Rich List 2007 published by the Sunday Times showed the fortunes of the richest 1,000 had risen by a fifth over the past year to almost £ 360bn. A decade ago that figure was £99bn, meaning that the volume of wealth held by this elite has risen almost four times.

A parallel Giving List showed the 30 leading philanthropists pledged or donated more than £1.2bn. Several donations ran into tens or hundreds of millions. While admirable in itself, this is dwarfed by philanthropy in the United States. There has been a strong American tradition of benevolence, particularly for large infrastructure projects such as art galleries or hospital wings that carry the donor’s name in perpetuity.

Some of the philanthropic efforts taking place are of mind-boggling proportions. Microsoft founder Bill Gates donated $22bn in 2000 to found the Bill and Melinda Gates Foundation, making it the US’s largest philanthropic trust.
Last year Warren Buffett, the investor, announced he would gradually give away 85% of his $44bn fortune, of which 85% would go to the Gates foundation.

Philanthropy has been a feature of the UK too, but perhaps less so until recently. There is some evidence that the more the state does to help its citizens, the less people are willing to give. In the Victorian era when capitalism in Britain was red in tooth and claw, business dynasties such as Guinness, Cadbury, Peabody and Lever, made charitable bequests whose legacies can be seen on Britain’s streets today.

However after the welfare state was born, a 1948 opinion poll found that more than 90 per cent of people felt there was no longer a role for charity in Britain. Whether the rebirth in UK philanthropy is a reaction to change in the welfare system under Conservative and Labour governments of the last three decades is open to debate.

One strong feature of recent large-scale donations may shed light on that issue. Philanthropy is increasingly focused on problems that globalisation has brought to the fore. Charity no longer begins at home. Thus the Gates’ foundation’s activities are focused on world health - fighting malaria, HIV/AIDS, and tuberculosis. Three years ago Sir Tom Hunter gave £100m to his charity, which invests in projects in Africa, and plans to disperse a further £1bn. These donations are often for purposes that overlap with government policy and agendas that politicians have campaigned on for many years.

What these donations symbolise is a willingness to donate money where the donor feels able to determine the fate of the finance – something currently impossible with general tax revenue. David Nickson, a partner at KPMG Europe, suggests in an article in Tax Journal magazine this month that it may indicate a cynicism about the way governments raise and disperse money or may be symptomatic of the rise of the individual.

There may be other factors at play. The huge public support for campaign by Bob Geldof and Bono to get rich nations, i.e. their taxpayers, to cough up more money to relieve poverty and disease in Africa received widespread support.
Individuals also seem more personally committed to issues such as African poverty and global warming. One civil servant I know took a career break to spend time working with an aid agency in Tanzania.

The $64m dollar question for governments is how to harness this philanthropy. They are certainly making it easier for people to give their money away – even if it isn’t destined for the Treasury’s coffers. Charitable giving in America has attracted tax relief since the 18th century while Britain joined the party in 1986. Income tax relief is now available on every cash donation made by a UK taxpayer.

Perhaps governments should go further. They are increasingly frustrated by the ability of the super-rich to avoid tax payments. Governments could exploit their voluntary generosity by more closely meshing their public policy interests with those of donors. For instance they could offer tax incentives to corporations making donations. One model might be the freedom companies have to reduce their tax bill by topping up their pension fund, because of the wider benefit of knowing the pension system is well-funded.

The same technique could be applied to donations towards a menu of spending options. Should a housebuilder gain tax relief in exchange for donating land or building affordable homes for free? Could a pharmaceutical giant lower its tax bill in exchange for major donations of basic medicines?

This is just one idea and there must be a myriad of other options. One thing is clear – the depth of poverty across the world calls for a resolution of this paradox of tax avoidance and generous donation.

This article first appeared in 'the city magazine' in October 2007