Moneysaurus and the Trumpenproletariat

Since the end of World War II, the nonprofit sector has consumed an increasing share of the United States economy. Health care, which is dominated by nonprofit hospitals, now hogs an 18% share. The growth of higher education, an overwhelmingly nonprofit industry, continues to outpace the general economy. Millionaires and billionaires are converting wealth into non-taxable foundations on an unprecedented scale, supporting the proliferation of tax-exempt foundations and nonprofit enterprises.

There are now some 1.6 million nonprofit institutions in the U.S. employing 11.4 million people and comprising the third largest employer in the country after retail and manufacturing, according to the Independent Sector website. In 2016 the PHP Staffing Group reported that employment over the previous 10 years had grown 20%  for non-profits compared to 2% to 3% for the for-profit sector.

Americans typically think of the U.S. economy as divided between the government sector and the private sector. But that view grossly oversimplifies the modern American economy. The nonprofit sector, which comprises 10% of the economy, belongs in category by itself. Nonprofit entities are private in the sense that they are not government organizations. But they behave very differently from for-profit enterprises. Most importantly, they aren’t accountable to the public in the same way that government and corporations are.

Americans have a U.S. Constitution and 50 state constitutions with checks and balances. We hold elections to throw out politicians we don’t like. We have the right to attend public meetings and to petition the government. We have transparency rules governing access to information. We have a fourth estate which, though diminished in size and capacity, views its central mission as acting as a watchdog over government. Governance leaves much to be desired — gerrymandering is a travesty of democracy — but the public is acutely aware of the inadequacies, and people are working to fix them.

We have a different set of mechanisms to hold corporations accountable. Executives of U.S. corporations answer to boards of directors, to equity investors, to bond holders, to banks and other financiers, and, most dramatically, to the marketplace. Unlike failed governments, failed corporations go out of business. Their corporate DNA exits the economic gene pool. Government functions as an additional backstop against corporate abuses against the public health and safety.

To whom do nonprofits answer in exchange for the massive benefit of being exempt from taxes? Nonprofits do have boards of directors (or trustees) but they don’t have investors capable of overthrowing them in a shareholder revolt or otherwise enforcing accountability. Most nonprofit boards are docile; they rubber stamp management’s vision for institutional advancement. While nonprofits aren’t as immune to catastrophic failure as governments are, they don’t pay the same price that corporations do for failure. Indeed, nonprofits with large endowments can be immune to outside pressure. Not that anyone notices. Transparency standards are minimal compared to those for government and publicly traded companies. Billions of dollars of so-called “dark money” slosh through the nonprofit system with almost no oversight and accountability. Except when scandals erupt, the fourth estate considers nonprofit activities of secondary interest. 

The political economy of nonprofits. Nonprofit entities have fundamentally changed the nature of American society, the economy. and the political system. Americans have been astonishingly sanguine about the creation of a new set of winners and losers.

Who are the winners? There are two sets of clear-cut winners — the millionaires and billionaires who get to shelter their wealth, and the nonprofit managerial class that gets to administer it. Insofar as the nonprofit managerial class is comprised of university-educated progressives who prioritize social justice issues, poor people and minorities are intended beneficiaries. However, insofar as the therapeutic ministrations of social-justice minions are counter-productive — a point I have argued repeatedly on this blog — the poor and minorities may be in actuality more victims than beneficiaries.

Whatever may be the case in that particular regard, the priorities of millionaires, billionaires and nonprofit administrators rarely extend to the well-being of working-class and middle-class Americans — especially the alienated, white Trump-voting segment of the electorate whom some have labeled the Trumpenproletariat.

These biases are most clearly visible in the higher education sector. The number one goal of the managerial class at colleges and universities is institutional advancement: building edifices, programs, and bureaucratic empires that maximize the prestige of the institution. In the pursuit of this goal, the managerial class is responsive to two main constituencies: (1) affluent alumni and their offspring (commonly referred to as legacies) whose good will they cultivate for gifts and benefactions, and (2)  lower-income and minority Americans in alignment with the leftist, politically correct value system of academe. The Trumpenproletariat, representing some 40% or so of the nation’s population, has zero influence.

Similar biases are evident in health care, although hospitals are not consumed with politically correct thinking to the same degree. The number one priority of hospital administrators is advancing their own careers by means of institutional advancement, leavened by the desire to win gifts and benefactions from philanthropists. Providing value for the health care dollar — quality medical outcomes at a lower price — is not on the radar screen. Hospital managers may say it is, but their actions over decades tell a different story. Again, the Trumpenproletariat exercises nearly zero power or influence in this realm.

Finally, there are the do-gooder entities that feed upon public donations and the benefactions of the wealthy. Some groups are community based, but an extraordinary number are supported almost entirely by foundations endowed by America’s millionaires and billionaires (both dead and alive). As a generality, the foundations created by dead rich white men (Carnegie, Rockefeller, Ford, etc.) have been captured by the liberal progressive nonprofit managerial class, which has successfully imposed its own obsessions such as climate change and social justice. The foundations set up by living white men (Bill Gates, Warren Buffett, George Soros, the Koch brothers, etc.) still reflect the politics of their founders. But that, too, is problematic.

When you are a multibillionaire, there are only so many houses you can live in, so many private yachts and jets to own, so many bottles of rare, expensive wine to imbibe, and so many fantasy vacations to check off your bucket list. You literally can’t spend the interest on your income fast enough to diminish your estate. You probably would be hard pressed to spend the interest on your interest. But you do want to establish a legacy reflecting your values. Thanks to the generosity of the U.S. tax code, you get to structure your legacy as a giant tax shelter.

Now, Bill Gates is a fine man. I think he’s doing some good thinks like trying to stamp our malaria and reform the U.S. educational system. But it’s safe to say that his preoccupations are not the preoccupations of the Trumpenproletariat. Far more dangerous than Gates are the billionaires who want transform society in their own image. While everyone should be free to do what they wish with -their wealth, one can legitimately ask if such activity should be showered with tax breaks and cloaked in secrecy.

I have come around to thinking that the unaccountability and opacity of the nonprofit sector is an unappreciated bane of our society — at least of those whose interests are not served by the privileged tax treatment. I will continue to give the matter close attention here on Bacon’s Rebellion.

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22 responses to “Moneysaurus and the Trumpenproletariat

  1. A provocative post. An excellent conclusion. The unaccountability and opacity of “non-profit” money is the bane of both politics and education. Non-profits are supposed to be forbidden to involve themselves in politics, and even in education the agendas are often partisan. Transparency as to the non-profit’s claims to be a non-profit and to meet the criteria for keeping that status, and as to its donors (who are claiming to be giving to non-profits on their tax returns — shouldn’t it be possible to check that the gifts and receipts match up?), would go a long way to cleaning up the flow of tax-exempt yet hidden money to both. Not to mention the resentments that build up when ordinary folks read about the abuses of tax exempt “foundations” and the like for distributing wealth and influence within a family, tax free.

  2. It’s a well-written and well-reasoned post … refreshing! just kidding…

    Non-profit employees pay taxes on their income though… and many corporations these days end up paying no more tax than non-profits – zilch!

    Below are the 18 companies that paid no federal income tax from 2008-2015, according to the Institute on Taxation and Economic Policy:

    Pepco Holdings
    PG&E Corp.
    Wisconsin Energy
    International Paper
    Amos Energy
    General Electric
    American Electric Power
    Ryder System
    Duke Energy
    NextEra Energy
    Xcel Energy
    CMS Energy
    Sempra Energy
    Eversource Energy

    But you also forgot one of the biggest sectors that pay no taxes by far and that is churches… of all stripes… including the kind that set up from a trailer on Sundays! Corporations pay property taxes and Churches do not!

  3. re: ” While everyone should be free to do what they wish with -their wealth, one can legitimately ask if such activity should be showered with tax breaks and cloaked in secrecy.”

    Surely you’re not talking about all those political groups that claim they are tax exempt because they don’t engage in politics, right and the IRS went after them!!

  4. I am of two minds about this post. I agree with much that was said about large non-profits funded by millions in endowments.

    However, by far the most numerous non-profits are those small organizations founded to undertake activities that serve their communities in ways that corporations and governments have been unable or unwilling to.

    I am on the board of such an organization. I put in tens of hours of unpaid labor each month, as do many of my fellow board members. Our Executive Director works longer hours for much lower pay than her private sector counterparts. A major part of our mission is to increase health and lower health care costs, particularly for those struggling with obesity, diabetes, and other similar issues.

    It is always difficult to raise funds each year, especially as the organization succeeds in serving the community and has to add staff. It has been especially difficult since the new tax cut wiped out the deductions that most ordinary citizens received from small amounts of giving each year.

    I believe that small non-profits are at least as accountable as private corporations. We have board oversight and if we are not effective in providing a valuable service, our donations will dry up. Just as customers will abandon private businesses that no longer give them what they desire.

    Too bad the same market discipline cannot be applied to some of our other organizations.

    I just urge caution about painting everyone with the same brush. We have been fortunate that our community is still supporting us even if it doesn’t result in a tax deduction for everyone.

  5. Wow, nobody wants to heal the sick, educate children, bring water to rural villages or provide wonderful BBC shows about dead British monarchs? It is all a massive plot to ensnare us in Venezuelan-style socialism? Come on, Jim, the non profit sector is completely out of control but for every five or six leftists there are at least a few good guys doing wonderful things and maybe even a right winger also working the system.

    I too am on the board of a fine organization that deserves its non-profit status.

    That said, my attitude for a long time has been to clamp down hard on the tax breaks, especially sales and property tax breaks, and to look hard at any investment/endowment income to provide a tax break only if it’s quickly spent on direct services. Initially the high income taxes provided the incentive for the rich to set up foundations to avoid estate taxes, but now its the bread and butter sales and property tax exemptions which put a city like Richmond in a deep hole and force up taxes for the rest of us. The very term “non-profit” is a joke when you review the finances of some of these institutions – including the religious ones, as Larry notes. Time for them to join the real (tax paying) economy.

    • Steve and TomH, I tend to agree with you that the small, community-based nonprofits are defensible. They are close to the community, they address demonstrable needs, and they raise much if not most of their money from the community. They are what people think about when they think “nonprofit” — and the rest are riding on their coattails.

  6. I think there may be some muddled thinking on what is real philanthropy.

    Bill Gates has ALREADY paid taxes on the money that funds his foundation.

    Ditto with Warren Buffet and others…

    and yes .. if they choose to pay salaries to folks to operate their foundations – again.. that money was already taxed!!

    Methinks – you might be a little biased in which ones you want taxed cuz Bill Gates is NOT doing what the Koch Brothers are doing with their already-taxed money! Attacking people for their philanthropy.. cuz they’re “liberals” geeze!!!!

    Gates, by the way, is only doing what Tom and Steve are doing -the motivation is the same -he’s just richer. I too, donate to the Food Bank and taxes for low income and seniors.. so I guess that makes me one of those “leftists” eh… I ought be ought making money for my own uses, right?

    • Sort of. Whatever money Bill Gates has he did pay taxes on that money. But that money would certainly be taxed again if it were given out in inheritance.

      In a world where we have massive defects and the rich already have too much power how the hell is it acceptable for billionaires like Bill Gates and Warren Buffet to skirt the tax laws and establish parallel government institutions in the name of non-profit do-goodness?

      Donations to non-profits should be taxed the same way as inheritance. You get a certain amount of money to give to your heirs (or to a charity) that is not taxed. After that, your charity or your heirs pay a stiff tax.

      As far as I know Oliver Wendell Holmes, Jr was the only American political figure who donated his estate to the US Treasury. He died in 1935. Where are the other big government progressives in following Oliver Wendell Holmes’ example? Why does liberal Bill Gates donate money to his own charity rather than just donating billions to the US Treasury? Because it’s your money and mine that liberals think should go to bigger government – never their own.

      • I’m surprised that DJ is apparently unfamiliar with inheritance taxes:
        Since you pay taxes on income, you may wonder if you have to report an inheritance that you may receive when you file your income tax returns. The answer is no, in general your inheritance will not be subject to income taxes.

        However, if you inherited something that subsequently appreciated, the appreciation could be taxable.”

        called stepped-up basis… the basis of the value of the asset that has appreciated over time – is “stepped up” at the time it is inherited and no taxes are owed on it except for very large sums of money – 5 million or more.

        Also – are folks paying attention to what is known as Pass Through taxes?

        ” Pass-through income is sent from a pass-through entity to its owners. The income is not taxed at the corporate level — it is only taxed at the individual owners’ level. A pass-through entity is a special business structure that is used to reduce the effects of double taxation.”

        So bottom-line – people who do very well in business and retire with a lot of money – AND wish to put that money to use for other humans – as opposed to giving to their heirs – tell me again why it should be taxed again?

        If the money is going for a philanthropic purpose – why should it be taxed?

        Or perhaps the question is – if the Koch boys want to spent it on Conservatives trying to run the govt – it’s “okay” but if liberals like Gates wants to spend it on helping people get clean water and not get Malaria – it should have a “do-gooder” tax on it?

        I always knew some folks had a convoluted view of the world…

  7. The nice thing about stock is you haven’t lost or made any money until you sell it. There is no tax gain or loss until you sell it. If a gazillionaire sets up a foundation with stock that started at zero value or a nominal value, or was inherited, and which has never been sold, then he or she hasn’t paid tax on that money yet, Larry. The full gain transfers to the foundation and all future gains are tax free to it.

    The abuses that worry me involve non-profits (not foundations) like hospitals or universities that continue to behave exactly like any other business, except they don’t pay many taxes and sometimes their competitors have to. They pay massive salaries, feed bloated bureaucracies, live off federal programs like Medicare or student financial aid, accumulate huge and idle endowments and force many costs of vital services off on the rest of us. I don’t get exercised about the foundations, Gates or Koch, although if there were tighter reins on political activity with foundation dollars that would be fine with me.

    This is all becoming more important because taxes are becoming more pervasive, notwithstanding the recent federal changes. None of us really knows how much of our income is taxed and how many times, federal, state or local. The result is that the taxed-in-full and mostly-tax-free economies draw further and further apart. Jim is right that it has gotten out of hand.

  8. Great post. I know of some deserving groups that dont mess with all the folderol and just help people out. Those are the groups I’d rather help. We do need more transparency on what is going on. Too much shady influence.

  9. The worst abusers of non-profit status come from the faith sector.

    • Maybe its time to roll out some of my memories about Jerry Falwell, the Old Time Gospel Hour, Inc. and the Moral Majority. Damn I should have kept all those notes…the best book I should write but never will.

  10. re: ” The nice thing about stock is you haven’t lost or made any money until you sell it. There is no tax gain or loss until you sell it. If a gazillionaire sets up a foundation with stock that started at zero value or a nominal value, or was inherited, and which has never been sold, then he or she hasn’t paid tax on that money yet, Larry. The full gain transfers to the foundation and all future gains are tax free to it.”

    Just to be clear. If you left your children a million dollars in stock – they’d not pay a penny in taxes on it even if they sell it right away. Similarly, if you donated that stock to a non-profit – they also would not pay tax on it.

    So what happens to that million if the kids get it versus the non-profit foundation?

    Jim seems to think it ought to be taxed – again…

    and what I’m asking is that if it’s tax free to the heirs why not tax-free to a foundation ? or does Jim think both the kids and the foundations should pay taxes on it?

    Now – one further question – Should the Koch brothers be able to donate a million dollars to “Elect More GOP” , tax free?

    • I was just correcting your assertion that the money had already been taxed before being given to the foundation. No, often it has not.

      • You’ll have to explain that better… or perhaps we’re talking past one another. People who hold capital assets – do not pay taxes on the GAINS – they already paid taxes on the money that acquired the asset – or perhaps you know ways to use income never taxed originally to buy capital assets.

        For instance – 401K assets are typically purchased with tax-free money since the govt encourages saving that way – but when you take it out on the other end – it’s ALL taxed AND you MUST take it out – called Required minimum distribution. OR you can put money aside in a ROTH account but that is taxed up front rather than on back end.

        But outside of these govt tax-advantaged plans – when you or I use our money to buy assets… that money has usually been taxed already.

        so tell me about the situations where the money you buy assets with has not been taxed… perhaps I need more education… on the issue.

        • Quick example: A start-up billionaire like Gates (or for that matter Henry Ford) has stock in his own company, which started at zero value or extremely low value and is never taxed until sold. Yes, he paid tax on dividends, but not the underlying stock, which is then donated to the foundation. That’s a pretty common path for these fortunes. Things can get interesting with the start up goes from private to public but even then I’m not sure there is any tax unless the initial partners divest.

  11. I see a big difference between nonprofits that provide services, etc., and those that don’t. The former includes hospitals, schools, scientific research and, given the history of America, churches. They need limits on their activity and how money is spent but generally contribute to society.

    Foundations and other similar entities that exist to participate or fund participation in public policy need stricter rules and limits on their existence. We need something along the lines of the 12th Century Statute of Mortmain (the dead hand). The law was intended to prevent landholders from donating their property to the Church to avoid taxes to the King. Private foundations should have a strict limit on their life. XX years. Then the foundation should be forced to shut down, pay taxes on its assets and distribute the remainder to some “service-providing nonprofits.”

  12. The non-profit requirements for hospitals (“community benefit”) are extremely vague and are therefore subject to interpretations that are out of line with public interest or outright abuse, yet they get tax relief of about $30B a year in the U.S. A lot of the hospitals use inflated charge master pricing (non-negotiated) when calculating their charity care. You even see cities (like Pittsburgh) suing their non-profit hospitals. This issue has been kicked around for years at the IRS and congressional level with no resolution. Other states, like Texas, have adopted more concrete standards for non-profits. Perhaps Virginia should look at this as well. As it stands, I think it may even be better to tax former non-profits and use the money for targeted health care services.

  13. re: “re: The law was intended to prevent landholders from donating their property to the Church to avoid taxes to the King.”

    Well the same concept exists in our own tax law where people have a choice between paying taxes to the govt or donating it to a charity and deducting it from your taxes… right? That’s where a lot of college endowments come from. They figure if they can’t keep it anyhow – prefer to not give to govt and instead to non-govt entities to use.

  14. re: ” A lot of the hospitals use inflated charge master pricing (non-negotiated) when calculating their charity care.”

    If true – it means that the estimates of charity care are wrong….

    let’s try to find some links from reputable sources that confirm…

  15. Larry,

    I had this article in mind. I believe the history is from 1969 to 2014, non-profit hospitals could use chargemaster for all “charity care” calculations, which obviously can inflate it significantly. A new ruling came in 2014, but as the article indicates, the responsibility to charge an amount generally billed is restricted to only those cases where the patient meets the financial assistance criteria set by the hospital.

    Beyond this, though, the hospitals themselves have broad latitude to determine community benefit, so it isn’t much of a standard.

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