Trading in Tocqueville: Philanthropy in an Era of Philanthrocapitalism, L3Cs, and Social Innovation Bonds

William Dennis opens “A Radical Reform for Nonprofit Tax Exemption: A Thought Experiment” with a compelling quote from Richard C. Cornuelle’s Reclaiming the American Dream: “Already in America, government is tightening its grip on the independent sector. It is challenging the tax-exempt status of foundations, making new efforts to ‘regulate’ almost all private groups. An independent sector regulated by its competition has, at best, an uphill fight.…”

Cornuelle’s concern about foundations losing tax-exempt status provides the backdrop for Dennis’ thought experiment on federal taxation and philanthropy: What if the tax subsidy for nonprofits was eliminated? Would this be a good thing? The answer, Dennis posits—at least in theory—is yes. But he recognizes that an abrupt end to tax advantages for the nonprofit sector might do more harm than good. Much of the infrastructure of the independent sector and the life choices of those involved with it, he notes, are dependent on the current constellation of tax incentives. Thus he offers this as a thought experiment with policy implications, but not as a policy prescription.

In 2012, substantive conversation about philanthropy, democracy, and taxation is important. There are numerous and controversial congressional proposals to alter the tax treatment of nonprofits and charitable giving. Nonetheless, there is a critical flaw in Dennis’ execution of his thought experiment: it is based on an understanding of the nonprofit sector that no longer maps to reality. Most critically, Dennis omits any mention of philanthrocapitalism, B-Corps, LC3s, Social Innovation Bonds (SIBs), and the rise of billionaire philanthropists, all of which blur the boundaries between business, government, and nonprofits.

Even in a thought experiment, these developments are too profound to be set aside. Many of the new developments in philanthropy have little to do with the idea of voluntary associations on which Dennis focuses his attention. Above all, these changes invert the power relations between philanthropy and government that Cornuelle identified. Instead of relying on government grants and subcontracts, as nonprofits have commonly done since the 1960s, philanthrocapitalism is premised on large foundations, such as the Gates Foundation, setting agendas and partnering only with governments that accept their agenda and match funds or promise to do so in the future. Foundations are arguably now “subcontracting” the state.  

Blurring Lines

The New Philanthropy has profound implications for civil society in the United States. Bruce Sievers, in “The Philanthropy/Civil Society Paradox,” persuasively argues that civil society emerged in response to the rise of the state. He writes, “[T]his emergent civil society, with its emphasis on individual rights, rule of law, pluralism, tolerance among diverse belief systems, and a commitment to the commonweal, provided a platform for the evolution of liberal democracy. Inherent in the scheme was a delicate balance of public and private power—an eternally unresolved tension between the public and the private poles of life. Without institutions and norms of civil society, and its underlying polarity, there would be no democracy as we know it” (2012, 4).

Concern about the death of civil society spans the political spectrum. But what Sievers contributes to a discussion of philanthropy and taxes is the idea that we move among different worlds in different spheres of social life—worlds with different rules, expectations, and incentives. A recent political exchange may help to illustrate the point. Mitt Romney recently suggested that taxes are a form of charity. The Cato Institute’s Michael Tanner concurred: “Taxes are a form of charity.… We tax people because there’s some use, some public good, for which they’re needed” (Washington Post 2012). Garrett Gruener, a wealthy activist for higher taxes on the rich, countered, “Democracy is not a charity. It’s an enterprise of all Americans to accomplish things that we democratically decide are important” (2012). The debates over taxation and the nonprofit sector, therefore, are as much about the nature and independence of the different sectors as they are about efficiency and fairness.

Sievers usefully borrows the concept of “the colonization of the life-world” from the German philosopher Jürgen Habermas to make the point that the “life-world” of civil society is different from that of government or business—and always in jeopardy of being colonized by either. This is very much in line with the concern expressed by Cornuelle that the nonprofit sector was at risk of being consumed by the government sector. The new movements in philanthropy, however, could amount to a colonization of the nonprofit sector by the market rather than by the government. Therefore, the question of taxing the nonprofit sector should not be looked at as simply affecting the efficacy of solving social problems or maintaining the autonomy of the independent sector from the government, but as a quest to reestablish the appropriate tensions and power relations between the nonprofit sector, the government sector, and the business sector in order to maintain some form of liberal democracy in a very changed world. This balance goes beyond the question of how much to tax nonprofits and expands out into the new tax structures being developed to accommodate the blurring of the line between the nonprofit and for-profit sectors.

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