Thomas Piketty, Wealth Inequality and Community Foundations

Perhaps the most important book on economics in many years is Capital in the Twenty-First Century, written by the French economist Thomas Piketty.  Piketty argues that the distribution of wealth throughout the world is becoming more and more unequal.

He cites data which indicate that in the 18th and 19th centuries western European society was highly unequal. Private wealth was concentrated in the hands of the rich families who sat atop a relatively rigid class structure.

The chaos of the first and second world wars and the Depression disrupted this unequal relationship. High taxes, inflation, bankruptcies and the growth of sprawling welfare states caused wealth to shrink dramatically, and ushered in a period in which wealth was distributed in a more equal fashion.

But as those shocks from the 20th century have faded, wealth inequality has risen in this century.  Piketty asserts that this is because there are no natural forces pushing against the steady concentration of wealth. He recommends that governments adopt a global tax on wealth, to prevent soaring inequality contributing to economic or political instability down the road.

What does this have to do with community foundations?  If you look at the big picture and over the long run, one role of community foundations is to decrease wealth inquality in communities.  People who have accumulated “excess” wealth (our donors) donate that wealth to make it available to those without much wealth – clients of food banks, patients in medical clinics, and mentally handicapped adults, to name just a few examples.

So, in a very real sense, community foundations are out to prove Professor Pikkety wrong.  Thousands of community foundations around the world strive to improve the quality of life in their communities – and that includes reducing the unequal distribution of wealth.

Willie Sutton, The Endowment Tax and Community Foundations

The Tax Cuts and Jobs Act recently signed into law contains a provision for an endowment tax.  Colleges and universities with endowments of $500,000 or more per student face a tax equal to 1.4% of their investment income.

Since community foundations are in the endowment business, the phrase endowment tax should cause us some concern.  Part of me feels comfortable in knowing that we do a lot of good for our communities, and our friends would support us on Capital Hill if such a tax was aimed at us.

Part of this, though, scares the bejeebers out of me ... much like the Wicked Witch of the West waving a flaming broom at the straw-filled Scarecrow.

A college professor is quoted in a Wall Street Journal article stating his reasoning for justifying the tax.  “There is an absurd amount of inequality when it comes to the value of college endowments,” said the professor, “This is recognition that if you’re going to hoard all this money and it’s just kind of sitting there and not being spent on students, we should actually tax it."

Endowments are not "hoarding".  They are a community's savings account, to serve the needs of your community now and in the future.

If you want the real reason for the endowment tax, we need to turn to the great philosopher, bank robber Willie Sutton.  "Why do you rob banks?", Willie was asked.  He responded, "Because that's where the money is."

Why tax endowments?  Well, you know the answer.