1 Percenters, Your Charity Doesn’t Make Up For Your Tax Avoidance

Hedge fund billionaire Leon Cooperman earlier this week became the latest of the super-rich to complain that they are being demonized for being wealthy and successful.

Cooperman, CEO of Omega Advisors, took issue with some of Democratic presidential candidate Hillary Clinton’s recent statements regarding executive compensation levels and the low tax rates that hedge fund managers are subject to.

“I don’t need anyone crapping all over what I do for a living,” Cooperman told CNN this past Tuesday. “I have nothing to apologize for. I’ve made a lot of money. I’m giving it all back to society.”

Two basic facts sparked Clinton’s comments and Cooperman’s petulant reaction. One, while median wages for workers have increased by 10.2 percent since 1978, earnings for CEOs like Cooperman have increased by 937 percent in the same period. Two, Cooperman, as a hedge fund investor, doesn’t pay taxes like the rest of us; because of the carried interest loophole, the top marginal tax rate on his investment earnings is 20 percent, instead of the top tax rate of 39.6 percent on ordinary income – earnings from labor.

While any serious plan to reduce inequality must include raising taxes on the supremely wealthy, the wealthy are doing all they can to keep every penny, increasingly funding conservative candidates who they know will not raise the top marginal rate or close the carried interest loophole.

Meanwhile, Cooperman, an immense beneficiary of this flawed system, claims that any perceived unfairness is more than made up for by his charitable giving. This idea, however, is an extremely distorted view the wealthy’s responsibility to society that will have disastrous consequences if allowed to spread further.

Cooperman is right in one sense. While America is notorious among similarly developed nations for its comparatively low public spending, it ranks at the top in private charitable giving. Although the causal relationship between these two phenomena is not clear, welfare state scholars are not surprised that the lack of public spending is seen alongside greater levels of private giving.

To Cooperman and the conservative ideology to which he subscribes, this status quo is entirely fine for the health of the nation. Private charitable giving, the theory goes, can serve as a perfectly adequate substitute for the increased public spending called for by liberals.

Historically, this view has proven flat-out wrong. Charitable giving simply cannot achieve the same results that public spending can.

Wealthy donors frequently donate to projects that benefit a very specific subset of the population – often one that does not overlap with those most in need. Cooperman, for example, gives much of his money to universities. While this is certainly respectable, university giving doesn’t provide the same type of relief to the poorest Americans that programs such as food stamps and Medicaid do.

Furthermore, charitable giving tends to decrease drastically when the economy worsens, just when Americans need the most help. During the 2008 and 2009 recession, for example, private giving fell by nearly 7 percent each year. Fortunately, during the same time period, government spending on programs such as unemployment insurance and food assistance increased rapidly to help those most in need.

That private giving drops at the exact time it would be most needed means that even if private charitable giving were perfectly targeted towards those who need it most – which it certainly is not – it would still fail tremendously to benefit society in the same way that public spending does.

Ultimately, beyond the disastrous practical consequences of believing that charitable giving can substitute for public spending, this idea is fundamentally at odds with the way we should be thinking about how society functions. Help for the less fortunate should be distributed based on rules and priorities democratically established by the public through its representatives, not by a group of billionaires.

This is not to say that Cooperman and others in the 1 percent don’t deserve credit for donating to worthy causes that certainly help make some people’s lives better. But saying that their charitable choices make up for the consequences of extreme wealth concentration and the low tax rates they pay is a dangerous mindset for society. The super rich need to accept that they owe more to the society that allowed them to achieve such tremendous success.

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