Giving back..Why should I care and how much should I give?
An edited version of this appeared in the Weekend AFR on Saturday May 15.
This is the longer version…..
Prior to moving to the US to work as a VP of a product group at Microsoft, in 1990, I had not spent any time thinking about the concept of philanthropy. Of course my wife and I had made the annual small donations to a range of well known charities but I had never given much thought to the concept of the very wealthy allocating serious money to address issues in society — philanthropy.
When I arrived in Seattle I quickly learned that America, for all its ills, is a wonderful example of a country with a deep culture of philanthropy. If you are wealthy in the US and do not give back considerable amounts of your money to charities you are seen as a pariah. Dinner party conversations are more likely to be about what charities you support and why and less about the price of your house.
On a flight between Seattle and NY to do a quarterly analyst briefing I was sitting next to Bill Gates and I asked him about his approach to philanthropy. At this point, 1990, he had not yet made any major public announcements regarding his intentions.
In summary he made a few points;
- His mother, Mary Gates, who was a well known philanthropist had a guiding principle which went along the lines of “If you have been successful in life it is your responsibility not your choice to give back”.
- He was going to give more than 90% of his wealth away to philanthropic activities to try to move the dial on major issues — as has has gone on to do in spades.
- He wasn’t going to do anything material in the philanthropic space until he could allocate the time and energy. He felt that you should bring the same intensity of intellectual rigour and time that you bring to work to doing good in the world.
All of these points seemed to make so much sense to me and when we returned to Australia (2 years later) Carolyn and I established our family foundation, moved >30% of our net worth into it and then started trying to go some good.
Having now allocated a non-trivial amount of our net wealth to philanthropy, over more than 20 years, I can honestly say that we get an incredible sense of fulfilment and joy from being able to help others. Giving actually provides a marvellous feedback loop.
Leaving my own journey aside I want to spend time on two core issues;
- Why should anyone give money to charitable causes?
- How much should you and I give?
Why Give Anything
The Key Principles;
- The Mary Gates Principle
“If you have been successful in life it is your responsibility not your choice to give back” - The Warren Buffet Principle 1 — Lucky Genes
“My wealth has come from a combination of living in America, lucky genes and compound interest”. Buffet has talked at length about how the genes you get from your ancestors (and the inherent skills and abilities these provide the basis for), where you were born and live, what careers you fall into provide a base for wealth to accumulate. A girl born to parents with low IQ in a remote village in Uganda, who ends up parentless due to tragedy at an early age does not have the same chance as a white boy born in Sydney to wealthy, smart and hard working parents. Yet both deserve the opportunity to live a fulfilled and happy life. - Warren Buffet Principle 2 — Inheritance
“I do not believe in inheriting your position in society based on which womb you came from..I think a rich person should leave enough for his/her children so that they can do anything but not enough so that they can do nothing” - Where money accumulates — Part 1
It seems obvious to say that generally the jobs that accumulate the most wealth are the ones that are own equity (businesses or funds/shares). Jobs that accumulate the most wealth (outside of being a business owner) are those involved with making money for others — whether that is a direct sense (Fund Manager, Investment Banker) or by providing a service that helps a business be more productive — make higher margins and more money — (Lawyers, Consultants) or by providing products that help an individual or business be more productive. - Where the money accumulates — Part 2
We all know people who had the intellectual capability to be anything they wanted to be. Some chose to be M&A lawyers, some chose to be Investment Bankers, some chose to be surgeons and some chose to be teachers. We are just all super lucky that many of our best and brightest chose careers where financial returns were not the currency of success.
The fact that super talented and hard working people choose to be teaches, nurses, doctors, care workers, engineers and similar roles that add value while not attracting high salaries something we should all be grateful for. We just need to at acknowledge that money flowing into pockets is not built on some algorithm determining the long term benefit to society for the work undertaken. - The Work Ethic Argument— Financial Returns are not mapped to hours worked or effort put in.
This kind of maps to the point above but just to labor the point. It would be super hard for any Fund Manager or Company Founder to suggest they work harder than many GPs, Tradies, store men, nurses or hospitality workers. Money does not map to hours worked or effort put in — when you get beyond the bottom quartile of salaries for work undertaken.
Recently the FT (Financial Times) ran a story (link below) that included this interesting comment which seems to indicate that at least some people are getting the general mood.
“You are a successful capitalist and pride yourself on getting rich by investing your capital better than most. You are also politically savvy enough to see which way the winds are blowing: not necessarily to your advantage. So you agree that something has to change to make the economy work for everyone, or at least to keep the pitchforks locked up”
https://www.ft.com/content/e1adf707-b95a-4422-9211-1841cd7ce659
It seems to me that when you pull all the data points above and concepts together it is very hard for anyone to suggest that if they made a ton of money in their job that they do not have a responsibility to do one of two things. Either;
- Start to allocate non-trivial amounts of money (and perhaps time) to trying to address suffering or need in our world.
- Admit they don’t really care about anyone outside their immediate family/friend circle, or it is someone else’s responsibility to help those less fortunate. Are they really happy to acknowledge that luck has played in their favour but it is not up to them to try to use this “luck” and give back to others less lucky ?
Basically be open and pick a side and then be loud and proud of where you landed
Why Some Don’t Give
It is probably useful for me to quickly cover most of the responses I get when I suggest rich people should give a considerable amount of their winnings to charitable causes;
- Charities Waste Money
Of course 100% of all charities are not super efficient (just as most businesses are not efficient users of capital). So rather than using this as an excuse not to give maybe use it as a motivator to search out the charities efficiently using capital and give them more resources to go good work. If you don’t want to do this selection work yourself then go to groups such as givewell.org who undertake work to select the most effective charities across a range of needy causes. - Australia has a big social net — so there is no real need to give
Firstly we don’t have a big social net . As a quick summary total tax take in Australia is around 27% of GDP, UK is 34% and Sweden is 44%. We are not being overlay taxed to pay for a raft of sufficient social services. - People may not give $ but they volunteer
Sure, if you are a financially struggling individual and your only real resource to offer is time then volunteering is a wonderful way to give back. It is worth noting that volunteering rates globally are declining as they are in Australia. Further some multi-millionaire choosing to allocate a few hours a month in volunteering but not giving any money away is not thinking about trying to be impactful — because allocating decent chunks of money will have FAR MORE impact than a few hours a month volunteering - I worked hard for my success
Firstly see the points in the last section..Secondly you were successful because you are in a stable society with laws that protect your rights and your money, with banking and payments systems that let you accumulate wealth without the fear that the state (or some other rogue actor) will take it away. So you did not achieve this wealth in a vacuum..Your wealth came at least partly from standing on the shoulders of the society around you.
What Should We Give
WARNING: The following pages have a lot of numbers. I think it is important to look at this issue with numbers and not just concepts. We need to be clear on what is happening and then decide whether we can do more or less.
As a start let us first look at some data points to attempt to provide boundary conditions to this question because clearly the answer could be from 0% of your wealth to 100% of your wealth.
Philanthropy Australia just released its lates look into Australian Philanthropy (or lack of philanthropy might be a more accurate title).
https://www.philanthropy.org.au/tools-resources/news/blueprint-a-deeper-dive/
There are some super interesting charts from this report. The first compares giving rates for Australia, New Zealand, US, Canada and the UK.
Overall Australian giving is slightly behind the UK and Canada but overall we are well behind New Zealand and the US. And there is more…
Individual giving as a % of GDP by Australians is dramatically lower than their fellow citizens in the other countries. Following the “individual contributions” a little more and you see that even when we pop our clogs the amount going to bequests is also very low (by Australians) compared to the other countries.
Following the individual giving a little more. Looking at income levels and % of those in each level claiming a tax deduction for a charitable donation
So 54.5% of people earning >$1m do not claim any tax deduction for a donation (and nor to 52.7% of those with incomes between $500K — $1m). As you go lower down the income tree the % claiming a tax deduction declines pretty significantly.
Only three things can be driving this.
1) Either those with incomes >$500K are making big donations but are reluctant to claim a tax deduction (ok..hilarious I know)
2) Or those with incomes >$500K are making donation so small that they can’t be bothered to keep the receipts and claim the donations back (more likely)..
3) Or generally speaking our most wealthy are not giving anything to charities (highly plausible).
Best guess has to be either option 2 or 3.
One explanation could be that wealthy folks do not give from personal income but, rather, have set up charitable foundations which then give to needy charities.
Over recent years many wealth Australians have moved some assets into PAFS or PuAFS (Private Ancillary Funds or Public Ancillary Funds). While these are definitely having an impact overall — and this is the hope of the side — this has not yet lead to a huge increase in giving.
To try to frame this. PAFS and PuAFS donate around $A800m a year from a corpus of around $A10b. This $800m is part of the $7.6b (Billion) of total giving in Australia..so maybe 10% ish of overall giving.
The AFR recently ran a story (https://www.afr.com/companies/financial-services/donations-of-australia-s-50-biggest-givers-double-in-five-years-20210222-p574op) where the headline was that donations were up 29% year on year in 2020 and had doubled over 5 years. If you say that really fast it sounds good but in reality something doubling over 5 years means it grew at a compound rate of 13% per year.
Spoiler alert — outlined a bit later on is data that indicates that wealth creation occurred at a FASTER rate than donation rates.
At a giving rate of 0.38% of GDP it will take quite some time to catch up to the UK, US or New Zealand (assuming they don’t continue to grow their giving rates).
It is useful, if you are trying to work out whether growing giving 13% year on year is a good thing, to try to unpack some of the data around wealth creation.
In 2015 to scrape into the BRW (as it was back then) Top 200 you needed around $286m of wealth. in 2015 the top 20 wealthiest Aussies had around $92b between them and the top 10 had $72b.
In 2020 to scrape into the AFR Top 200 you had to up your game and have at least $540m (which is 97% more than the entry requirement for 2015).
Further the Top 10 wealthiest Aussies had amassed $145b ( and increase of 110% over the 2015 data). And on it goes.
Another way to calibrate giving by the wealthy using the AFR data is to look at the giving list vs the wealth list. The 50 wealthiest Australians have a net wealth of $273b and the top 50 donors gave $968m last year which represents around 0.35 of 1% of the wealth. Just let that sink in — noting also that the largest donation (around $150m of the $968m donated) came from a dead guy (Ramsey Foundation) and not living, breathing gzillionaires.
Actually a number of the “top givers” are actually estates of dead people but for simplicity as we delve deeper let’s assume the money came from the living.
To make it into the top 50 donors in the AFR piece you had to give at least $4m. To be a Top 50 wealthy Australian you needed a wealth of just shy of $2b. Giving $4m a year from a wealth of $2b means you are giving 0.2 of 1% of your wealth away annually..Do this for 20 years and you might have given away maybe 4% of your wealth..ie in technical terms you have given bugger all.
Taking all the above into account, given the time value of money a more reasonable and informed AFR headline might have read…
“Aussies resist the temptation to give more and hold the line in giving at 2015 levels relative to their wealth….i.e. we have not become more generous in the last 5 years.”
Bill Gates is probably as famous for the work of the Bill and Melinda Gates Foundation as he is for his amazing work at Microsoft (Ok I was a VP at Microsoft on the US campus for a while and worked for Microsoft for 9 years and call Bill a friend…so there is a little bit of bias here).
His foundation has done amazing work but he has also made quite public his plan to give nearly all his wealth away to charity before he dies.
He started up the Giving Pledge which tries to motivate people with net wealth of >$US1b (Billion) to agree to give more than 50% of their wealth to charity either before or when they die. Over the years people from outside the US have made this pledge and today there are 220 billionaires who have committed hundreds of billions of dollars to charity.
A couple of Australians — Twiggy Forrest and Ainsworth — have made the pledge.
Interestingly while Twiggy Forrest (wealth $23b) has committed to move >50% of his assets into charities before he dies his current rate of giving indicates there is a way to go. Last year Twiggy gave away $88m. This equates to 0.38 of 1% of his wealth. If he had moved 50% of his wealth to a PAF (from where you have to give 5% away each year) then his giving last year would have been $575m or roughly 650% of his current giving rate.
Probably the most giving Australian (in terms of $ and % of net wealth) ever was Paul Ramsey. In his will he left around $A4b to the Ramsey Foundation and they now have the firepower to do some meaningful work in moving the dial on some major issues in society.
Before continuing down this path of working out how much is the right amount to give we should review tax rates and the social net.
The US takes about 27% of GDP in taxes and yet has a pretty poor social net (they spend a ton on defence) and Americans backfill by donating around 1.44% of GDP.
In the UK overall tax rates are around 33% of GDP and they have a way better social net than the US (thank god for the NHS) but even in the UK they (individuals) give 0.54% of GDP.
Total tax take in Australie is 27% and we have a pretty good social net but it is clearly not sufficient given the short falls in aged care, disability care, domestic violence, medical research and arts funding (to name just a few areas desperate for more resources). Yet individuals in Aus only give 0.38% of GDP.
So we take less tax than the UK but UK citizens give 43% more than we do and we take in about the same tax as the US (27% of GDP) but US citizens give 278% more!).
So either in a comparative or a objective review the argument that our taxes pay for the needy just doesn’t pass the sniff test.
Some data on this.
What Now
If you accept the premise that you should allocate some proportion of your net wealth to philanthropy (more than likely to a foundation in your name that then gives money away each year) — what should that number be?
Research I funded about 15 years ago showed that the average high net worth Australian allocated around 1% of their net wealth to charity — at a time that the average wealthy American allocated 15%. I am funding an update to this study and my guess is maybe the 1% has become 2% but we are light years away from double digits.
There are some other ways to triangulate the “what should we give” debate.
How Much do I need?
You start with how much you need to spend every year to ensure every aspect of your life is as you want it to be, forever.
If you spend $500K a year (ie spend) on all expenses then you would need a corpus of around $30m (if you assume a tax effective vehicle and a drawdown of 2.5% of the corpus per year — at 2.5% the corpus would retain its net value for at least 40 years).
It is important to note at this point that generally speaking everyone’s yearly spend curve peaks around the time their kids are at primary then high school and then gradually declines from there. So even if you were spending $500K a year at your peak it is highly unlikely — to maintain the same standard of living — you will need to spend $500K for the rest of your life.
If you spend $1m you “need” maybe $50m and if you spend $10m a year you “need” $500m.
We have over 100 Australians with a net worth north of $1b. You could argue that any wealth over $400m — $500m is probably surplus to needs and could be moved into a charitable foundation…If they did this all 100 of them would be proud members of the Giving Pledge community.
Another way to look at this is to go top down.
Would it be unreasonable to assume that someone with a net wealth of $10b could live exactly the same life they live now if they had “only” $8b. Can the same be said for someone with $1b.i.e. could they live their life without any change to consumption habits on $800m.
What about the struggling individual who just scraped into the AFR Top 200 with wealth of $540m. Could they live a life unchanged with only 80% of this ? i.e. $450m. Probably.
Where does this thesis run out of puff? It is probably fair to say that someone with $10m in net assets would have to make some changes if they had “only” $8m. Only because some people do like to live (as is their right) to the edge of their income/asset allocation level and if you live in Sydney a lot of your net worth maybe in the family home (it is not easy to allocate a % of your family home to a charitable trust).
A recent ACOSS report tried to unpack wealth in Australia.
In this report and a recent one by OXFAM the amount of wealth in Australia that sits in the hands of just a few people is staggering. 1% of Australians hold close to 24% of the wealth with the top 10% holding around 70% of the total wealth of all Australians. With total Australian wealth sitting at around $11.3t (Trillion) it means that around 250,000 Australians hold $2,724b (Billion) of wealth..or around $11m each.
What If….
As covered above from the AFR reporting of JB Were stats we know that the top 50 donors gave $968m last year. We also know that the PAFs and PuAFS donations overlap. Ie some of the top donors use PAFS to engineer their giving. Of the top 50 donors around half were from dead people or to people who are not part of the AFR Top 200. So only 25 donors (who donated around $350m) were associated with our top 200 wealthy.
Put another way 170 people in our top 200 with wealth from $14b to $540m did not give even $4m a year to charity…This means that someone who sat in the middle of the top 200 (with a wealth of $1b) gave less than $4m away — which in turns means they gave away less than 0.04 of 1% of their wealth away.
Someone at the bottom of the top 200 ($540m) only had to give 0.75 of 1% of their wealth to make it into the top 50 donors but they didn’t.
Whichever way you cut the comparison of the Top 200 wealthy and Top 50 Donors these are hardly the numbers you would expect from a group of our most privileged and lucky.
What if we assumed that everyone in the Top 200 allocated 20% of their net worth to a PAF which then had to (by legislation) gave away 5% of the corpus per year (which kind of works out to 1% of the total wealth given away each year). The AFR top 200 have a total wealth of around $480b. If 20% ($96b) was allocated to charitable giving through PAFS then around $4.8b (5% of the corpus) would be donated annually more than 13 x the current identified giving rate of this group.
Remembering that TOTAL giving in Australia is around 0.81 of 1% which is $18.2b and individual giving is 0.38 of 1% which $7.6b. So adding maybe $4b is a big deal! and that would be just from 200 Australians.
What if the top 1% of Australians (250,000) put 10% of their net worth into a PAF that then allocated 5% of this (so around 0.5% of net worth) to charities on an annual basis. This would mean that around $272b would be sitting in PAFS and around $13.5b would be donated annually. At 20% allocated the annual donations would be $27b. This would add a lot of firepower to the work being undertaken to help those in need.
Finally if you blend the data, focus just at the top end (ie more than the top 200 but less than the 250,000 making up 1% of our population — just the 40,000 Australians with a net worth of more than $30m). This group has a total of $1t(Trillion) or $1,000b(Billion)in wealth. Assume this group can move 20% of their net assets into PAFS etc etc then there would be $10b a year donated — moving the dial in terms of donations to needy causes.
So top current individual giving is $7.6b. Adding a small chunk of asset allocation to donation from the top 200 would add $4b or adding a similar allocation from the top 40,000 would add $10b and if everyone in the top 1% gave a decent chunk it would add somewhere between $13.5b — $27b in EXTRA giving…
Hopefully all the above makes a few points clear;
- There are very good examples globally of very wealthy people allocating more than 50% of their new wealth to philanthropy
- Our most wealthy do not allocate much of their wealth to philanthropy when compared to their fellow wealthy travellers in the US, Canada, UK or New Zealand.
- There are tens of thousands of very wealthy Australians who could allocate at least 20% (probably a lot more!) to charitable giving and in doing so they would help address a vast array of needy causes. Today.
Daniel’s Thesis on Giving;
If you have more than $20m in net investable worth you should allocate at least 20% to your own PAF from which you can donate to any cause that touches your heart. If you have more than $100m you should allocate at least 30% and if you have more than $1b you should allocate at least 50% (ie mapping to the Gates inspired Giving Pledge). If you fall between these levels work out what is best for you and society and do what is right.
What can we do to increase giving?
The work to bring PAFs to life has made it easier for wealthy people to give and the increase in donations over the past few years while modest is encouraging. This alone, sadly, has not changed the culture of giving amongst the majority of our most wealthy — as the data clearly shows.
Given it is so easy to setup a PAF (or use a PuAF) why haven’t tens of thousands of our most wealthy moved in this direction. Further why of the more than 100 billionaires in Australia have only 2 signed up for the Giving Pledge — or in other ways allocate serious money to philanthropy.
With all the good that can be done and all this capital sitting around and not adding value to the individual why doesn’t more of the excess capital end up helping those most in need?
Unpacking the possible reasons for this mis-match provides only a few options;
- Our wealthy have not been introduced to or been introduced to but do not accept the concepts at the start of this post and so have never thought deeply about the responsibility of wealth nor the luck involved with financial success.
- Our wealthy have not done the maths with regard to what they need to live a full life and what is excess capital.
- Our wealthy think it is just fine — even good — to pass on vast wealth to their children and generations beyond.
Whatever the individual reasoning it seems that as a society we need to do two things going forward;
- Make it super easy for our wealthy to allocate serious money to philanthropy. PAFs are an amazing example of what we need to do. Perhaps there are other, reasonable actions to take to make giving even easier
- Introduce higher tax rates for the wealthy (income and capital) and reduce capital gains tax relief for certain asset classes and over certain asset values.
- Introduce an Inheritance Tax. Ok people. Breathe. Nearly all OECD countries have some form of an estate tax. I like this idea the best and here is my idea for one.
A short history of Inheritance Taxes in Australia
Australia has estate taxes until a short period in 1979 when the well known and corrupt Queensland Premier (Joh Bjelke-Petersen) removed them in Queensland — under the guise that it would impact single widows (It never really did). Anyway Neville Wran (NSW Premier) was spooked and thought that this move by Qld would mean that everyone would move from NSW to Qld (or at least all the rich people) So he repealed Estate taxes in NSW — with exactly zero deep thought or review…Then every other state fell into line.
So Estate/Inheritance taxes disappeared from the Australian landscape not through careful review but reacting to the actions of a nutter. Brilliant.
Estate Taxes exist in most OECD Countries. However to get a real picture of potentially how much money is going into helping those less fortunate you need to look at Tax rates as a % of GDP (as we did earlier). Estate Taxes and Individual Giving rates.
The table below sorts first on Estate Taxes then by Tax as % of GDP and then individual giving rates.
https://en.wikipedia.org/wiki/List_of_countries_by_inheritance_tax_rates
https://en.wikipedia.org/wiki/List_of_countries_by_charitable_donation
It is important to note that the details around cut in levels etc are different in each country but when you look at this list you can’t help but notice that yet again Australia has threaded the needle in terms of being on the wrong side of history on each key metric. Again we have a low total tax take and yet again (as with giving rates) we have a non-existent Estate/Inheritance Tax.
In fact Australia has played the brilliant trifecta. Low taxes, no inheritance tax and low levels of giving..Genius move!
One might have hoped that given wealthy Australians are not taxed that high and there is no Estate/Inheritance Tax we might have seen globally high giving rates and yet we fall behind our cohort.
You can’t help but think that our wealthy are a pretty greedy bunch of people.
Inheritance Tax — DP style
I have tried to develop something that is super non-controversial. I wanted to make sure there was no way an ordinary Australian wanting to leave a decent but not ridiculous amount to their kids was not able to.
So here goes…
If you have net wealth over $20m you need to move assets equal to 20% into a PAF (or PuAF) from where you can annually donate to what ever causes touch your heart. (noting that once money is in a pAF or PuAF you can’t get it back and you have to donate 5% of the value each year to registered charities).
If you don’t do this then on your death 30% of your estate will be taxed. The money will go into an Australian Philanthropy Evergreen Fund. This fund will be at arm’s length from Government (a la The Future Fund) and will allocate 5% of its corpus each year to registered DGRs. Selection of DGRs that receive funding can be agreed by an eminent group of advisors — covering all areas of social need.
If you have set up your PAF at least 5 years before you die and it has 20% of your assets then you will not be subject to the 30% Estate Tax.
So give less while you are alive or give more when you are dead. Either way you are not keeping it all and nor should you.
And so….
In the end all of us have to put our head on our pillow at night and at that time we are alone with out thoughts. If you can sleep soundly in the knowledge that you could have helped those in need today, while not changing your life one iota, but decided not to then that is your choice but just because you don’t want to give it does not mean that society can’t required you to give back.
It is simply not enough to say that you pay your taxes and look after your family and maybe some friends. Societies only hang together because of collective effort and collective values.
Hopefully, more of us will choose to reflect on our responsibility to society in general, how luck has played its role in our lives, what we really need to live, how much we should pass on to our children and then work out how to put more capital to work in helping those in need.
If more of us do not give back at appropriate levels then I hope governments of all persuasions develop some spine and bring in tax reform to address what is now a massively distorted landscape of multi-generational inequality.
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