When we try to estimate a potential donor’s gift capacity, the fundraising tradition has been to use statistics from the IRS that show that, on average, Americans give around 2-5 percent of their income annually to charitable organizations.
That average is derived from people who itemized charitable deductions. Even though that’s an average, for those of us in prospect research that’s been a reliable percentage to use because, by and large, only people who benefit from itemizing actually bother to do it – and that’s wealthy people.
Back in 2003, an organization called New Tithing Group (NTG) delved a little deeper into the IRS data and parsed out giving just for affluent Americans – those with $200,000 or more in reported adjusted gross income (AGI).
What they found is that the most-generous donors gave approximately 1.1% of their total investable assets (as reported to the IRS). NTG argued that, if the affluent, generous donors in 45 states gave at the same level as the top 5 states (Utah, Oklahoma, Minnesota, Nebraska, and Georgia), giving nationwide would increase by 15%.
What academics and journalists who are delving through the Panama and Paradise Papers are learning about the nature and pervasiveness of offshoring gives us a new lens through which to view philanthropy by the wealthy.
For example, here’s a paragraph I came across in my teetering Paradise Papers reading pile from the past month:
The HSBC leak, the Panama Papers, and the amnesty data all paint the same robust picture: the probability of hiding assets offshore rises sharply, continuously, and significantly with wealth, including within the very top groups of the wealth distribution. By our estimates, households who own around $10-12 million in net wealth are twice as likely to conceal assets abroad than households with around $5-6 million; households with more than $45 million are four times more likely. Conditional on hiding assets, the fraction of one’s true wealth hidden abroad is high (around 40%) and does not vary much with wealth.” (1)
It does not vary much with wealth
That means that your prospective donors are probably doing it.
And if you’re thinking “oh, that’s silly, my prospects aren’t holding assets offshore. They’re in Texas (or Alabama, or Rhode Island, or Colorado) for Pete’s sake!” allow me to disabuse you of that notion:
To set up an offshore account, you don’t actually need to physically go to the Caymans to make a deposit. All you need is a phone, personal documents that prove who you are and how much money you have, and a bank account that can wire money. Accounts can start as low as $25,000. Depending on your potential, they might go even lower. As I wrote last week:
Jeffrey Winters, a professor of political science at Northwestern University and the author of the book, Oligarchy, said in an interview in The Atlantic, “individuals start being able to afford Mossack Fonseca-level wealth defense once their annual earnings (from both work and assets combined) cross a threshold of about $3 million to $5 million.”
That’s not even close to the cut off for ultra high net worth.
Let me be clear – it’s not illegal to have money offshore. You just have to declare it on your taxes.
We’ve been basing our estimates for wealth and philanthropy on tax returns. But even two US Senate reports (in 2008 and 2014) found that 90% of the wealth held by US citizens at UBS and Credit Suisse (just two examples from leaked documents) went undeclared in 2008.
That’s a pretty large percentage of undeclared wealth for customers at two major financial institutions. It’s not like it’s a wobbly 35% or 45% of the wealth they held offshore going undeclared and so you can say “well, I can’t depend on that as a consideration in my calculations” or “well, maybe not everyone is doing it.” Ninety percent of offshore wealth going unreported is a fairly indisputable majority.
So 40% of HNW wealth is going unreported 90% of the time.
So what does all of this mean?
- – We’re probably underestimating the wealth of the majority of our prospects by at least 40 percent.
- – We’re overestimating HNWI philanthropy as relative to their AGI.
The wealthy are obviously still very philanthropic, and they are starting to shape philanthropy in some *very* interesting, creative, ways (I’m looking at you Chan-Zuckerbergs, Jim Simons, and the Gateses). World-changing philanthropy is already happening in this new Golden Era, and maybe – because of the Giving Pledge and these offshore caches – we’ll see that significant rise in philanthropy that New Tithing Group – and we all – hope for.
As for us here in the fundraising trenches, well, prospect research is an educated-guessing game at the best of times; we’re working with the visible assets we can see in order to make an estimate of a prospect’s giving capacity. Sometimes if we don’t see tangibles, we base estimates on intangible things like lifestyle, or circle of friends, or imputed philanthropy based on significant volunteer roles, such as campaign chair.
One other intangible we now need to add into our calculation is the likelihood our HNW prospect also has 40% more wealth hidden offshore.
A fascinating, pithy read: (1) “Tax Evasion and Inequality” by Annette Alstadsæter (Norwegian University of Life Sciences), Niels Johannesen (University of Copenhagen and CEBI), and Gabriel Zucman (UC Berkeley and NBER), October 6, 2017, p. 3 http://gabriel-zucman.eu/files/AJZ2017.pdf
Also:
“Charitable Giving by Affluent Tax Filers“. New Tithing: http://newtithing.data360.org/report_slides.aspx?Print_Group_Id=79
“As Wealthy Give Smaller Share of Income to Charity, Middle Class Digs Deeper” by Alex Daniels. Chronicle of Philanthropy, October 5, 2014. https://www.philanthropy.com/article/As-Wealthy-Give-Smaller-Share/152481
“Income Inequality and Offshore Tax Dodging; the rich are richer than we thought” by David Trilling. Journalist’s Resource, Harvard Kennedy School Shorenstein Center on Media, Politics, and Public Policy, September 15, 2017. https://journalistsresource.org/studies/economics/inequality/income-inequality-offshore-tax-haven-research
