Why Do Rich Americans Feel So Strongly About Charities?

(A lecture given at the Chinese Academy of Social Sciences American Research Institute by Professor Zi Zhongyun, former director of the Tianze Economic Research Institute)

In American society, there are tens of thousands of large and small private foundations established for the public good, which are independent from the government. The government supports them by giving them tax deductions, and also monitors them with relevant laws. This is how American foundations became so enormous. Traditional thinking and social values, however, played a more important role in expanding American foundations.

There are three reasons why today’s American foundations are different than traditional charitable activities. First, their goal is to cure. Many foundations in America have slogans like “fighting the causes of poverty.” Second, they are well organized, and they use donations methodically. Since the foundations work within a strong organizational framework, the use of every last bit of money will undergo rigorous evaluations. Third, the organizations work to “teach a man how to fish” and not “give a man a fish.” They mainly work to help others become self-reliant and break free from the shackles of poverty. They also carefully avoid making their beneficiaries lazy. For this reason, even though there are countless development projects, most projects focus on either education or health, which gives more people a chance to receive an education and adequate health care. This gives Americans a fair chance to compete. Since the beginning of the last century, these foundations have emphasized the development of a sustainable society. Some of the foundations have even cooperated with United Nations institutions, which has helped the non-profit sector develop.

According to my investigations, Americans typically believe that people become wealthy due to their own ability. However, those who become wealthy should repay society. Every citizen and every company should feel responsible for society. Donating to the community is not only considered a duty but also a right of the benefactor. Donating to the community is a value shared by all of society: people are pushed by an invisible force to fulfill this duty to society.

The increasing gap between the rich and the poor at the beginning of the 20th century caused sharp social conflict, which caused the non-profit sector to be born.

The essence of America’s institutions widened the gap between the rich and the poor. If this process were allowed to run its course, the gap would become wider and wider, and the resulting social conflict would become unbearable. This would happen in any society. It happened in Europe in the 19th century with Marxism. Society was no longer able to tolerate the increasing gap between the rich and the poor, which caused many kinds of reformist thinking.

These events occurred later in America. After the American Civil War, from the end of 19th century until the beginning of the 20th century, the industrial capacity of the country developed very quickly. The rate at which people accumulated wealth was unprecedented in history and unparalleled in other countries. Furthermore, the wealth was concentrated in a few hands, increasing the acuteness of social conflict. In addition, the government tended to be rather corrupt. The corruption was caused by Congressmen conspiring with a few big capitalists, a system in which the former would pass a few laws that were beneficial to the latter. Then they would share the spoils. This type of situation tends to encourage, resist or stabilize the polarization of wealth in society.

How did America alleviate this conflict between the rich and poor? First, it increased social monitoring and media monitoring. Second, it created a strong government welfare policy. In addition, it encouraged the establishment of private charities, which had a remarkable effect on alleviating the social conflict in America at that time.

Emphasizing Education and Medical Treatment

Every country in every time period has public welfare or charities. As long as there is a wide gap between the rich and the poor, there will be charities. In Europe, the churches were responsible for doing charitable activities. In general, the wealthy members of a community have a responsibility to give money and other goods to society. The oldest form of donating occurred when the wealthy gave to the church and the church redistributed to the poor. Later, specific laws were enacted. It was decreed that the rich people in a diocese would be required to give money and goods to the poor. This was one kind of tradition. In America, however, things were different. Americans created a new institution of foundations, which had its own special characteristics.

First of all, they are organized differently. They seek to get to the root of the problem instead of just alleviating the symptoms. In other words, they “teach a man to fish” rather than “giving a man a fish.” When a foundation receives donations, those funds are organized and managed using modern methods. Foundations have specific goals and detailed concepts about how they will use donations, the most important of which is that the money must be used to help solve fundamental social problems.

John D. Rockefeller, one of the earliest philanthropists, believed that disadvantaged groups were less likely to receive an education. The poorer a child was, the less likely it would go to school, causing a vicious cycle. At the same time, disadvantaged groups had poor nutrition so they were less healthy. This caused them to be unable to compete with others. Eventually they would be totally unable to compete. For this reason, philanthropists would especially focus on education, health, and medicine. Of course, each philanthropist would have his or her own priorities. For example, Rockefeller largely donated to health and medicine projects. He donated a lot of money to projects that developed new drugs such as penicillin. Therefore, America’s different kinds of education and different kinds of foundations all had huge influences on society.

I would particularly like to mention the following fact. When the Carnegie Foundation was first founded, Andrew Carnegie donated $5.6 million to education. In that same year, the American government’s educational funding totaled $5 million. As an individual, Carnegie donated more to education than the entire American government. In any case, his extreme wealth was very important. This tradition has been passed on through the years, even to Bill Gates. Some say that Bill Gates loves to read Carnegie’s essays because they form the basis of the modern welfare society. Carnegie and others believed that people needed to donate part of their wealth during their entire lifetime. They believed that their so-called dignified lifestyle needs society’s approval. The wisdom to spend money well is just the same as the wisdom to earn money well.

America’s educational television station was developed by the Ford Foundation and American television stations. It does not have any advertisements, and it specializes in showing educational programs. When programs like Sesame Street were first aired, television was just becoming widely available in America. Some children who were unable to go to school could get education in their homes. Sesame Street is just one of many milestones of that time.

There are many social reasons for this phenomenon; why did it happen in America? First of all, there was no country that had as many millionaires as America. In particular, no country had so much of its wealth concentrated in the hands of individuals who became wealthy very quickly. The second reason has to do with American thinking. Americans believe that as long as people receive an education, they can improve their standard of living. Third, wealthy people recognized that they benefitted from society and believed that each person was the master of their own fate. For this reason, they thought they had a responsibility to improve society.

The American Government Used Tax Deductions to Encourage Donations and Carefully Monitored Charities and Non-Profit Groups

In 1917, after the first charities were created, the American government created a tax deduction policy which encouraged donations. The government tax policy even encouraged less wealthy people to donate whatever amount they could from their salary and receive a tax deduction. In this way, donating to charity became a very common occurrence. At the same time, the government monitored these non-profit organizations to see if they were following the law. Using a non-profit organization to evade taxes and using donations to do business or advertising for a company was not allowed. These laws were not created in a day. After ten years of countless hearings, foundations were finally able to develop healthily. The modern version of the non-profit tax law was basically finished in 1969. There were some revisions but the overall structure did not change. These tax laws determined the following things: what was considered a non-profit organization, what a philanthropic organization was, what these organizations were allowed to do and what they were not allowed to do. The government strictly forbade these organizations from partaking in political activities such as giving donations to an election candidate or using donations for lobbying. Foundations were allowed to sell stock, and the stock could increase in value and could be managed by experts, but speculation on these stocks was not allowed. Later there was a law that stated foundations had to use up 5 percent of their funds every year. Foundations would give audits to Congress every year.

Foundations Are Very Transparent

American foundations are very transparent. Starting in 1969, the tax law stated that each non-profit organization had to report to the Internal Revenue Service, explaining which projects they wanted to accomplish, how much money it would need and the how much the organization owned in assets. For this reason, every year each organization has an annual report, which can be found online. Any citizen can find this report. When I visited the Carnegie Foundation in New York to find out the yearly assets of the organization, the woman at the front desk printed a detailed copy of their report. Unlike companies, they do not have any secrets. The transparency of non-profit organizations ensures that they do not become corrupt.

I think asking these kinds of questions is absolutely necessary. The government can monitor these organizations and improve the law while organizations can have a clear concept of their mission. Moreover, it ties in with America’s volunteerism. Those who have money give money, and those who have strength give their own strength. This system is taken for granted in America. For this reason, not only wealthy people contribute to public welfare but almost everyone donates a little money. In conclusion, everyone must give some money or do some community service. On one hand, America is an extremely individualistic society that values personal struggle, cruel competition and allowing only the strong to survive. On the other hand, without this spirit of volunteerism, American society would not have been able to last until today.

The proportion of GDP taken up by public welfare is between three and four percent. Ever since the second half of the 20th century, public welfare provided by private citizens was indispensible even though it could not substitute the government’s welfare policy. Some conservative administrations such as Ronald Reagan’s administration and George W. Bush’s administration think the government should reduce its welfare initiatives. Many people say these administrations rob from the poor to give to the rich. That is, their policy made the private sector responsible for many initiatives, and many people criticized this move. Even though the private public welfare system is developing well now, it is still unable to take the place of the government. The government must be responsible for the welfare system. If this is true for America, this is definitely the case for other countries.