You hear a lot about how “the rich” are using charities to effectively reduce their tax to minimal amounts, among other methods.
On the face of it without digging, it obviously makes people angry and detest the rich. But scratching beneath the surface, I’m not quite sure how exactly they would achieve this? In order to claim the tax back from money donated, you still have to… donate money? Which would still equal more than the money claimed back from tax.
So unless they are actually doing something illegal and funneling money through a charity, claiming tax, and then using that money from the charity to fund purchases not related to the charities mission, how exactly is it benefiting the donor (financially)?
In: Economics
Firstly, the people here saying “the rich don’t gain anything from this” are mostly lumping “millionaires” with “hundred millionaires” and “billionaires.” There is a GIGANTIC difference between each of those. Like, as big of a difference between someone who has $1,000 in their bank account and $1m in their bank account.
So let’s just talking about the ultra wealthy ($100m+ net worth). The main way they minimize taxes is by setting up their own charitable foundation. When you transfer your wealth to a charity, you get to deduct that from your taxable income.
Super simplified:
– Let’s say someone made $10m in a year (through salary, dividends, or selling stock). Instead of paying taxes on that $10m, they donate it all to their foundation. Now they have $0 income for the year, so instead of paying around $2m in taxes they pay $0.
– What might an ultra wealthy person spend money $10m on in a year? Give it to their kids? Buy a private jet and fly around the world? Buy priceless art? Maybe a painting of themselves? Throw extravagant parties? But instead they give $10m to their charity, yay helping the needy!
– Then the foundation hires the rich person’s kids as the directors at $500k salary. The charity sets up offices all around the world, so they need to pay for travel and accommodations at all those locations. The charity buys a Picasso to hang on the walls. They need to throw large fundraising galas.
Speaking of art:
– Two billionaires, Billionaire1, Billionaire2, all set up nonprofit art museums.
– Billionaire1 donates $10m to his museum, and the museum purchases a minor Picasso previous worth $1m for $10m dollars It even makes the news! (“minor Picasso painting sells for $10m!”)
– Billionaire1 gets to deduct $10m from his income, he saves $2m from his taxes that year, foundation, museum gets a Picasso now worth $10m.
– Billionaire2 also has a minor Picasso he had previously purchased for $1m. Instead he donates it to his foundation, and puts down $10m as its value (because didn’t you read the news? minor Picassos are now worth 10m). Now Billionaire2 gets to deduct $10m from HIS taxes.
– Billionaire1 and 2’s net worths essentially stay the same (if you include their foundations as part of their net worth), except they both got to skip out on having to pay $2m in taxes.
(This isn’t the only way billionaires use art as a way to enrich themselves btw, they also take non-taxable loans against it, or take out ever-increasing insurance policies, etc).
So next time you ask “why are people paying increasingly large amounts of money for pieces of art at auctions?” Now you know why.
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