1. Has regulation of charitable foundations thrown the baby out with the bath water? Journal of Public Economics 129 (2015) 63–76 Benjamin M. Marx Dept. of Economics U. of Illinois at Urbana-Champaign Jan 5, 2016

2. Benjamin M. Marx, Dept. of Economics, UIUC Introduction Did lax regulation allow the wealthy to abuse charitable foundations for tax deductions?

3. Benjamin M. Marx, Dept. of Economics, UIUC Introduction Did lax regulation allow the wealthy to abuse charitable foundations for tax deductions? Effects of the Tax Reform Act of 1969 (TRA69) “…the most far-reaching legislation affecting private philanthropy in our two hundred year history.” (Worthy 1975)

4. Benjamin M. Marx, Dept. of Economics, UIUC Introduction Did lax regulation allow the wealthy to abuse charitable foundations for tax deductions? Effects of the Tax Reform Act of 1969 (TRA69) “…the most far-reaching legislation affecting private philanthropy in our two hundred year history.” (Worthy 1975) Estimates using panel data on charitable foundations

5. Types of Foundations Foundation Type Private / Public Examples Number In 2008 2008 Assets ($ bil.) Targeted by Tax Reform Act of 1969 Private Non- Operating Private Ford Fdn Bill & Melinda Gates Fdn Citi Fdn Merck Company Fdn 70,124476 ✔ Operating Getty Trust Carnegie Endowment for Int’l Peace 4,76239 Community Public Boston Fdn NY Community Trust 70950 Source:Foundation Center’s “FC Stats”

6. Benjamin M. Marx, Dept. of Economics, UIUC The Tax Reform Act of 1969 (TRA69) Provisions to improve foundation governance and transparency: Penalties for self-dealing, excess business holdings, and political activity Requires financial reporting to IRS and publishing annual reports Excise tax on investment returns Minimum spending rule: ~5% of assets per year Sources: Deep and Frumkin (2001), Mehrling (1999) and Worthy (1975)

7. Benjamin M. Marx, Dept. of Economics, UIUC Data: The Foundation Directory

8. Benjamin M. Marx, Dept. of Economics, UIUC Data: The Foundation Directory

9. Benjamin M. Marx, Dept. of Economics, UIUC Data: The Foundation Directory

10. Benjamin M. Marx, Dept. of Economics, UIUC Data: The Foundation Directory

11. Benjamin M. Marx, Dept. of Economics, UIUC Data: The Foundation Directory Published by Foundation Center 99.7% or more of the field’s estimated assets Surveys followed by use of government records as needed Variables (most years) Characteristics: State, Incorporated/Trust, Date Established Finances: Assets, expenses, non-administrative expenses, gifts People: Donors, Deceased Donors, Officers, Directors Electronic data compiled using ABBYY FineReader 10, OmniPage Professional 9, and Python

12. Benjamin M. Marx, Dept. of Economics, UIUC Outline

13. Benjamin M. Marx, Dept. of Economics, UIUC Outline

14. Benjamin M. Marx, Dept. of Economics, UIUC Empirical Strategy: Difference-in-Differences  Outcomes Entry and exit Gifts Administrative expenses  Regressors post t *private i treatment indicator X it dummies for deceased donors, age and financial variables interacted with post t, foundation time trends  Standard errors clustered by state

15. Benjamin M. Marx, Dept. of Economics, UIUC Results: Total Effect

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21. Benjamin M. Marx, Dept. of Economics, UIUC Heterogeneous Effects

22. Benjamin M. Marx, Dept. of Economics, UIUC Variable NameDefinition Donor-Managers # of manager full names matching donors’ Managers in Donors’ Family # of manager surnames matching donors’ Has Human Donors Indicator: donors are not all companies No State Reporting Law Indicator: foundation is not required by the state to file financial reports (Fremont-Smith, 1965) Constructed Variables

23. MT WY ID WA OR NV UT CA AZ ND SD NE CO NM TX OK KS AR LA MO IA MN WI IL IN KY TN MS AL GA FL SC NC VA WV OH MI NY PA MD DE NJ CT RI MA ME VT NH AK HI State Financial Reporting Laws Before TRA69 Reporting Laws For# of FoundationsMean Log Assets Trusts745 13.44 Corporations126 13.42 Both114013.37 Neither231913.51 Source:Fremont-Smith, Marion. Foundations and Government: State and Federal Law and Supervision. New York, Russell Sage Foundation, 1965.

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30. Benjamin M. Marx, Dept. of Economics, UIUC Conclusion TRA69 had a strong negative impact on giving to foundations Evidence of abuse, but compliance cost explains much of the response Regulators must be careful about raising the cost of activities with positive externalities

31. Benjamin M. Marx, Dept. of Economics, UIUC Thank you!