Much of the Internet is giddy over Mark Zuckerberg and Priscilla Chan’s “pledge” to give “99%” of their Facebook stock to “charity.” Bill and Melinda Gates said, “The example you’re setting today is an inspiration to us and the world.” Unfortunately, it’s not a very good example.
Since the last gilded age, the super-rich have generally given to charitable organizations or to their own charitable foundations. That’s why we have the University of Chicago, Carnegie Hall, and the Getty Center, to name a few. Today’s new class of gazillionaires has largely followed in their footsteps: Gates created the Bill and Melinda Gates Foundation, Stephen Schwarzman gave $150 million to Yale, John Paulson gave $100 million to Central Park, and so on.
Well, Mark Zuckerberg has found a different way.
Instead, he’s creating an LLC that he owns (the Chan Zuckerberg Initiative), giving his stock to the LLC, and telling us all that the LLC will do wonderful things for the world.
Quick primer: A limited liability company is just a type of business organization, like a partnership or a corporation. It has owners, who control it, either directly or through managers whom they appoint. It can do anything that any other profit-seeking business can do. It doesn’t pay taxes; instead, its profits, losses, or deductions simply get transferred to its owners’ tax returns. Its primary advantage is that it is extremely flexible: you can design an LLC more or less any way you want.
So let’s say Zuckerberg and Chan give 99% of their stock to their LLC. What does that really mean?
First off, “give” is the wrong word to use in this context. That implies that the money is irrevocably going from them to something else.
In this case, they are investing in their own company. Because it’s an LLC, they still have complete control of the money.
That means they can, among other things:
- Write checks from the LLC to themselves as its owners, pay themselves salaries for running the LLC, borrow money from the LLC, borrow money personally using LLC shares as collateral, sell some of their shares in the LLC to other people, or take cash right back out in many other ways.
- Use the LLC to buy houses they live in, offices that they work in, etc..
- Invest in profit-making companies.
- Contribute to political campaigns or super PACs, engage in direct political activity, or lobby legislators.
- Pay for his own political campaigns, if he so chooses.
- Give money to charitable foundations or operating 501(c)(3) nonprofit organizations.
Essentially, Zuckerberg can do everything with the LLC’s money that he can do with his own money. So on the most substantive level, he hasn’t done anything except announce some vague intentions. The “99%” claim made a lot of headlines, but there’s a lot less there than meets the eye. A lot of things that other billionaires do with their own money—like invest in other companies—Zuckerberg can now do with the LLC’s money. The only thing he seems to be saying is that he and his family will restrict their personal consumption to 1% of his fortune (about $450 million), but even that is not entirely clear. He certainly retains the ability to take money back out whenever he wants, and the LLC will almost certainly do some things that really are personal consumption (like political contributions). In addition, whenever the LLC makes a contribution to a real charity, the associated tax deduction will flow back up to Zuckerberg and Chan. So to the extent that they have to sell stock to pay for their consumption, they will never pay tax on those sales. (Put another way, their remaining $450 million, as well as any money they make in the future, is now all after-tax money.)
Is this really so bad, though? I mean, he says he will use the LLC to make the world a better place.
But compare what he’s doing to what past tycoons, up to and including Bill Gates and Warren Buffett, have done. They donated directly to charitable organizations or to charitable foundations. There are a lot of criticisms you can make of the current “charity” system that exists because of the tax deduction for contributions: a lot of recipient organizations do little good for society, some do harm (like the NRA’s 501(c)(3)), and the tax deduction directs money from productive investments to mega-rich institutions like Harvard University. But Gates and his predecessors at least agreed to play by certain rules: not to take the money back if they changed their minds, not to use it to further increase their wealth, not to use it influence the political system (although that rule has some loopholes), and so on. The idea was that if you became a multi-billionaire, you would relinquish some of your control over a large chunk of your wealth and irrevocably dedicate it to attempting to improve society, according to rules that society has agreed on. That’s what the Giving Pledge was all about.
Mark Zuckerberg doesn’t want to play by the rules. He thinks he can do a better job. Maybe he can, although I don’t have any reason to believe that’s true. This is the next step in the privatization of philanthropy. No more Giving Pledge. Instead, we’ll have the Keeping Pledge:
I pledge to keep all of my wealth and use a lot of it to make the world better place, as long as I get to define “a lot” and “better.”
Mark Zuckerberg isn’t the first person to make the Keeping Pledge. The Koch brothers already did: they’ve given away lots of money to charity, but they’re keeping even more to spend on politics, because they believe that that’s the most effective way to make the world a better place (as they see it).
Zuckerberg’s LLC’s investments may end up having as much positive impact on the world as the Gates Foundation’s (although I’m not sure how high a bar that is to begin with). Most likely we’ll never be able to evaluate it in any kind of definitive way. But it is certain to have a different impact in the short term. Other super-rich people will feel no pressure to sign onto the Giving Pledge or donate their money to the traditional charity system. Instead, they will create their own LLCs, maintain complete control over their money, and spend it on their own pet projects and political issues. That’s not a good thing.
Also posted on Medium.