The IRS does review whether grants are mission aligned … but (a) I don’t exactly feel secure that they’re keeping all the foundations in line; (b) it would get infinitely more complicated if profit were allowed to be part of the justification for a grant/investment.

I’d personally rather just see foundations have to pay taxes on investment income like everyone else. I think any favorable treatment should be given only for what they actually do to improve the world. You may disagree with my mentality of wanting to push them to “use it or lose it,” but keep in mind that taxing investment income would merely be returning the system to NEUTRAL (currently, it is giving them favorable treatment for spending later instead of now – who can defend that?)

This is a good point, but I’m not sure Lucy is implying that there are such opportunities–her argument is simply: No favorable tax rate for non mission-aligned investments. She’s not suggesting that foundations be required to invest in such a manner–just that, if they don’t, they get taxed.

I mean, the dollars foundations must pay in taxes still go into the public coffers–that’s still an okay from the public standpoint, right?

Good point from Alex about more incentive to spend if there are no tax advantages.

I wonder about this point:

“This means that the foundation is viewed as providing a public benefit, not just based on the dollar value of grants they make, but also from the value that arises from having an institution whose very existence is designed to benefit the public.”

Now, do foundations really provide a public benefit just by existing? Or does their public benefit more closely track with the money they give away?

Perpetuity is an interesting question. I tend to think the choice to be perpetual or not should be up to the board and not enforced via taxation. However, I don’t think enough thought goes into creating a strategic time horizon for the foundation. I’m hearing more foundations, large and small, talking about not wanting to exist forever.

Thanks for your comment. Any thoughts you have on these issues is appreciated.

The prospect of taxed endowments creates a powerful incentive for foundation boards to spend down over time, thus putting more money into the sector, rather than keeping it locked up in the market.

I look forward to the evolution of the conversation.