Chapter 4

The Private Money Is There

One concern some may have about the feasibility of Citizen Capitalism is whether it’s possible to raise enough assets through private donations to create a Fund with significant impact. Even a cursory inspection shows there is more than enough individual and corporate money available. Starting first with individuals, the Center on Wealth and Philanthropy at Boston College has predicted that by 2061, more than $58 trillion will be transferred from American estates, with nearly half of that amount ($27 trillion) going to charity.¹ Corporations, too, routinely spend substantial amounts that could be allocated to the Universal Fund. Although direct corporate philanthropy is relatively modest, corporations spend hundreds of billions of dollars in cash each year repurchasing shares from their own shareholders. These repurchased shares, which are then retired, could just as easily be donated to the Universal Fund. For the past five years, for example, the companies in the S&P 500 have typically averaged between $400 billion and $650 billion of total share repurchases annually—and peaked over $750 billion in the first 2018 quarter.² This figure does not include share repurchases by smaller public companies outside the S&P 500, or repurchases by private companies.

On the face of it there is more than enough individual and corporate money due to change hands in coming years to create a Universal Fund that would soon have assets in the trillions, or tens of trillions, of dollars. Is that sufficient? Let us do some quick calculations. The Census Bureau estimates there are about 227 million US citizens age eighteen or older. So, assuming some fluctuations in the number of citizens, let us estimate that 225 million would be eligible citizen-shareholders.³

Although the dividends that corporations pay shareholders vary from year to year, industry to industry, and company to company, as a historical matter the dividend yield on stocks (the ratio between the dividend a company pays and the market price of one of its shares) has typically fallen between 2 and 5 percent annually.⁴ If we assume a dividend yield of 2.25 percent for the stocks in the Fund portfolio, this would mean a $1 trillion Fund would generate $100 annually for every citizen-shareholder, a $10 trillion Fund would generate $1,000, a $30 trillion Fund would generate $3,000, and so forth. By way of comparison, after starting small, the Alaska Permanent Fund pays dividends of $1,000–$2,000 today. It has proven itself one of the most popular policies in Alaskan history and has been estimated to reduce the state’s poverty rate by 25 percent.⁵

Again, our figures are conservative. Given the relatively small amounts of income initially available, it’s unlikely all eligible US citizens would immediately register to become citizen-shareholders. So let us assume that only 100 million out of the 227 million eligible US citizens sign up to become citizen-shareholders. Holding everything else constant, a $1 trillion fund would generate approximately $225 annually for every citizen-shareholder, a $10 trillion Fund would generate $2,250 annually, and a $30 trillion Fund would generate $6,750 for each citizen-shareholder. The absolute maximum the Fund could reach is boundless, particularly if, as we envision, the Fund was structured to allow donations of cash, equity, bonds, and other assets. Current US market capitalization stands at approximately $30 trillion, the US fixed income market is valued at more than $40 trillion, the REIT (real estate investment trust) market hit the $1 trillion mark in 2016, and sales in the US art market totaled approximately $22 billion in 2017.⁶ Each of these segments of capital represents a source of potential donations to the Fund. As we are about to see, both individuals and corporations have good reasons to make donations in the next decade or two that could well exceed $10 trillion. Unlike the Alaska Permanent Fund, which is founded on a dwindling resource, the Fund is structured to grow indefinitely through ongoing donations. And if it improves long-term corporate performance, dividend yields would be even greater than our assumed 2.25 percent.

So the money is there. But what about the will?

Corporations Have Strong Motivations to Donate: Immediate Advantages

We begin by looking at corporations, because their motivations for donating shares are straightforward. Business corporations as a general rule don’t spend much on charitable contributions. What they do spend enormous amounts of cash on—$400 billion to $650 billion annually—is buying back their own shares from their shareholders.⁷ These corporate share repurchases provide a natural supply of stocks to be donated to the Universal Fund.

Why do companies spend so much money repurchasing their shares? The cash goes to shareholders and is the economic equivalent of a dividend. But share repurchases are perceived to help support share price.⁸ They also satisfy, at least temporarily, hedge funds and mutual funds with short-term time horizons demanding an immediate return on their investments. With a share repurchase, the corporations’ cash goes only to the short-term shareholders who already want out, in contrast to a dividend that would have to be paid to all shareholders.

What do companies do with the shares they repurchase? Essentially: nothing. Repurchased shares are relabeled “treasury” shares and can neither receive dividends nor be voted. In essence, the company spends an enormous amount of cash and gets in return a bit of relief from the pressures of short-term investors. If a company were to donate the shares it repurchases to the Universal Fund, it would still get this relief and it would secure a patient, long-term shareholder—the Fund. In addition, if donations to the Fund were made tax deductible, donating corporations would reap an immediate and substantial financial advantage: a tax deduction.⁹

Earning Customer, Employee, Community, and National Loyalty

Although harder to quantify, there is another important benefit a company would reap from donating repurchased shares. By doing so, it would earn the loyalty of up to roughly 225 million citizen-shareholders—citizen-shareholders who are also customers, employees, investors, taxpayers, and voters. This kind of loyalty is extremely valuable. To give just a few examples, it’s common for today’s consumers making purchases to consider not only the price and the quality of a good or service but also whether the business that provides it is socially and environmentally responsible. There are even mobile phone apps, like Good-Guide and Green Globe, to help them do so. Employees accept lower salaries to work at companies they perceive as more ethical. Investors who prefer socially responsible investing practices now comprise the fastest growing segment of the market for professional investment services.¹⁰

Companies recognize the economic benefits of being perceived as a “good corporate citizen.” Some go to considerable lengths to develop this perception; companies like Costco, Starbucks, and Levi Strauss have deliberately positioned themselves in their media relations to appeal to consumers through this strategy. Other companies, like Patagonia and King Arthur Flour, have chosen to incorporate or reincorporate themselves as “benefit corporations” explicitly dedicated to pursuing social and environmental goals.¹¹ The first powerful institution to respond to the February 14, 2018, Parkland High School massacre perpetrated by a former student armed with a devastatingly lethal AR-15 semiautomatic rifle was not the Florida legislature. It was Dick’s Sporting Goods. Dick’s, which is one of the nation’s leading gun sellers, announced early in the morning of February 28 that it was immediately ending sales of all assault-style rifles in its stores and raising the minimum age for all gun purchases to twenty-one.¹²

Moreover, many corporations, like Microsoft, Facebook, and Citigroup, have a foundation arm that focuses on philanthropic endeavors. For those corporate foundations focused on issues like economic progress or income inequality, donations to the Universal Fund could readily become part of their corporate philanthropic activities. In addition, for the hundreds of corporations that produce sustainability reports, like Coca-Cola or UPS, donations to the Universal Fund could be considered an extension of their approach to sustainability. Sustainability reports are stand-alone reports that are intended to describe the environmental, social, and financial impact of the company’s activities, as well as demonstrate the connection between the company’s strategy and its role in creating a sustainable economy.¹³ In the United States, sustainability reporting is not mandatory. Yet in the past few years, the number of corporations that do sustainability reports has quadrupled from a mere 20 percent of the S&P 500 in 2011 to 82 percent of the index in 2016.¹⁴ The uptick in sustainability reporting is part of a broader trend, which anecdotally demonstrates that the world of social concerns and the corporate world are moving closer together. Other aspects of this trend include the rise of new corporate forms such as “benefit corporations” or “social purpose corporations,” which are explicitly formed to pursue both financial and social value creation; the establishment of social stock exchanges, which are only available to corporations that commit to returning both financial and social value; and numerous studies that repeatedly show that millennials want to work for companies that demonstrate values and ethics. The Universal Fund can be viewed as being synergistically aligned with this wider sustainability movement. Corporate donations to the Universal Fund are an efficient and relatively painless way for a company to affirmatively demonstrate its commitment to sustainability and a certain set of social values and ethics. Finally, many corporations might see the Universal Fund as a desirable long-term shareholder that would support management decisions to reinvest and to take care of stakeholders like employees and customers.

In suggesting that companies have strong financial reasons to pay attention to how the public perceives them, we do not mean to cynically suggest that the employees, managers, and directors of these companies do not care about the public welfare. To the contrary, we believe many of them care deeply. The difficulty they face is that, in a system structured to focus them on raising share price, it can be hard to incorporate such concerns unless they are tied to a plausible long-term benefit for the company. Because donating shares to the Universal Fund would help a company appeal not just to a segment of the population but to all citizens, operating companies in an ethical and environmentally and socially responsible fashion would become more profitable and therefore much easier to justify.

Acquiring a Powerful Long-Term Shareholder Group

Finally, another advantage corporations gain by donating repurchased shares to the Universal Fund has to do with the nature of the Fund and of citizen-shareholders themselves. Because the Fund does not try to “beat the market” by buying and selling shares, and because citizen-shareholders cannot transfer their interests in their shares but must hold them during their entire lifetimes, the Fund and its citizen-shareholders are indifferent to short-term gyrations in a company’s stock price. They are fundamentally long-term, diversified investors. This means that a Universal Fund would create a new and increasingly powerful shareholder group with no incentive to pressure companies to sell assets, take on debt, cut payroll and research and development, or act unethically or illegally to raise share price. To the contrary, they want the companies in the Fund to operate sustainably and to make the long-term investments that lead to long-term financial success. They also want those companies to operate in ways that benefit—not harm—their broader interests as employees, customers, taxpayers, and voters.

Donating shares to the Fund would allow companies to acquire a new kind of shareholder to counterbalance the narrow financial interests that have captured control of so many of our largest firms. It is these narrow interests—many of which don’t have a direct economic stake (much less a long-term stake) in the success of the companies they control, and don’t have any incentive to take account of the welfare of average Americans—that drive so many corporate directors and managers to operate companies in ways they intuit are not desirable from either a business or moral perspective. Donating repurchased shares makes it easier for corporations to do what so many of their directors and managers want them to do—to operate in a sustainable, socially and environmentally responsible fashion that ultimately benefits all.

Individuals Also Have Strong Motivations to Donate

Perhaps the first question to ask in examining why individuals would donate substantially to the Universal Fund is why do individuals ever donate substantial amounts to any charity? Perhaps you care deeply about the cause? Perhaps you are driven by tax considerations? Or perhaps you are relatively indifferent because you have acquired enough wealth so that spending more on yourself—buying another sports car, another vacation home, another luxury vacation, another yacht—brings little satisfaction. (It’s what economists call the principle of declining marginal utility.) And after you’ve passed on, your money brings you no personal satisfaction at all. You really can’t take it with you.

Some of the very wealthy try to solve this problem by building dynasties. But for many and possibly most, the prospect of leaving enormous amounts of unearned wealth to their children (assuming they have any) might seem unattractive. Most parents want to make sure their kids are economically secure. However, most are also likely to be concerned that they do not unwittingly create heirs who are entitled, dissatisfied, dissolute, dysfunctional, and depressed. Perhaps in a perverse twist, studies find that children of the affluent are actually more likely to be depressed, anxious, and at risk for substance abuse.¹⁵ As Warren Buffett explained to Fortune magazine, his goal is to leave enough money to his children “that they would feel they could do anything, but not so much that they could do nothing.”¹⁶

Estate taxes also factor into the decision of how much one might leave to one’s heirs. Federal estate taxes currently apply to any individual who leaves more than $11,180,000 to heirs. Rates begin at 18 percent and rise quickly to 40 percent. For those above the tax threshold, this greatly increases the attractiveness of making charitable bequests, since many are not thrilled by the idea of leaving nearly half their wealth to the IRS. The end result, as David Callahan puts it in The Givers, is that “many wealthy people aren’t keen to see much of their fortunes one day going to estate taxes—or, maybe even worse, being passed down to their children.” To those with large fortunes (and there are more of them each day), “philanthropy is the only real place the money can go.”¹⁷

If donations to the Universal Fund were made tax deductible, there would be special tax benefits to donating stocks.¹⁸ In many cases, the wealthy individuals who would donate to the Fund would have made their wealth by building successful businesses in which they retain large amounts of stock that is now worth far more than they paid for it. If legislation making donations to the Fund tax-deductible were passed, the donor could get money now in the form of tax savings, in return for a donation of securities that, if the donor were to sell them instead, would trigger a substantial capital gains tax bill.¹⁹

The bottom line is that, if donations to the Universal Fund were made tax deductible and excluded from estate taxes, individuals would reap substantial financial benefits from donating to the Universal Fund. These would be in addition to the non-financial benefits we are about to explore.

Nonfinancial Benefits

Charitable giving is part of many cultures. For example, the concept of tithing (routinely donating a part of your income or wealth, often one-third or 10 percent, to a religious or other social welfare institution) is seen in Mesopotamian, Jewish, Sikh, Muslim, and many Christian religious traditions, including those of the Church of Jesus Christ of Latter-Day Saints (Mormons). But philanthropy is especially prominent in American culture. The National Philanthropic Trust reports that in 2016, Americans donated nearly $400 billion to charity. Approximately sixty-three million of them—25 percent of the adult population—also volunteered their time. High-net-worth households are particularly willing to be generous; more than 90 percent give to charity.²⁰ In August 2010, Warren Buffett, along with Bill and Melinda Gates, organized the Giving Pledge, an open invitation for billionaires to publicly commit to donating half or more of their wealth to philanthropy. So far, the Giving Pledge has been signed by 184 of the world’s richest individuals, couples, and families.²¹

Why do so many people give so much? As many studies in economics, psychology, and neuroscience have shown, and as a number of self-help books will tell you, giving to and helping others makes people happier.²² Americans in particular have taken this lesson to heart, and consistent with their optimism and belief in the future, they often give because they hope to change the world and make it better. This may be especially true for the ultrawealthy, who often enjoy a sense of what has been called “hyperagency”—the belief that their actions can actually make a difference.²³ Citizen Capitalism addresses such a wide range of issues that are widely perceived to be problems, and is consistent with and indeed promotes so many widely embraced American values, that it is likely to appeal to a large portion of those who want to use their charitable dollars to make our nation a stronger nation and the world a better place.

A second attractive aspect of donating to the Universal Fund is that it greatly simplifies the task of deciding who or what to donate to. Would-be donors today are confronted with a bewildering array of organizations and initiatives to which they could lend their support. There are over a million nonprofits registered in the United States, and more are appearing every day. Moreover, even after deciding which social problem is of particular interest to them—a task that itself is so difficult many high-net-worth donors hire consultants to help them²⁴—there remains the job of gauging the organization’s effectiveness. Many nonprofits have high overhead costs, which is unappealing to donors who may have made their fortunes through close attention to the bottom line in a business. Some donors with a personal vision prefer to create their own foundations. But foundations, too, often have high administrative costs. In contrast, the administrative costs associated with the Universal Fund would be minimal, and the range of social and economic problems it addresses is wide enough to capture many of the issues donors are likely to care most about.

Ultrawealthy individuals may also be especially inclined to donate to the Universal Fund because many perhaps recognize, and are grateful for, the opportunities and advantages they enjoy that may not be available to everyone else. Not everyone can enroll in an elite private university, or hire a top lawyer to win a legal dispute, or consult a prominent medical expert about a worrisome condition, or even put a healthy meal on the table every night. Many of the ultrawealthy have at least an intuitive sense that they receive more than their fair share of the benefits from our common legacy of natural resources, infrastructure, civic institutions, and culture and want to extend similar opportunities to others. By promoting a more egalitarian distribution of influence and income, Citizen Capitalism appeals to this sense of fairness. It’s no coincidence that Facebook cofounder Chris Hughes named his book proposing a UBI Fair Shot.

And Citizen Capitalism serves another fairness concern, one shared by wealthy and nonwealthy alike: concern for fairness to future generations. Most responsible people care not only about their own welfare but also about their children, grandchildren, and the generations who will follow us. But future generations have no dollars to spend in the market, no votes to secure politicians’ attention, and no shares to vote in corporate director elections. Their interests are ignored by our market, political, and corporate systems, as are the interests of nature and the environment. By creating a new empowered class of long-term citizen-shareholders indifferent to share prices and attentive to corporations’ long-term economic, social, and environmental performance, a Universal Fund could help us all be better stewards of the nation and the planet. They can repay the “primordial debt” they owe for the natural resources past generations have preserved and the knowledge, infrastructure, institutions, and culture they have bequeathed to them by paying it forward through Citizen Capitalism.

In the process, the individuals and corporations who donate to the Universal Fund will also create for themselves an enduring legacy. No one wants to be forgotten. The names of the pioneering donors who make Citizen Capitalism a reality will be remembered for a long, long time.

In the coming chapters we drill down on other related benefits of Citizen Capitalism—how it helps drive corporate sustainability; how it gives a diverse range of citizens a voice in corporate boardrooms; how it offers a workable model for renewing support for capitalism; how it fits with broader American values; and how it compares to other similar proposals. We will also discuss possible critiques and challenges.