The United States gives more generous tax deductions when individuals set up charitable trusts than do many other countries in Europe, Latin America, and elsewhere. This, along with the long-noticed generosity of Americans, helps explain why private donations are far more important to American universities, even public universities, hospitals, religious organizations, museums, symphonies, and other American cultural and health activities than they are elsewhere. For example, American individual giving as a percentage of gross domestic product has been about 2%, while charitable giving is under 1% of GDP in the United Kingdom.
The main case for giving tax breaks to individuals who set up foundations, and for exempting from most taxes the incomes that foundations earn, is to encourage decentralized private support of universities, health care, and many other activities, as opposed to relying only on centralized government support of these activities. Universities and other recipients in turn have to compete against each other for funds from the many foundations. I believe that such competition and decentralization of support encourages a more efficient use of resources by recipients, and makes it easier to finance unpopular art, music, or other activities that have difficulty getting support when governments are the dominant source of support.
The Bill and Melinda Gates Foundation is by far the largest private foundation in the world, especially with its gift from Warren Buffet of stock in Berkshire Hathaway. That gift will be spread out over time, and is worth in present value between $20 and $25 billion. Since the Gates foundation had assets prior to this gift of close to $30 billion, the total assets now amount to more than $50 billion. The 20 largest American foundations have combined assets of well over $150 billion, with the Gates foundation having about one-third of this total. All twenty had assets over $1billion, including more than $15 billion for the Hughes Medical Institute, over $11 billion each for the Lilly endowment and Ford Foundation, and in excess of $5 billion for the Packard and Hewitt foundations. The Buffet gift will create an outlier in the Gates foundation, but basically foundation assets overall are not highly concentrated in the United States.
American foundations do many things, and have very different orientations that range from pretty far right to pretty far left. Perhaps there is an overall tendency for larger foundations to be set up by businessmen with relatively conservative views, although neither the Gates nor Buffet foundations fall into that category. There is surely a tendency for foundations to become more liberal over time. Examples of foundations that started out conservative and became much more liberal with time include the Ford, Pew, and Packard Foundations--the Packard Foundation shifted rapidly after the death of its conservative founder David Packard. I do not know of any large foundations that moved from being very liberal to becoming conservative.
The two main reasons for this shift in philosophy are 1) that the children of successful conservative self-made businessmen tend to be more liberal than their parents. There are several reasons for this, but one is simply "regression to the mean": conservative parents have less conservative children, although one might expect this to produce some foundations that go from liberal to conservative. 2) Over time foundations come under the management of professional foundation personnel instead of the founders and people they trust. Professional managers tend to be highly educated and liberal, just like the majority of journalists at major newspapers. In order to combat this shift and other shifts over time in the focus of giving, some foundations are set up with sunset provisions which require that they give away all their assets within a given time period.
The largest foundation that I know of which succeeded in doing this was the Olin foundation under the guidance of the late William Simon. The Olin had a few goals, such as encouraging centers for the study of law and economics, and generally succeeded very well in achieving these goals. Bill Gates recently announced that his endowment would be spent within 50 years of the death of the last of its three trustees. Perhaps all foundations with tax benefits should be required to spend all their assets within 30 years or so of their creation--50 years seems too long to me.
How well have foundations done in disbursing their wealth? As I mentioned earlier, private foundations are under pressure to do better by the competition among them to support different causes. On the whole, they seem to do a pretty good job, although I may be biased since many private foundations have over the years supported my research. However, I do believe that foundations are much too prone to spend their resources on the latest popular causes and fads.
The Gates foundation deserves special mention because it is so big, and has the active management of Bill and Melinda Gates. Its emphasis on diseases of the third world seems like a good one since pharmaceutical companies are not likely on their own to invest in research on these diseases because poor countries are unable to pay much for new drugs. Hence, companies shy away from working on diseases prevalent in poor countries because they anticipate they will have to highly subsidize any drugs that they develop. Similarly, governments of rich countries generally spend their medical research support on diseases that strike their populations, which are increasingly associated with old age, while poor countries need help in fighting diseases like malaria, tuberculosis, and AIDS that strike young persons. But it is still too early to tell whether the Gates foundation will be effective. I do not believe it will be easy for a foundation that is giving away each year more money than many governments do to be highly efficient and nimble.
Much is being made of the business-like approach to giving by some new foundations, including the Gates foundation. Maybe it will be better than the old approaches, but given the sharp division of labor in advanced societies, it is not surprising that successful businessmen are usually much better at making their money than spending their money on charities. Still, I do believe that the new approach can help if it does not frown on cooperation with commercial enterprises that are looking to make profits, sometimes while trying to do "good." A significant development is that Sergey Brin and Larry Page, the immensely wealthy founders of Google, decided not to take a non-profit status for their new charitable arm Google.org in order to be able to support commercial ventures that have a social purpose.