But a huge portion of that money isn’t going to food pantries or scientific research or even churches. Instead, the ultrawealthy, including many billionaires who have pledged to give away their technology or stock-market-fueled fortunes, are funneling their wealth through opaque financial instruments, where it can sit for years tax free without touching an actual charity, according to a new report from the progressive think tank Institute for Policy Studies. 

“There’s a fair amount of charitable dollars that are not being deployed, where the donors have already gotten a tax break,” Chuck Collins, director of the Program on Inequality at IPS, told Fortune. 

More than one-quarter of charitable giving in the U.S. last year went to donor-advised funds, or DAFs, according to the National Philanthropic Trust. DAFs are vehicles that give the donor an immediate tax deduction, but allow money to sit potentially for decades without being used for actual charitable work.

DAFs are the fastest-growing type of charitable investment, according to Fidelity. Among the ultrawealthy, they are the most popular, and many of the headline-grabbing billionaire donations in recent years have gone to DAFs.

In 2021, Bill Gates donated $15 billion; Elon Musk gave $5.7 billion, Jack Dorsey gave $700 million, and Mark Zuckerberg $700 million—but rather than individual charities, those donations all went to the donors’ DAFs or family foundations, IPS notes. Last year, more than two-thirds of the billionaires who signed the Giving Pledge, a nonbinding promise to give away the bulk of their wealth to charity in their lifetimes, gave either to donor-advised funds or their family foundations. 

A donation in name only

Proponents of DAFs say that their structure encourages giving: The tax deduction encourages wealthy patrons to dedicate money for charity even before they’ve decided which cause to support. “Donors may have good reasons to postpone grants,” a Stanford Law School article says.. In one hypothetical, a tech founder who “sells a startup for millions of dollars” may want to donate her takings but is too busy to immediately decide how to direct the funds; a DAF is a good choice for this person, the law article notes.

However, while DAFs could in theory grow the charitable pie, in practice, they too often allow the donor the illusion of charity while letting them keep control of their funds, critics say. 

While a gift to a DAF is treated the same as an outright gift to the Red Cross or United Way, in practice, it “effectively allows the donor to retain ongoing control over the charitable disposition and investment of the donated assets,” tax scholars Roger Colinvaux and Ray Madoff wrote in 2019. What’s more, “donors are under no obligation, and have no incentive, ever to release their advisory privileges to make the funds available for charitable use.”

And ultrawealthy donors get a substantially larger tax break than a middle-class worker. As much as 74 cents of every dollar given to charity comes back to the donor in the form of tax breaks, according to calculations by Colinvaux and Madoff, with the highest-earning donors getting the biggest benefits A person in the top tax bracket would save 37% of their federal income tax for every dollar they contribute with a charitable donation; a similar amount of state income tax; and, depending on what they donate and when, they can also avoid capital gains tax and estate tax. (By contrast, a typical worker who makes about $60,000 and doesn’t own stocks would save 22% from their cash contribution, in addition to any state tax savings.) 

What’s more, because there’s no way to track donations from particular DAF accounts, they act as a form of “dark money,” allowing donors to give vast sums, essentially anonymously, to a range of potentially unsavory organizations, including nonprofits that advocate for specific political causes or organizations classified as hate groups, IPS says. 

“This allows DAFs to be used to hide transfers — similar to the way the ultra-wealthy use multiple shell companies to hide the movement of money among offshore accounts,” IPS writes. 

All of these strategies are completely legal, the IPS notes, as are other potentially questionable tactics used by family foundations—such as paying family members to serve as foundation trustees or act as executives of foundations, sometimes at salaries in the hundreds of thousands of dollars a year. However, the IPS argues, they erode public trust in charities and the tax system overall.

“The fact that billionaires opt out of paying taxes, have these closely held family foundations and get to play God about where the money goes, that’s private power — unaccountable private power,” Collins said. 

“At this point philanthropy is at risk of becoming taxpayer-subsidized private power.”

Big tax losses 

Estimates of how much the tax system loses to all kinds of charitable deductions are inevitably low, since only some philanthropic transactions are tracked, IPS notes. Still, it estimates that taxpayers’ losses are in the billions. 

Last year, the corporate and personal charitable tax deductions directly cost the U.S. $73 billion, IPS said—substantially more than the budget of the Department of Energy or Department of Labor. If accounting for the gains in investments made by charities themselves, which are also tax-exempt, the losses exceed $110 billion. And they go into the hundreds of billions when estimating the cost of donations of special assets, like stock, real estate. or art. 

“We the taxpayers are chipping in quite a bit in the lost revenue,” Collins said. Given the size of this public subsidy to ostensibly charitable causes, Collins argues that taxpayers deserve more transparency from increasingly popular vehicles like DAFs, as well as stricter laws to make sure their activities are, actually, charitable.

IPS is advocating to change the tax laws including requiring that DAFs spend a certain amount of money every year, like private foundations must do, and increase their reporting, as well as closing loopholes that let foundations transfer funds to DAFs.

“They’re being marketed as a ‘you can have it all’ donation instrument,” Collins says. “Give the money, you can still control the investing side, you get a tax break — and there’s a secrecy element.”