Levels of donation

By vipulnaik @ 2022-09-18T03:56 (+64)

Via the MagnatesMedia YouTube video on the subject, I came across a Reddit post on levels of wealth. The post separates out different levels of wealth and the qualitative differences between them, with the four levels being $10-30 million, $30-100 million, $100 million-$1 billion, and $1 billion+.

As with all such analyses, the threshold selection is somewhat arbitrary, and a lot of nuance is missed, but I still find the exercise interesting.

I thought it would be interesting to do a somewhat similar exercise for levels of donation; this seemed like a good prompt in response to which I could express several thoughts that have been floating around in my mind.

This post looks at various levels of donation as well as the ways one could level up (if deemed desirable).

The levels of donation

Level 1: retail donor (< $1,000)

Lower limit for level 1: retail donor: $0

Upper limit for level 1: retail donor: $500 to $1,000

Prototypical donor: Low-income person (typically young, such as a student) donating some money; higher-income person donating 1% of income.

• Split between donees? (no): The one-charity argument is pretty much definitely true here; it's very hard to imagine a case where the marginal value functions of two donees cross within this small an amount of donation.

• Investigate? (no): It probably doesn't make sense to spend extensive resources investigating by yourself or hiring others to investigate. You should either donate directly to the best endpoint donee, or give money to a reallocator (such as the EA Funds, GiveWell Maximum Impact Fund, or GiveWell All Grants Fund) that is sufficiently value-aligned with you. It may not even make sense to write extensively about your decision.

• Engage donee? (no): It probably doesn't make sense to ask a bunch of questions of the donee or expect any kind of personalized response; it's best to rely on information you already have as a donor.

• Optimize for transaction costs? (no): You should probably just use whatever donation method the donee recommends, rather than reaching out to the donee to figure out the best method for your particular case (for instance, if they suggest using PayPal, use PayPal, even if you know it has network fees that you'd rather not spend).

  As a data point, GiveWell's page on how to donate sets a threshold for $1,000 for when you should switch from donating by credit card to donating by check.

• Optimize for taxes? (no): Optimizing donation timing and other donation mechanics for tax considerations probably doesn't make sense at this level.

Level 2 (four-digit donors)

Lower limit for level 2: $500 to $1,000

Upper limit for level 2: $5,000 to $10,000

Prototypical donors:

• Person or couple with median income (by first-world standards) donating a nontrivial percentage of income annually (such as the 10% set by the Giving What We Can Pledge).
• Person with higher income donating a smaller percentage of salary or donating at a cadence more frequency than annual.

Considerations:

• Split between donees? (conceivable but unlikely): It's conceivable (though unlikely) that the one-charity argument starts breaking down here, if the expected best use of your funds also has sharply diminishing marginal value (e.g., helping an organization get off the ground, or close a small funding gap). So you might find yourself splitting your donation.

• Investigate? (yes, a few hours): If you don't have any obvious endpoint donee or reallocator with whom you are closely value-aligned a priori, it may make sense to spend a few hours investigating the options. It may also make sense to document your thinking.

• Engage donee? (maybe, hope for responsiveness but not proactive effort from donee): It may make sense to ask questions of potential donees to get information beyond what you already know, especially if there isn't a lot of publicly available information. However, you should not expect donees to drop everything to appease you or go through application processes.

• Optimize for transaction costs? (yes): You should coordinate with the donee on the mechanics of the money transfer to minimize transaction costs, to the extent that the donee has options available.

• Optimize for taxes? (yes; start thinking about it): Optimizing donation timing and other donation mechanics for tax considerations may start making sense. For instance, you may decide to defer donation by a month or two so that it falls in the next tax year. However, this is most likely going to be a minor consideration compared to other considerations.

Level 3 (five-digit donors)

Lower limit for level 3: $5,000 to $10,000

Upper limit for level 3: $50,000 to $100,000

Prototypical donors:

• Person or couple with high income (by first-world standards) donating a nontrivial percentage of income annually (such as the 10% set by the Giving What We Can Pledge, or possibly a higher level such as 30%). See, for instance Patrick Brinich-Langlois (or his page on the donations list website).

• Person with significant acquired wealth donating a portion of the wealth.

• Winner of a small donor lottery.

Considerations:

• Split between donees? (plausible): There's a high enough chance that marginal value functions change enough over the course of your donation that you should think about marginal value functions and not just assume the one-charity argument. If you don't want to be bothered by such considerations, donating to large organizations (or reallocators) is probably the way to go.

• Investigate? (yes, and maybe engage others to investigate too): It may make sense to not only spend your time but seek the time of others -- potentially even pay others -- to investigate options and find the most value-aligned option. Whether you do so depends on how good you think the existing options (both endpoint donees and reallocators) are. It may even make sense to participate in something like the S-process with other funders and recommenders, or add one's own funds to an existing S-process (the advantage of the S-process over donating to EA Funds is that you can input your own weights on different recommenders, so it may be better if you are somewhat but not fully aligned with the individual recommenders).

• Engage donee? (yes, seek more proactive response): At this amount of money, if you're considering giving all or a large chunk of it to a specific donee, it makes sense to engage the donee in depth, to understand better how they expect to use the money, how it'll interact with the rest of their fundraising plans, etc. This gives a clearer picture of the marginal value function. The amount of money may even be enough for you or the donee to think of other uses for the money beyond what the donee had in mind. But it's still not enough money for you to expect the donee to radically change direction to acquire the money.

• Optimize for transaction costs? (yes): At this level, it may make sense to do more than just figure out the best of the existing money transfer options; it may even be worth setting up a new way to transfer money to reduce the transaction costs.

• Optimize for taxes? (yes, possibly even encourage the donee to get a relevant tax-exempt status): At this scale, the tax savings from being able to deduct the donation from taxes may be high enough to cover the costs for the donee to apply for tax-exempt status, if it doesn't have one already but is otherwise eligible for one.

Level 4 (six-digit donors)

Lower limit for level 4: $50,000 to $100,000

Upper limit for level 4: $500,000 to $1,000,000

Prototypical donors:

• Person or couple with high income donating a sizable fraction of income annually; see for instance the donor power couple Jeff Kaufman and Julia Wise(or their page on the donations list website). They've pledged 30% and target 50% of their pre-tax income as donations.

• Person or couple who acquired significant wealth and is donating a chunk of it; for instance, selling a bunch of cryptocurrency, or exercising and selling accumulated stock options.

• Winner of a big donor lottery.

Considerations:

• Split between donees? (likely): At this point, unless you happen to think the most scalable things are also the most high-value, it's quite likely you'll either want to split your donation between donees or donate to a reallocator such as the EA Funds. The reallocator will effectively use the extra money to donate to multiple additional endpoint donees (note that some reallocators such as the GiveWell Maximum Impact Fund donate in larger chunks of money, so if that's where you want to donate then you will probably not effectively be splitting your donation).

• Investigate? (yes, at this point it becomes a matter of due diligence): At this level of money, even if you have the impression that a particular endpoint donee or reallocator is value-aligned, you should investigate in order to seek confirmation of this. Even slight misalignments in value would tilt the scales toward running something like a S-process.

• Engage donees? (yes, you can even set up an application form and conduct multiple rounds of grantmaking): At this point, you can go to donees or ask donees to come to you. You can write up your own request for proposals and expect existing or even potential new donees to read it and apply based on what you're looking for. You can reach out to people and suggest they start up organizations that you would like to see.

• Optimize for transaction costs? (yes): Not much changes from the previous level for this.

• Optimize for taxes? (yes): At this scale, it makes sense to be thinking hard about the right financial instruments to use to minimize tax obligations over the long term. You may even pay people to figure this out and set up the right systems.

Level 5 (seven-digit donors)

Lower limit for level 5: $500,000 to $1,000,000

Upper limit for level 5: $5,000,000 to $10,000,000

Prototypical donors:

• Person or couple who is donating a significant chunk of income but chose to accumulate it over a period of years rather than donate annually.

• Person or couple who acquired a lot of wealth through cryptocurrency, stock options, or cashing out on a business owned.

• Family foundations of various sorts.

At this level, a bunch of new considerations start popping up.

• Split over time, and use initial grantmaking to "learn": Rather than donating the entire amount upfront, split over time, and use initial grantmaking to learn more about the space.

• Build relationships with donees and understand their expectations of renewed funding: When you make grants to donees, talk to them about whether they would need followup grants; communicate clearly with donees if you don't expect to make followup grants. Use exit grants when stopping support to donees.

• Consider quitting your job or hiring somebody part-time / full-time to manage the ongoing grantmaking work: This is particularly relevant if you're not deferring your donation choice to a known reallocator.

Level 6 (eight-digit or more)

Lower limit for level 6: $5,000,000 to $10,000,000

Upper limit for level 6: no limit!

Why not split this level further? Couple of reasons:

• I'm hitting the limits of my intuition and experience at this level.
• I think constraints imposed by money are low at this level, so the way the donor donates is based a lot more on how the donor wants to approach the act of donation.

Prototypical donors:

• At this point, we're talking big foundations (or influencers of such). Examples in the EA penumbra include Good Ventures / Open Philanthropy, Jaan Tallinn / Survival and Flourishing Fund, and FTX Foundation / FTX Future Fund.

• Outside the EA community, we're talking of foundations such as Ford Foundation, Bill & Melinda Gates Foundation, Wellcome Trust, MacArthur Foundation, Hewlett Foundation, etc.

A bunch of new considerations start emerging here.

You become an entity to be feared in the space. Even people whom you aren't donating to are now stakeholders in the way your money is affecting the ecosystem. At this point, it starts becoming important to communicate your philosophy and engage with relevant communities. You get in the hot seat to some extent and start having to justify that you aren't distorting the space.

This is also the level at which you can actually hire a staff full-time to manage the grantmaking operations, if you so choose. Or you can significantly grow the budget of a reallocator which might allow that reallocator to invest more resources in staff (you may want to explicitly fund the reallocator's operating expenses and capacity-building work rather than earmark your funds to use for endpoint donees).

Leveling up

If you happen to believe that the most scalable interventions are also the most high-value, and that these have already been figured out, leveling up doesn't matter that much per se -- your giving won't change qualitatively. For instance, if you think that GiveDirectly is the best use of the next trillion dollars of your money, it doesn't matter too much what level you are at -- you'll keep donating to GiveDirectly.

However, if you think the most high-value interventions are either not that scalable or are still in the process of being figured out or don't exist yet, leveling up changes the qualitative picture in terms of what you can accomplish with your money.

Since the different levels I've identified are separated by factors of ~10, leveling up is not easy. Let's talk about the three ways of leveling up:

• Increasing your rate of allocating money for donation
  • Increasing your income
  • Reducing your expenses
  • Increasing the proportion of your savings that you allocate for donation
• Accumulating over time
• Pooling with like-minded people
• Donor lotteries

Increasing your income

This is probably the most high-upside way of leveling up. For instance, Sam Bankman-Fried seriously leveled up when he got into the crypto space and started making tens of millions.

It's worth noting, though, that increasing income while staying within the same kind of job won't usually lead to a leveling up. For instance, getting a 10% raise a the job, or taking a competing job offer that pays 30% more, won't get you to level up. If you are interested in seriously leveling up, you need to find some really high-upside opportunities (and most of these are also high-risk, so you need to see asymmetric benefits in leveling up to be really excited about these opportunities).

Realistically, I'd say that outside of stumbling upon a successful startup or rising in the ranks in finance, you can probably go up to level 3 (upper limit of $100,000) and maybe up to level 4 (upper limit of $1 million), but not further.

Reducing your expenses

This is even less effective than increasing your income, because the effect of reducing your expenses is bounded; you can donate at most 100% of your income! Moreover, once your income crosses a certain threshold, the effect of reducing expenses is even smaller.

The cases where reducing your expenses really allows you to level up are probably the cases where you're at level 1 (retail donor) and with slight reduction of expenses you can get to level 2 (up to $10,000). It seems unlikely that a move from level 2 to level 3 could be facilitated primarily by reducing expenses.

Increasing the proportion of your savings that you allocate for donation

As with reducing your expenses, the upside here is limited: you can allocate at most 100% of your savings to donation (there's some pre-tax/post-tax nuance but the basic point stands). How much upside you have here depends on how much of your saving you're currently allocating for donation. My rough sense is that this can likely get you up from level 1 to level 2, and in some cases up from level 2 to level 3, but rarely further. But if you're already a billionaire and just haven't thought about donation much, then you have more room to grow.

Accumulating over time

Instead of donating money every year, you could accumulate the money so it grows more. You could also reinvest it and have it grow even faster (something something miracle of compound interest).

However, given that the levels are separated by a factor of ten, we're talking about accumulating over 5-10 years in order to level up one level, and 25-100 years in order to level up two levels (even accounting for compound interest). While this might be worthwhile in some cases, it also needs to be balanced against haste considerations and the urgency of various issues. All in all this does not seem like an efficient way to level up, but it could be helpful in combination with other things (such as increasing your income).

Pooling with like-minded people

The simplest example of pooling is within a marriage: you and your spouse share similar values, and also share many of the rest of your financial decisions, so it makes sense to pool together your donations. If your earnings are in the same ballpark, you level up by a factor of 2.

You may also pool with other like-minded people you work with; for instance, Sam Bankman-Fried and many of the people he worked with at FTX and Alameda pooled together their resources to fund various FTX-related philanthropy.

You can also pool with other like-minded people you are not in a personal or work relationship with.

Pooling can deliver a multiplier big enough to level up, if the pool is big enough! For instance, if you find 9 other like-minded people with similar amounts of money, you can pool and go up one level.

You could also pool with others who have way more to donate than you do. One example would be to marry somebody of wealth; another example would be to become friends with and seek to influence such a person.

Donor lotteries

Donor lotteries are another way to level up. Donor lotteries is a bit like pooling with like-minded people, with one key difference: there can be a case for donor lotteries even if the other people aren't like-minded! This explainer goes over this in more detail.

Conclusion

This post is an attempt to articulate systematically the qualitative changes as one goes up in levels of donation, inspired by past discussions of levels of wealth. The post is both descriptive (especially within the effective altruist penumbra) and prescriptive for the broader world of donation (in the sense that it describes what should happen but doesn't always happen in that broader world). One key crux around the extent to which one believes levels matter, is the extent to which you believe that the most scalable, shovel-ready interventions are also the most high-value; if you believes that, then leveling up has limited qualitative impact. On the other hand, if you believe that there is a lot of high-value untapped potential that is not currently scalable or shovel-ready, and that you would be able to identify at least some of this potential (directly or by delegating), then leveling up delivers super-linear expected returns.

See also

If you enjoyed this post, you might also like my previous post Donor strategies for separating "how much" from "where" to donate.