(Photo by iStock/witsarut sakorn)
We love a good impact story. The story of the foundation that designed a new innovative environmental program. The entrepreneur that scaled a social innovation. The new catalytic capital fund. But I have spent enough time in this field to recognize that much of this work, for all its good intentions and often very real impact, can also end up preserving the status quo, or at least leaving it unchanged. That status quo is an economy capable of generating extraordinary wealth, yet one that continues to distribute it so unevenly that large parts of society are being left behind, with the most vulnerable furthest behind of all. It is also an economy generating growing frustration and discontent with how it works, and for whom.
This means that, sometimes, the most impactful thing many of us can do is simply to pay our taxes. It also means that encouraging, advocating for, and supporting adequate taxation might be the most important thing the social sector as a whole can put its energy into.
Saying this can feel almost too simple. Yet much of the impact sector operates on the understanding that governments often face severe resource and operational constraints when addressing complex social and environmental issues. As a result, private capital is naturally expected to bridge the divide, with foundations serving as crucial catalysts and conveners. This framework is widely recognized as the “Sustainable Development Goals funding gap.”
But why does the gap exist in the first place? Why is the solution always more private capital rather than stronger public institutions?
In The Entrepreneurial State, economist Mariana Mazzucato demonstrates that many of the technologies that we associate with private genius—the internet, GPS, green technology—were all funded by the US government, long before a single venture capitalist showed interest. It is “the state not the private sector that has kick-started and developed the engine of growth,” as Mazzucato argues, “because of its willingness to take risk in areas where the private sector has been too risk averse.” But even initiatives that encourage governments to take on greater risk in support of innovation rarely ensure that society shares in the upside, a dynamic Mazzucato describes as the socialisation of costs and risk and the privatisation of profits.
Consider SpaceX. When three failed launches left it near bankruptcy, what saved it was not another venture round but NASA becoming an early customer, providing the patient funding and demand certainty that private markets wouldn’t. But after the public de-risked the company, it took no equity; as its valuation climbed into the hundreds of billions, the upside accrued almost entirely to private shareholders. After the public bore the risk, it captured almost none of the reward. And had the public taken even a small equity position alongside its early support, that same success would now be helping to fund the public budget rather than bypassing it.
This prompts the obvious question: If there is public money to de-risk a rocket company, why not to resource a hospital?
Disruption Is Not Social Progress
The consequences of over-relying on private solutions, often driven by technological disruption, while under-resourcing public systems are not theoretical. During a recent trip to Washington DC, I watched an Uber fare for the same short journey fluctuate between $12 and $60 within a two-hour window. But no public bus has ever charged a passenger five times more for being in a hurry. And Uber benefits from public transport chaos: Strikes, engineering works, infrastructural delays, and closures are opportunities for higher earnings. The failure of the public system is, quite literally, built into the business model. And once Uber no longer needed to subsidize its fare, the fares went up. A recent Consumer Reports has also found that Uber and Lyft are now taking between 43 and 49.5 percent of each fare, even as a well-funded public transit system remains the most cost-effective, equitable, and scalable urban mobility solution ever designed. A metro line serves millions, at the same price, in any weather. An app serves those who can afford whatever the algorithm decides to charge them.
The same logic appears in sectors that are far more consequential than transport, particularly those traditionally regarded as impact sectors. For example, BYJU’S, backed by The Chan Zuckerberg Initiative and valued at $22 billion, once hailed as the future of learning and celebrated as proof that private capital could democratise education across the Global South. Yet much of its growth was driven by aggressive sales tactics, including the marketing of expensive learning packages to lower-income families through financing arrangements many struggled to understand. By 2025, the company had entered insolvency proceedings. Several early investors exited before the collapse. The families who took on loans to purchase educational packages had no such option.
The question is not whether private capital can create value. It can. The question is whether it creates enough public value to justify the resources, attention, and legitimacy we continue to grant it, while neglecting the institutions that were designed to serve everyone. And when essential services become investment opportunities, success is often measured in growth, margins, and returns rather than access, quality, or equity.
The Overlooked Gap
According to the IRS, approximately $696 billion in federal taxes in the US are not paid voluntarily and on time each year due to non-filing, underreporting, and underpayment, representing a compliance shortfall of roughly 15 percent.
If we apply even that 15 percent shortfall to global tax revenues—which the IMF estimates at roughly $20 trillion annually—the result is an implied global tax gap of approximately $3 trillion per year. Of course, this is an extrapolation, and compliance varies enormously across countries. But it highlights the scale of revenue likely lost, simply, through non-compliance. A structural funding constraint may be, at least in part, a challenge of tax administration, transparency, and political choice.
In addition to non-compliance, a substantial share of revenue is lost through practices that are entirely legal. Multinational corporations shift profits to low-tax jurisdictions, for example, which the Tax Justice Network estimates costs governments roughly $348 billion a year. Wealthy individuals defer taxation almost indefinitely by holding appreciating assets rather than selling them, borrowing against the gains. And philanthropy itself is at least partly publicly financed too. The charitable deduction is a formal government expenditure, and donor-advised funds compound the problem: DAFs hold over $230 billion in the United States, with no legal distribution deadline, thereby generating immediate tax deductions even as the money sits, grows tax-free, and might never reach a beneficiary.
Even when philanthropic capital does flow, a high-net-worth individual who, for example, reduces their tax liability by $50 million and directs $5 million of the savings toward an education fund has not made a $5 million contribution to social good. They have made a $45 million withdrawal from the public systems that are trying to help the most vulnerable. It is akin to diverting water from a shared reservoir, then being praised for donating some of it back during a drought.
When we increasingly ask private capital to solve problems created by decades of under-investment in public goods, the problem is not just structural. It is also cultural. "Tax avoidance is a key skill to building wealth," as Scott Galloway, a NYU professor and entrepreneur, said on a recent podcast. The fact that Galloway also supports higher taxes on the wealthy is precisely the point. When even those who understand the dysfunction most clearly feel obliged to counsel tax minimization, we have normalized a posture toward taxation, reinforcing the argument that only naive people pay taxes.
What the Impact Sector Can Change
The impact sector attracts some of the most genuinely committed people, who work on the world’s most urgent problems, along with serious capital and intellectual energy. The uncomfortable possibility is that much of the sector is trying to repair, privately and at a fraction of the scale required, the very public capacity that under-taxation has quietly weakened.
So, what should we do?
- Treat tax compliance as an impact metric. ESG frameworks already assess corporate tax governance, but we should apply the same lens to investors, fund managers and intermediaries. A Luxembourg fund managing capital from a Cayman entity for a family office paying 8 percent effective tax is not impact neutral. Its structure is part of its impact footprint and should be disclosed and measured. Also, donor-advised funds deserve the same scrutiny as blended finance vehicles. The sector demands additionality evidence for a $10 million first-loss tranche, yet asks little about $230 billion sitting in DAFs with no distribution timeline or accountability for outcomes.
- Hold governments accountable for how taxes are spent. Activist hedge funds take positions in companies and push for governance reforms, better capital allocation, and transparency on returns. There is no structural reason the same logic cannot apply to public spending. Impact investors, institutional asset owners, and development finance institutions already engage governments on policy. That engagement could explicitly include tax enforcement, public expenditure quality, and the social returns of government programmes. The leverage is potentially far larger. A pension fund that shifts its government engagement from macroeconomic stability to public spending accountability is deploying its influence at a scale no blended finance vehicle can match.
- Reframe the narrative. The sector has significant communication infrastructure: convenings, publications, rankings and annual reviews. Using that infrastructure to make the link between tax avoidance and the SDG financing gap visible is itself an act of systems change. It means saying clearly that the gap we are mobilising private capital to fill is partly a gap that private capital helped create. The sector should also build a positive narrative around tax. Paying tax is not just a compliance issue. It is a contribution to the public systems, institutions and services that make inclusive and sustainable development possible.
- Build for the public, not around it. The impact sector must go beyond financing alternatives to public systems. Instead, it should invest directly in public goods by backing the entrepreneurs, tools, and institutions that strengthen state capacity and essential services, from tax collection, procurement, and municipal finance to public education, healthcare, and affordable housing.
- Help governments build revenue-generating assets. Taxation is essential, but it is not the only route to funding public goods. Sovereign wealth funds, like Norway’s Government Pension Fund Global, show what becomes possible when states retain ownership of productive assets and use the returns to help finance public budget, creating fiscal space for universal healthcare, free higher education, and a strong social safety net, without relying on income tax alone. The Norway fund also uses active ownership, excluding companies that fail environmental and social standards and engaging portfolio companies on governance reform. The same principle can work below the sovereign level through community wealth funds, municipal investment vehicles, public-private enterprises with social-dividend mandates, and governments acting as anchor investors.
A More Honest Impact Strategy
This is not a retreat from innovation, but a shift in where entrepreneurial energy is aimed. The test is whether a solution complements public services, expands public capacity, reduces delivery costs, improves accountability, or helps the state reach people more effectively. The sector should not just fill gaps left by weakened public systems. It should help rebuild them.
What we need is a sector willing to say, plainly: Paying tax is an impact strategy. Not a ceiling. More than an obligation, it is a contribution to the only systems ever shown to deliver essential services equitably and at scale. By overlooking the role of public systems, we may be missing out on one of the most efficient impact strategies available.
Read more stories by Alan Wagenberg.