Don’t Regulate Charities, Tax Them

The Red Nose Institute mails red clown noses to U.S. troops stationed abroad.  It does so, according to its web site, “to put a smile on the faces of our troops overseas.”  They continue:

The idea is for folks who care about our military to donate red foam noses. Monetary donations are also accepted and used to purchase even more noses and also to help with mailing costs. The noses are then mailed to U.S. troops deployed anywhere overseas.  A letter is enclosed with each package telling that the folks sending them are extremely proud of our military and thankful for what they are doing on our behalf.  Servicemen and women are encouraged to share the noses with someone who might need a smile and possibly to share them with the nearby children. There is NO COST to our military or to anyone requesting noses.  We all know that relieving stress is of the utmost importance! If sending red noses to troops can help do this, our job has been accomplished!

The Red Nose Institute is also a charitable organization exempt from taxes under section 501 (c) (3) of the tax code.  This bothers Rob Reich and his colleagues at Stanford University.  Reich, who is an associate professor of political science and not the diminutive former Clinton Administration official, issued a report last year, “Anything Goes: Approval of Nonprofit Status by the IRS,”  calling for reform of the process by which the IRS approves organizations as tax exempt.

Their report laments “the distinctive modern American proclivity to confer special tax benefits to wildly diverse and indeed eccentric associations.”  The report cites The Red Nose Institute along with several other nonprofit organizations as instances that illustrate the problem.  Instead, they would like the IRS to scrutinize applications for nonprofit status more closely and raise fees to discourage applications.  They conclude:

The 501(c) code, we believe, stands in need of reconsideration in light of the massive growth of the nonprofit sector. Is this really an effective way to organize charity? Should the mere desire to associate for nearly any purpose be rewarded with tax privileges?

I see the problem completely differently.  Why should the IRS be in the position of determining whether certain organizations benefit the public or not?  I would contend that the Red Nose Institute is doing much more good for the world than the Ford Foundation has (with its funding of anti-Israel and anti-semitic groups) .  In fact a great many nonprofit organizations have promoted ideas that are much more harmful, wasteful, and just plain silly than sending red noses to boost the morale of troops overseas.  At least the Red Nose Institute has a plausible theory of action and their intervention doesn’t cost much.

Essentially, Reich and his colleagues are trying to substitute their own taste (through the authority of government officials) for the taste of individual donors.  They are just picking organizations that don’t strike their fancy rather than applying any objective or even reasonable test for whether an organization promotes the public good.

Another organization they feature in the report as obviously silly is Curtains Without Borders, which “aims to conserve historic painted theater curtains.”  Why does this serve the public good any less than museums that conserve painted canvasses let alone ones that display jars of urine containing crucifixes?

The point is that there is a particular and distorted vision of “the good” that some people would like to impose on all of us through the coercive power of the government.  I do not want to use the tax code to favor certain organizations as being for the “public good.”  Instead, I would propose treating all organizations the same in the tax code.

Frankly, I don’t even understand why we privilege non-profits over profit-seeking organizations.  As we’ve discussed before, the profit-seeking entrepreneur can do as much or more to improve the human condition as the do-gooder types to whom we regularly give humanitarian awards.

And to be clear, allowing people to keep their own money is not a “tax privilege.”  Taking people’s money through taxation is a necessary evil that we should try to keep as minimal and evenly dispersed as possible.  Taxing all organizations at the same lower rate is better than taxing some at a higher rate so that others pay no taxes.

If we can’t go all the way and end tax exempt status, I’d favor keeping the door as wide open as possible to organizations that claim to be public charities.  I’d rather err on the side of having some silly low-revenue organizations over having the IRS intimidate people into sharing a particular vision of  the good.

4 Responses to Don’t Regulate Charities, Tax Them

  1. Brian says:

    I completely agree. We should also impose taxes on churches while we’re at it.

  2. matthewladner says:

    The chances of imposing taxes on churches approximately equals the probability of abolishing taxes completely.

  3. I agree with that also. That’s why I specified my second best option — keep the door to tax exempt status wide open so that the government plays as little of a role as possible in picking what organizations do and do not benefit the public.

    I would add that equal treatment of all organizations — whether religious or secular, nonprofit or profit-seeking — would create a true level playing field for serving the public good. Why should a profit-seeking university be at a tax disadvantage to a nonprofit university when they are both trying to serve the same public good? Why should the church-run pre-school have a tax advantage over the profit-seeking pre-school?

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