This column appears in the commentary section of this week’s magazine. The full issue is open exclusively to TIME subscribers. To become one, click here.
Let’s stipulate that it’s totally uncool for IRS agents to single out Tea Party groups for extra scrutiny. But let’s also stipulate that it’s totally absurd for Tea Party groups, as well as liberal groups and any other blatantly political groups to qualify as tax-exempt “social-welfare organizations.”
What social-welfare organization really means, in the Tea Party context, is “tax-exempt political organization that doesn’t have to reveal its donors.” It’s a dodge. In other contexts—the National Rifle Association or the Sierra Club—social-welfare organization really means “tax-exempt political organization that doesn’t have to limit its lobbying and campaigning like a normal charity.” Another dodge. The obvious solution would be to eliminate the social-welfare organization as a tax entity—the technical term is 501(c)(4)—and stop giving tax breaks to political groups. That would bring some positive change out of the who-knew-what-where-when IRS circus.
Then again, Jeremy Koulish of the nonpartisan Tax Policy Center says eliminating 501(c)(4)s in order to stop subsidizing political activity would be like using a chain saw to kill a bunch of mosquitos. He recently searched social-welfare organizations and found most of them—like the Miss America Organization and the giant Minnesota-based HMO HealthPartners Inc.—didn’t seem political at all. That’s a fair point…except why should an HMO or a pageant be tax exempt? When you think about it, why should any group be tax exempt?
The entire concept of a tax-exempt nonprofit—not only the controversial 501(c)(4) social-welfare shelters but also motherhood-and-apple-pie 501(c)(3) charities and foundations—is odd. An organization that doesn’t make any taxable profit shouldn’t need a special status to avoid paying taxes. My wife owned a retail store that didn’t pay taxes during the Great Recession; it was an unintentional nonprofit, which is why it no longer exists. Charities, foundations and other intentional nonprofits shouldn’t need tax exemptions unless they have profits they need to shelter. Which many of of them do.
In 2012, the U.S. had 1,616,053 tax-exempt organizations, 10 times the number of fast-food restaurants. Harvard University is tax exempt even though it has a $31 billion endowment; it’s basically a huge hedge fund with a lucrative merchandising operation attached to a school. The NFL is also tax exempt, to help its owners keep more of their profits away from Uncle Sam. The Prostate Cancer Fondation doesn’t pay taxes either, although it did pay its CEO $1.2 million. You may or may not like the Heritage Foundation or Planned Parenthood, the Chamber of Commerce or the AFL-CIO, the Boy Scouts or the NCAA. But the tax dollars you send to Washington help ensure that none of those groups has to send any tax dollars to Washington.
Of course, questioning tax-exempt organizations makes it sound as if you hate soup kitchens and Kevin Durant (the NBA star whose foundation gave $1 million to tornado victims), not just country clubs and Alex Rodriguez (whose sketchy foundation actually lost its exemption). It’s almost as impolitic as questioning the tax deduction for charitable donations. But as long as I’m using my chain saw, the charitable deduction, which costs the Treasury nearly $50 billion a year, is another perk for folks who want hospital wings in their name. You can’t take advantage unless you’re rich enough to itemize. The higher your tax bracket, the more you benefit from the deduction.
The real beneficiaries of all this complexity, aside from 1,616,053 CEOs, are the lobbyists, lawyers, accountants, consultants and other middlemen who help navigate it. A more rational society would simply tax moneymaking individuals and businesses, then use the revenues to finance vital services the private sector won’t provide. If altruistic Americans also wanted to support symphonies and Rotary Cubs and scouting groups with perverse views about homosexuality, fine! They just wouldn’t receive tax advantages for their altruism, and neither would the groups.
But whenever anyone talks about reining in nonprofits, charities go berserk and politicians duck for cover. IRS agents can’t even Google obvious infractions without triggering a national uproar. The only hope for change lies in broad bipartisan tax reform that would eliminate some of the loopholes and complexities that currently festoon the tax code while lowering overall rates.
Unfortunately, the word out of Washington is that tax reform, already maimed by partisan gridlock, has been killed by the IRS furor. So the mosquitoes will continue to swarm.