By John Hood
As debate raged in Washington about ending the federal tax on estates, some in North Carolina defended it on the grounds that it benefited nonprofits.
I run a nonprofit, and yet I find myself appalled by this argument. To say the estate tax motivates individuals to support charitable causes is, essentially, to support the use of government coercion to force people to give. It has a whiff of extortion about it.
Charity and coercion are not the same. They are not brother and sister. They aren’t even distant cousins. To be philanthropic is to demonstrate one’s love of humanity (the original Greek meaning).
If I ask you to give money to the Salvation Army, explaining the crucial role it plays in combating social ills, you are free to say yes or no. If it’s yes, I will complement your generosity. If it’s no, I’ll thank you for your attention and try again later.
If I hold up a cudgel and demand that you give money, however, your decision is not an act of morality or compassion. It is an act motivated by fear.
No doubt, some readers might challenge my position by pointing to the larger public policy treatment of charitable nonprofits. Doesn’t giving nonprofits, including the John Locke Foundation, tax exemptions and their donors tax deductions constitute government meddling in philanthropy?
My answer is yes, at least in part. There are aspects of the tax treatment of nonprofits that trouble me greatly.
For example, I do not believe nonprofits should be exempt from local property taxes. Whether a place of business is for-profit nonprofit, or government has nothing to do with the service costs associated with its operation.
Nonprofits benefit from street access, law enforcement, and other services. Their donors, employees, and clientele should shoulder the appropriate tax burden.
As for tax exemptions for the income of nonprofits, that’s a bit easier to understand.
In the business world, net income either gets reinvested to generate future income or it is disbursed to owners in the form of taxable dividends or capital gains.
In the nonprofit case, however, there are no owners to receive income. If its executives essentially “pocket” the “profit,” we properly capture that by taxing the individual income flow.
The most controversial issue may be the tax-deductibility of contributions. My own view is that we should really be taxing consumed income, not income per se.
One could argue that giving away money to a charity is not consumption, in which case it shouldn’t be taxed.
Or one could argue that donating does provide a service to the donor – a sense of accomplishment or rectitude – that is consumed and thus properly taxed.
I’d be comfortable with the system either way. What makes me entirely uncomfortable is the idea that donors owe charities their hard-earned money and, if the donors won’t pay voluntarily, government has a proper role in forcing them to.
John Hood is president of the John Locke Foundation in Raleigh, N.C.