"Tax-Exempt" Status and Non-profit activity

Here’s a perennial, difficult question for classical liberals–how does a free society fund its collective choices? More specifically, the recent furor over the IRS’ alleged targeting of conservative political groups raises the question of what kinds of private activities should fund public decisions.

One view is that any kind of gainful activity should be subject to taxation. This view has the advantage of simplicity and generality. What’s more, it accords with a particular view about the division of burdens and benefits in society: because all the benefits we receive that enable all our types of productive activities have a social or collective dimension, all types of productive activity may be appropriately subject to taxation.

On this view, allowing certain kinds of activities to be “tax-exempt” is just a kind of political favoritism.   And this aspect is certainly true. But arguments about the political economy of taxation–how to make a tax code that’s more efficient, resistant to rent-seeking–occurs at a lower level of analysis than arguments about what a just or fair tax system looks like. These arguments are arguments about what principles should guide thinking about a tax system in the first place.

A free and open society is one that permits its citizens to employ and gain from productive activities. It should not make types of activity subject to taxation on the basis of the description of the activity, because a free society has an obligation not to use reasons that represent judgments between the kinds of activities in which citizens participate. So the simple fact that an activity is economic, or recreational, or philanthropic, or non-profit, or profit-based does not constitute a reason to tax or not to tax that activity. From the public point of view, there is nothing intrinsic to profit-based activity that renders it more, or less, defensible than than non-profit or philanthropic activity.

What is more, it is not enough to simply say that the beneficiaries of collective choices are morally obligated to support the choice. In the first place, benefits don’t create obligations. If someone washes my car while I’m at a stoplight without asking me, I have no obligation to pay them, even if my car’s aesthetics improve greatly from their labor. So is there something special about collective choices? I don’t think so. If collective choices really were things that we could not do individually, then it could be argued that the necessity of collective choices means that we consent, implicitly or explicitly, to the means necessary to support them. But most collective choices aren’t like that. As Locke recognized, collective provision of security and justice is more efficient than private provision, but security and justice would still exist without collective provision. So perhaps only if I prefer collective provision I have an obligation to benefit.

It seems then that classical liberals cannot appeal either to the type of social activity or simply ask “Who benefits?” I hope to develop a proposal for the distribution of burdens in a further post.


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