RALEIGH – Rob Schofield, director of public policy and government relations at the North Carolina Center for Nonprofits, is a longtime friend and TV colleague. I respect his opinion on most matters even when I disagree. But in a recent column in The News & Observer, he defended the current federal estate tax on the grounds that it benefits nonprofits. I run a nonprofit, one that may well benefit from the tax-imposed incentive for people to donate wealth rather than letting it accrue for heirs. And yet I find myself appalled by this argument.
To defend the current U.S. tax rate on estates – 46 percent, one of the highest in the world (scroll down slightly) – on the grounds that it motivates individuals to support charitable causes is, essentially, to support the use of government coercion to force people to be philanthropic. It has a whiff of extortion about it, despite the fact that most of the charitable causes in question are worthy ones.
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 (that’s the original Greek meaning of the term). If I ask you to give money to the Salvation Army, listing its history of accomplishments and 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 to the Salvation Army, however, your decision to do so has nothing to do with generosity. It is not an act of morality or compassion. It is an act motivated by fear.
No doubt, some readers at this point might challenge my position by pointing to the larger public policy treatment of charitable nonprofits. Doesn’t providing nonprofits (including the John Locke Foundation) various tax exemptions and their donors tax deductions constitute government meddling in philanthropy, albeit perhaps of a somewhat less-extortive variety? 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 the nonprofits (or federal and state governments, for that matter) should be exempt from local property taxes. If property taxation is a legitimate tool for financing local services, it is so because of the relationship between property value and the value of services. Whether a place of business is for-profit, nonprofit, or government has nothing to do with the service costs associated with its employees, vendors, and customers. Nonprofits benefit from street access, law enforcement, fire protection, and other services in ways not particularly dissimilar from other enterprises.
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 (in which case it should be exempt from current tax), or it is disbursed to owners in the form of taxable dividends or capital gains (though these should either be deductible at the corporate level or the recipient level, rather than being double-taxed as is the current policy). 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 individual income.
The most controversial issue may be the tax-deductibility of contributions to some nonprofits. My own view, explained in detail elsewhere, 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 to a charitable cause does provide a service to the donor – good feelings, a sense of accomplishment or rectitude, etc. – 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. Uh-uh.
Hood is president of the John Locke Foundation.