The Magazine

Tax the Nonprofits

A modest proposal.

Mar 11, 2013, Vol. 18, No. 25 • By CHARLES WOLF JR.
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Nonprofit organizations (NPO), often referred to as the “independent sector,” are an essential part of America’s vibrant, pluralistic civil society. Their activities span a wide range of public and private purposes​—​philanthropic, cultural, religious, professional, educational, scientific. The public as well as private interests that NPOs represent add vitality as well as fractiousness to American society.

Okay, now render unto Caesar.

Okay, now render unto Caesar.

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A common feature nurtured by NPOs’ expansive diversity is their “enormous and incessant growth,” to quote a leading authority, Bruce Hopkins. Although their exact number isn’t known, the best current estimate is about 2 million, consisting of 1.4 million in the annual IRS registry, an additional number of religious organizations (approximately 350,000), and a further increment of “smaller” NPOs. Neither religious organizations nor the smaller NPOs are required to file annual returns with the IRS​—​hence the uncertainty about a precise number.

Can the NPO sector contribute to easing the U.S. fiscal imbalance, while helping rather than hindering the dynamic free enterprise system, and retaining societal benefits provided by nonprofits?

Annual NPO income is about $1.6 trillion​—​a revenue stream equal to 9 percent of U.S. GDP. This income includes donations and membership fees deductible from contributors’ taxable income, as well as earnings realized by some NPOs from services they provide to government and to the business sector. NPOs are allowed to earn income consistent with their nonprofit status, but are restricted in realizing profits from such earnings, as well as in the uses to which net earnings can be put.

Employment in the independent sector is about 8-9 percent of total nonfarm civilian employment, and total assets held by NPOs are estimated at $2 trillion, about twice the amount held a decade ago.

The United States continues a slow and unprecedentedly weak recovery from the Great Recession of 2008-2009​—​depressingly reminiscent of Japan’s protracted stagnation since 1990. Annual U.S. GDP growth is less than 2 percent, while unemployment hovers between 7 and 8 percent. If involuntary underemployment and temporary employment are included, total unemployment is about 14-15 percent of the labor force. The accompanying fiscal predicament consists of a federal budget deficit of more than $1.2 trillion in each of the past three fiscal years, and an accumulated gross public debt, approaching $17 trillion, which now exceeds GDP. Slightly over 70 percent of the gross debt is publicly held, and more than one-third of the publicly held debt is owed to other countries (mainly China and Japan); the government debt that’s not publicly held resides mainly in the balance sheets of the Federal Reserve.

Resolving our budget problems is difficult and urgent​—​the difficulty is compounded by the intense wrangling that pervades the political system. While the two political parties profess agreement on the need to reduce both the annual deficit and the accumulated gross debt, the parties disagree over how large the reductions should be, whether they should be accomplished by cutting spending, by raising revenues, or by both measures, and how much of the reductions should be made now versus in the future. Invoking the future reminds us that actions taken now do not prevent legislators and presidents from reversing them later.

Democrats urge that cuts focus mainly on defense spending, that cuts in entitlement spending should be avoided, and that any other cuts should be limited lest they set back the slow recovery. They argue that more substantial cuts should be deferred until later when (and if) more robust growth resumes. Instead of such cuts, the Democrats favor additional spending for infrastructure and education, as well as further increases in taxation of upper-income recipients beyond those enacted a few months ago to avert the fiscal “cliff.”

Republicans insist on larger spending cuts now, especially reductions in escalating entitlement costs, along with commitments for further cuts in ensuing years. Republicans oppose cutting defense spending, arguing that such costs would imperil national security. They are equally opposed to any further tax increases, arguing that these would adversely affect business investment, consumer spending, economic growth, and employment.

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