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The For-Profit Charity
  Posted: January 2, 2007
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Why should nonprofits and their donors get all the goodies from the IRS? That's the question posed by Eric Posner and Anup Malani of the University of Chicago Law School in a working paper published in September. Posner and Malani suggest that the exclusive tax benefits available to nonprofit corporations are both unfair and inefficient. In response, they recommend that the same benefits should be extended to for-profit charities, and to the charitable activities of for-profit commercial firms.

According to the authors, there are three primary arguments used to support the special status of the not-for-profit sector, none of which they believe justifies the exclusive tax incentives:

• The public goods theory suggests that charitable tax benefits encourage citizens to support firms that create public goods, displacing the need for government or tax revenues to do the same job less efficiently. (The authors claim that commercial firms can also provide public goods and services, and would do so more effectively and efficiently in some cases.)
• The agency theory holds that the nonprofit form removes the lure and distortion of profit-seeking from the pursuit of social good -- especially in cases where the donors or consumers cannot evaluate the quality of the goods or services provided. (The authors believe this problem could be resolved through contract and management structure.)
• Finally, the altruism theory suggests that the nonprofit form encourages altruistic individuals to undertake activities that will benefit others. Assuming that for-profit enterprise will ultimately value profit over quality or quantity of production, the nonprofit creates a space for those who value the latter over the former. (The authors dispute this point entirely, suggesting altruism and commitment to quality can be expressed by entrepreneurs in any organizational form.)

The proposition was provocative enough to make The New York Times Magazine's list of ''big ideas'' for 2006 (available here, if you're a subscriber). And it nudges an already bubbling conversation about the flexibility and future of the nonprofit corporate form.

In the arts, the question of fiscal priviledge for nonprofits is particularly vexing, since creative expression is produced, preserved, presented, and distributed through a full spectrum of organizational types (from independent contractors to commercial firms to informal collectives to cooperatives to hybrids thereof). With nonprofit cultural organizations seeming ever more corporate and risk-averse, and with so much innovation and expressive energy in other forms, it's easy to ask why the nonprofit form in the arts has achieved such favored-nation status.

Since the first focused cultural work of major foundations in the 1950s and the cultural philanthropy and government support that flowed in the following decades, the nonprofit form has been a necessary key to unlock gifts, grants, and discounts. Whether that corporate form was the best choice for the mission or vision of the organization became secondary to the fiscal imperitive.

While I'm not yet convinced that a for-profit charity model is possible or even beneficial in our current economic and social system, I'm thrilled to see the conversation moving forward. As I've mentioned before, organizational form is a tool, not a goal. Great artists (and exceptional managers) are always ready to rethink or reconstruct their tools if their larger vision requires it.