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.
This model seems to be the subject of great investment by the most popular business moguls, despite the absence of tax incentives. Can anyone suggest additional literature on the matter since Posner’s publication?
I operate my business, My Misfiring Mind Inc., for-profit, but I have charitable motives. I write, tutor college students and advise businesses on how to produce effective and ethical publications, (newsletters, magazines and such.)
My Misfiring Mind Inc. pays me nothing. I get an $890 per month pension. Out of that, I pay for my one-bedroom apartment, groceries, et cetera. Frugality makes for simplicity and more free time.
I let the profits accumulate inside the business for expansion. From that, the company gives micro grants to local entrepreneurs to start small businesses. Most recently the company invested $1000 in a local man’s food vending cart that sells killer tri-tip sandwiches, ribs, fried catfish, and so on in front of an incredibly busy DMV office. Again, simplicity. He now has a profitable business and a good living. A hot dog stand wouldn’t stand a chance there now. My Misfiring Mind Inc. also donates money to local charities that I feel make the most impact in the community.
My point here is that a for-profit business with charitable ambitions can get a lot more done by simply being a profitable business without the restrictions placed on non-profit, tax-exempt organizations. My company has never asked for a donation; I never ask for money for nothing. If someone gives me money, it is because they bought something worth the price. The profit generated from that sale gets passed onto local causes that I trust, such as the group home that I lived in when I was a delinquent teenager. As for tax-exempt status, to hell with it. It’s way too complicated, and I wouldn’t be able to get much done if I had to keep track of it. Also, I don’t want to share the decision making. I have no need for the energy-sucking political egos that come with running a non-profit that has a board of directors.