There Are Way Too Many Tax-Exempt Nonprofits in America

A tea party activist dressed in Revolution-era garb speaks with an attendee at the Conservative Political Action Conference in National Harbor, Maryland, on March 15, 2013.

Photo by NICHOLAS KAMM/AFP/Getty Images

Let me be clear about two things. One is that IRS officials—as the IRS leadership rightly concede—should not have been subjecting tea party groups to heightened scrutiny during applications for tax-exempt status. The other is that many tax-exempt nonprofits are lovely organizations. I’ve worked at two over the course of my career, some of my best friends work for tax-exempt nonprofits, my wife works for one now, and in the course of doing my work I’m frequently able to take advantage of the knowledge, expertise, and hard work of people who work at tax-exempt nonprofits.

That said, I mostly take this tea party fracas to illustrate that we have way too many tax-exempt nonprofits in America.

The idea of a tax subsidy for charitable giving makes sense. And to an extent, I think tax subsidies for arts and cultural activities have been a big success in the United States. It’s good to have a robust arts sector outside the commercial space, and direct government funding for the arts is likely to be hyperconservative in its tastes. And if charities are tax-exempt and arts and cultural institutions are tax-exempt, then you see the logic for applying it to schools and other educational institutions. And then it’s a fine line between education and political advocacy. So next thing you know, you have political advocacy groups all over the country getting tax exemptions.

But it’d really be worth scaling this all back a great deal. A rich guy giving a gift to an elite university that mostly serves the educational needs of rich kids is not particularly worthy of a tax subsidy. That’s doubly true when we all know that the “gift” is in some respects a bribe to boost the admissions prospects of his own family members. We don’t have a shortage of political advocacy in the United States. God is not going to become angry at us and punish us if our churches become less splendid. Due to the progressive rate structure of the income tax, these tax deductions are very much a way of increasing the social and political clout of the rich and don’t seem to inspire a ton of charity in the sense of helping poor people.