The accepted academic explanation for why we subsidize nonprofits is that by doing so, we help them to provide public goods otherwise subject to market failure — where the amount produced is less than the amount needed. Consider clean air. Nobody can be prevented from enjoying it, but this open access leads some individuals to free-ride: Why should I pay for it, when I’ll benefit even if I don’t?
If too many individuals free-ride, the market under-supplies the good — no one will pay to produce clean air if they can’t charge others for it. In some cases, the government imposes taxes so that it can provide the public good directly (think of national defense). For the public goods provided by charities (think of soup kitchens and museums), the government helps overcome free-riding with tax subsidies whose costs are borne by all taxpayers.
A “public goods” rationale is more objective than a focus on whether organizations are “beneficial and stabilizing influences” on a community and “foster its moral and mental improvement,” which the Supreme Court articulated as justifying property tax exemptions for churches. A test that doesn’t use subjective justifications is welcome: The government shouldn’t be in the business of granting tax exemptions based on which activities it considers “good” for society. But the economic rationale suggests that the government’s real test for tax exemption should ask whether an activity is subject to free-riding or other market failures. If it isn’t — and church attendance is not — tax-free status is unnecessary.
In the case of religious organizations, many factors already minimize free-riding. The Mormon Church requires tithing; many Jewish synagogues charge dues and sell tickets to attend services for important holidays. Even though Protestant churches have abandoned pew rents, social pressure to contribute still abounds.
Of course, other charities also use social pressure to encourage giving. Private schools have incentives such as special events for classes that reach parent participation milestones in annual fundraisers. Or consider the names that grace buildings on college campuses and the donor lists in opera programs and alumni magazines. One study even demonstrated that donations to colleges and universities tend to cluster at the lowest dollar amount needed to attain recognition in alumni magazines.
The self-benefiting nature of many charitable contributions also counters free-riding. For many individuals, the clear connection between their donations to an organization and the benefits they receive — a better education for their child, a satisfying religious life or social status — minimizes the chance they will free-ride off of others.
Thus, free-riding is less common than one might think — a fact underscored by the number of charitable donations made by individuals who receive no visible financial benefit for doing so. More than 95 percent of Americans contribute to charity, even though only one-third of them itemize and are therefore able to claim a charitable deduction from their taxes. Religious organizations alone receive roughly one-third of all charitable donations – almost $115 billion a year. The ability of organizations with tightly knit donor communities — such as churches, schools and the opera — to fend for themselves suggests that current law unnecessarily subsidizes many organizations — including, but not limited to, religious institutions.
This is not to say churches never deserve a subsidy. Many of their more unglamorous activities actually benefit society at large, while likely facing market failure. If a church provides ongoing substantial services to others — such as providing basic necessities to the poor through a soup kitchen or shelter — that service merits governmental help. But providing congregants with spiritual services and education, with the occasional food drive thrown in? No need to subsidize that.
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