COMPETITION FROM TAX-EXEMPT BUSINESS (Discussion)

Abstract

TAX EXEMPTION IS A POWERFUL weapon of economic policy. In order to make use of it with optimum economic effect yet without encountering constitutional barriers the fiscal authority must be discriminating without being discriminatory; it must be economically selective without violating legal prohibitions. The task of accomplishing this may seem to be impossible, yet many types of tax exemption do exist in our tax structure with full constitutional sanction. The major types of tax exemption are: (i) the exemption from the individual income tax of those incomes that fall below a certain level; (2) the exemption of certain governmental bond interest from income taxation; (3) the partial exemption from property taxes granted certain persons, such as veterans; (4) the exemption from property taxes granted new businesses in some localities; (5) the exemption from either property taxes or income taxes or both granted to co-operative enterprises, governmental agencies or religious, charitable, or educational institutions; and (6) certain exemptions granted to firms operating in foreign countries. We are concerned here with those tax-exempt entities which engage in business in competition with firms that are subject to taxation. The question involved is whether and to what extent tax exemption gives the tax-exempt enterprise a competitive advantage over the taxable enterprise. Professor Guthmann has quite reasonably confined his paper to a description of the exemption from the federal income tax enjoyed by co-operatives and government-owned utilities. Since the questions he raises are of fairly broad application, however, we may first supplement his remarks by reviewing briefly the provisions of the Internal Revenue Code which deal with exemption from the federal income tax.