Democratizing the Nonprofit Sector*

Abstract

IN 1913—just prior to World War I—the United States Congress established a national income tax. There was a concern, however, that the income tax would lead individuals to reduce their charitable contributions. Accordingly, Congress rendered donations to groups ‘organized and operated for charitable, scientific, and educational purposes’ exempt from taxable income. This included an enormous variety of groups: social service agencies, community health clinics, cultural groups, and educational organizations. In the years that followed a variety of more specific groups were included such that non-profit organizations now qualify for tax-exempt donations if their purpose includes assisting the poor, protecting the environment, advancing art, science, education, religion, or culture and, more generally, pursuing purposes beneficial to the community. Although the favorable treatment of such organizations is myriad, this article focuses on the tax-deductible status of donations to such groups in the US. The decision to exempt donations to nonprofits from taxation is an important one for the political community. Total private giving in the US amounted to $295 billion in 2006. Estimates suggest that charitable deductions cost the Federal Government approximately $50 billion annually in foregone revenue. To put this in perspective, in 2007, $57.5 billion was allocated at the federal level for education and $7.7 billion for the Environmental Protection Agency. Moreover, ‘nonprofits account for 5 percent of GDP, over 8 percent of the economy’s wages, and about 10 percent of employment. Nonprofit wages and employment have both been growing as a share of the total economy, with nonprofit employment growing three times