Monday, May 26, 2008

Non-Taxation Non-Profit

Tyler Cowen at Marginal Revolution points to an interesting article regarding the difficulties of distinguishing between profit and non-profit organizations for tax exempt status. I have thought about this before, and I have come to the conclusion that taxation of profit-firms put non-profits at a competitive disadvantage in many places. When Michael Moore decries the problem of health insurance industries to be that they are "for profit," I ask why then there are no major non-profit health insurance agencies if profit is the problem? One reason being is that their profit margins are not that large, despite what he says. However, the nature of that industry is such that it relies heavily in maintaining portfolios and trading in asset markets (resulting in lower premiums for consumers), but this would violate an NPO's tax-exempt status. We actually don't know for certain that NP health insurance companies would be competitive, but they have no chance if they are not permitted to trade in asset markets. In fact, NPO access to capital is significantly hampered in many ways in the name of protecting their tax-exempt status.

This sounds counterintuitive, but there are many industries in which the tax exempt status prevents NPOs from emerging and competing rather than encouraging it. The solution is then to end taxation of firms, so as to end the need maintain NPO tax status. There is no such thing as taxing a firm anyway, only households.

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