Big Profits….No Taxes. The American Way?

Posted by Laura Otten, Ph.D., Director on August 21st, 2008 in Articles, Thoughts & Commentary

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According to a new report from the Government Accountability Office, two-thirds of U.S. corporations paid no federal taxes between 1998 and 2005. And a whopping 68% of foreign companies doing business in the United States also paid no federal taxes during that same period. All while doing “trillions of dollars in sales.”

I must say, I am inclined to agree with Senator Byron Dorgan (D.,N.Dakota), who observed in response to the report, “It’s shameful that so many corporations make big profits and pay nothing to support our country.”

This failure to pay income taxes by for-profits making serious dollars is all the more offensive when juxtaposed to the current trend of more and more jurisdictions, from local governments to the feds, questioning the tax-exempt (both in property and income taxes) status of nonprofits. These are organizations that Senator Dorgan should like, as by the nature of their very work they are doing much to support our country.

According to a recent The New York Times article (5/26/08), apparently nonprofits look more and more like businesses and people are getting confused as to what really constitutes a charity. (Has anyone bothered to read the IRS Code? It makes it pretty clear.) Part of the confusion, according to the Times article and conversations with many others, seems to stem from the fact that nonprofits increasingly earn income, not relying solely on raised income.

And the problem with that? To be honest, earned income—and social enterprise in particular—is extremely hot right now, being seen by many as the silver bullet for nonprofit sustainability. After all, isn’t that how for-profit businesses survive—charging for their products and services? Further confounding people’s thinking on what makes a nonprofit a nonprofit is that they see some of the same services being offered by both for-profit and non-profit organizations. A private health club and a YWCA or YMCA. The public zoo and a private safari land or sea world. A for-profit addiction treatment center and Gaudenzia. Each might appear to engage in the same activity, but each has different goals, measures of success, funding options, etc.

Should governments decide to tax nonprofits on their property and/or income—how should those taxes be paid? I can just see it now: an annual appeal to pay the tax bill! How many takers will that get? Earning more money to pay the tax bill will only increase the income tax bill, so how good an option is that?

Tax exemption for nonprofits, as it was originally designed, was offered as a quid pro quo for providing services that lighten the government’s load. The vast, vast majority of nonprofits, regardless of whether they are charging fees or raising dollars, are still doing that. Regardless of whether there is a for-profit look-alike down the street, nonprofits are still doing that. They are upholding their end of the bargain.

The ones who aren’t are the for-profit companies eluding their tax responsibilities, which is their quid pro quo for not relieving the government of anything. It would appear, though, that government wishes to relieve for-profit companies while reneging on its deal with nonprofits. Let’s dig into the right pockets.

The opinions expressed in Nonprofit University Blog are those of writer and do not necessarily reflect the opinion of La Salle University or any other institution or individual.