Theorizing the charitable tax subsidies: the role of distributive justice.

• Author: Fleischer, Miranda Perry

A cynic is a man who Knows the price of everything And the value of nothing --Oscar Wilde

TABLE OF CONTENTS I. INTRODUCTION II. AN OVERVIEW OF THE CHARITABLE TAX BENEFITS AND THEIR THEORETICAL FOUNDATIONS A. The Measurement Theories B. The Subsidy Theories 1. The Building Blocks: Why Subsidize Charity? 2. Refinements of the Basic Economic Subsidy Theory: Efficiency, Pluralism, and the Donative Theory a. Efficiency b. Pluralism c. The Donative Theory III. A FULL UNDERSTANDING OF THE CHARITABLE TAX SUBSIDIES REQUIRES AN EXPLICIT CONSIDERATION OF DISTRIBUTIVE JUSTICE A. Existing Scholarship Is Incomplete Because It Does Not Adequately Identify Which Projects Merit Subsidies 1. The Traditional Subsidy Theories 2. The Economic Subsidy Theory and Its Refinements a. Pluralism's Unanswered Questions b. Efficiency's Unanswered Questions B. A Fuller Understanding of the Charitable Tax Subsidies Requires an Analysis of Distributive Justice 1. Distributive Justice and the Traditional Subsidy Theories 2. Distributive Justice and the Economic Subsidy Theories a. The "Agnostic" Subsidy Theories b. The "Hostile" Subsidy Theories C. Scholarship Which Does Explicitly Address Distributive Justice Issues Is Too Shallow D. The Law Governing the Charitable Tax Subsidies Is Confused IV. A PREVIEW OF THE IMPLICATIONS OF USING DISTRIBUTIVE JUSTICE AS AN ADDITIONAL TOOL A. Utilitarianism B. The Maximin Principle C. The Capability Approach D. Egalitarianism and Equality of Opportunity 1. Equality of Resources 2. Equality of Opportunity for Welfare V. CONCLUSION I. INTRODUCTION

Distributive justice plays a starring role in many fundamental tax policy debates, from the marginal rate structure (1) to the choice of base (2) to the propriety of wealth transfer taxes. (3) In contrast, most current tax scholarship on the charitable tax subsidies (4) generally either ignores or explicitly disavows normative distributive justice concerns. (5) Instead, it focuses on the efficiency and pluralism-enhancing advantages of having charities provide public goods instead of or in addition to the government. (6) While identifying these advantages is a necessary and important contribution to our understanding of charitable giving policy, avoidance of distributive justice concerns ignores the very purpose of charity: voluntary redistribution. (7) After all, it is called the charitable deduction, not the public goods deduction. (8)

As a result, the current body of work on the charitable tax subsidies is incomplete. It purposely under-theorizes what is "good" for society in order to avoid making value judgments about which projects should be subsidized. Although this sounds appealing in our diverse society, completely avoiding such judgments is both impossible and counterproductive. Most current scholarship thus excessively under-theorizes what is considered beneficial to society, creating confusion about the charitable tax subsidies in both theory and practice.

The little scholarship on the charitable tax subsidies which does attempt to define what is good for society also under-theorizes it. For example, older scholarship arguing that charity should be subsidized because of the various benefits it provides to society uses standards which are too vague to be helpful (9) (of course, this flaw largely motivated the body of work seeking to avoid such standards). More recently, a few scholars have criticized the charitable tax subsidies by arguing that "too much" charitable giving benefits the middle and upper classes of society and does "too little" to help "the poor." (10) These criticisms are also incomplete, for they do not engage the fundamental questions of distributive justice theory: "What should be redistributed?" and "What is a just distribution?" (11)

Addressing distributive justice issues explicitly and more completely will enhance our understanding of the charitable tax subsidies on both a theoretical and a practical level. (12) This is so for three reasons. First, existing scholarship is incomplete and inconsistent: it is incomplete because it does not adequately identify which projects deserve a subsidy, and it is inconsistent because it implicitly contains value judgments that have distributive justice implications but that are unacknowledged (and often disavowed) by their proponents. Second, popular criticisms of the charitable tax subsidies raise distributive justice issues that have not been adequately addressed. And lastly, the law governing charities and exempt organizations is itself confused on the role of distributive justice.

This Article is the first of a series seeking to reintroduce distributive justice concerns into our understanding of the charitable tax subsidies. This first part makes the case for considering distributive justice issues alongside efficiency and pluralism and quickly previews some of the implications of so doing. The rest of the series will analyze in more detail such implications, by exploring the most common accounts of distributive justice used by tax theorists (utilitarianism, the difference or maximin principle, the capabilities approach, various forms of egalitarianism, and libertarianism) and considering what each account adds to our understanding of the charitable tax subsidies. (13) To be clear, this Series is not necessarily advocating narrowing the subsidies to those organizations that help the poor (as is often assumed when the terms "redistribution" or "distributive justice" are heard). (14) As those more familiar with political philosophy know, there are a number of strands of distributive justice, many of which do not involve redistribution to the less fortunate. In fact, one of my goals is to mine those other strands for insights into the charitable tax subsidies.

Extending our understanding of the charitable tax subsidies in this manner has three advantages. First, a more nuanced understanding of what charities should do will help the efficiency- and pluralism-minded scholars better address how to structure the tax subsidies to best promote those benefits. (15) Second, a deeper understanding of distributive justice will help us better assess existing justice-related criticisms of the subsidies. And lastly, because our society currently spends a great deal of resources subsidizing charity, such a discussion will help us allocate our resources in a more systematic fashion.

This Article proceeds as follows. Part II provides a brief description of the tax benefits for charities and their theoretical justifications. Part III makes the case for reintroducing considerations of distributive justice into our thinking about the charitable tax subsidies. Part IV quickly previews some of the possible implications of doing so, and Part V concludes.

2. AN OVERVIEW OF THE CHARITABLE TAX BENEFITS AND THEIR THEORETICAL FOUNDATIONS

   Charities have enjoyed a special tax and legal status since biblical times, when Joseph exempted the land of the priests from his declaration that "Pharaoh should have the fifth part" of the land of Egypt. (16) Many other ancient civilizations similarly exempted religious organizations from tax, reasoning that such organizations belonged to the gods, far beyond the realm of mortals. (17) In medieval England, churches initially were not taxed because they were the taxing authority, while during the time of the Reformation, exemption was expanded to secular charities precisely to undermine the power of the churches. (18)

   The 1601 Statute of Charitable Uses (which continues to influence much current thinking about charity) reflected this expansion. (19) It conferred special benefits (20) for a wide range of activities--including aid to the aged, the impotent, the poor, sick and maimed soldiers, orphans, prisoners, and unmarried women; schools, universities, and scholars; and public-works projects such as repairing bridges, causeways, and highways. (21) The Statute of Charitable Uses was enacted in conjunction with the Elizabethan Poor Laws, which placed more responsibility for caring for the poor on localities. (22) Because of this tie, some scholars believe that a fundamental purpose of the Statute of Charitable Uses was to encourage private charity to the poor to help ease the burden on the localities. (23)

   As the American colonies were developing their tax systems, exemption often occurred either randomly due to the ad hoc nature of the tax scheme or, in the case of some churches, on the grounds that it was pointless for the colonies with official churches to tax an arm of their own government. (24) As colonial tax systems matured, a system of exemption modeled on England's became fairly standard. (25) The federal tax system has granted exempt status to charities since 1894, (26) and most (if not all) states exempt them from the corporate income tax, state sales taxes, and state property taxes. (27)

   Simply because taxing income (as opposed to land or property) is a much more recent development in tax history, (28) allowing individuals to deduct charitable contributions from their income is a more recent innovation than tax exemption. That said, the Internal Revenue Code has contained an income tax charitable deduction since 1917--only four years after the 16th Amendment made the income tax a permanent fixture in our tax system. (29) Additionally, the Code also allows deductions for charitable transfers from the estate and gift tax bases. (30)

   As codified today, tax exemption under [section] 501(c)(3) of the Code and the ability to receive tax-deductible contributions under [section] 170 apply to a much broader range of organizations than those providing religious benefits and relief to the poor. Quite generally, to qualify for these benefits, an organization must be formed "for religious, charitable, scientific, literary, or educational purposes." (31) "Charitable purposes" has been broadly interpreted to include a wide variety of goals: preserving the environment...