The recent Red Cross scandal is a reminder that charitable nonprofit organizations sometimes act poorly. Meanwhile, many for-profit commercial organizations try to do good—by helping poor coffee growers, or providing hurricane relief, or supporting schools. Yet the good-doing nonprofits enjoy tax benefits denied to the good-doing for-profits. Why should this be the case? It turns out that there is no reason for discriminating against commercial operations that provide charitable benefits. Indeed, the incentive structures of a profit-making business could be used to enhance the efficiency of charities. Hence the case for the “for-profit charity.” Click here for the argument (an abstract of the paper is below).
Nonprofit firms may not distribute profits to owners but instead must retain them or reinvest them. Nonprofits that are “charitable organizations” under Section 501(c)(3) of the tax code may receive donations from individuals who are allowed to deduct their donations from their income for tax purposes. We argue that the law should not link tax benefits to corporate form in this way. There may be good arguments for recognizing the nonprofit form and good arguments for providing tax subsidies to charities or donors to charities, but there is no good argument for making those tax subsidies available only to charities that adopt the nonprofit form. Consequently, the “for-profit charity” may well be a desirable institution. Currently, no such entity exists, but the reason is surely discriminatory tax treatment; the charitable activities of many commercial firms suggest that in the absence of discriminatory tax treatment for-profit charities would flourish. Current tax benefits for charitable nonprofits should be extended to for-profit charities, and to the charitable activities of for-profit commercial firms.