Charitable Giving and Nonprofits

Finance: Examining Charitable Giving and Trends in the Nonprofit Sector, March 17, 2022

There are two questions for the taxation of charitable contributions. The first is where the money comes from. The second is how the outgo should be taxed.

Under our proposed asset value added tax, assets would be marked to market at initial public offering, option exercise and the first sale after inheritance, gift and donation. When assets are donated to charities and nonprofits, no tax will be paid. When these institutions sell these assets, taxes will be collected in full. Whether endowment income is taxed is an open question, although usually the asset value added tax would be levied.  

Sales to employee-owned or cooperative firms will be zero rated, just as they are when a single owner sells out to an ESOP when transitioning out. We propose expanding this privilege to all asset sales. Note that as long as a business or family farm is kept in the family or sold to a cooperative, no tax is levied.

Large religious organizations, charities and nonprofits have become big business and need to be taxed accordingly, where appropriate. Some are legally held as the property of the minister or bishop. Taxing such entities as sole proprietors makes legal sense. While this could be seen as targeting certain religious organizations, such as the Catholic and Episcopalians, their choice of organizational form is not the fault of the public. As such, their tax treatment must match similar business classes.

Charities that have commercial operations will be subject to an Invoice VAT (I-VAT), aka goods and services taxes. They do so under the TCJA provisions in question like any other commercial company. If so, these operations compete with type C corporations (which pay corporate taxes), as well as type S, partnership or sole proprietor firms (that pay individual income taxes at pass-through rates). 

Paying Invoice VAT is essential after tax reform to provide visibility to paying customers who also pay a VAT so as to capture all tax payments imposed by the entire supply chain. Without such treatment, every business will turn into some form of charitable organization overnight, this would not be advisable.  Fiscal conservatism should not be synonymous with empowering tax evasion schemes. 

Whether non-commercial operations are subject to an I-VAT depends on how payroll taxes are financed under reform.  For example, if Social Security or Medicare were to become I-VAT funded, thus becoming zero rated at the border and replacing the payroll tax, then charitable organizations must continue to fund non-commercial operations, as they will benefit the employees of these organizations.  If, however, entitlement services are funded under a payroll tax are funded through our proposed Subtraction VAT (S-VAT), then there is an argument to leave the non-commercial activities of these entities Invoice VAT (GST) exempt. 

Political organizations and committees would also pay S-VAT (or I-VAT) on their payroll and their purchases would not be I-VAT exempt in the long term. Committees that give little to candidates should not be tax exempt, as they are essentially corporations whose high salaries are essentially partnership income in disguise, without the corresponding risk. As such, they should be taxed at pass-through rates. As such, they should pay the asset value added tax on such distributions.

Charitable organization employees will continue to pay the employee contribution to Old Age and Survivors Insurance, assuming it is not subsumed into our proposed Subtraction VAT (S-VAT).

Likewise, employees would be paid the same child tax credit as commercial employees – again as an offset to S-VAT levies.  Health and higher education credits proposed for other enterprises would also be available to charitable organizations, as well as any other applicable credits.  Note that because certain payroll and personal income taxes will be eliminated, the gross pay of charitable employees will decline in like manner to those of their commercial counterparts once tax reform is enacted.

Finally, this schema is as applicable to governmental organizations as it is to charitable organizations, with modifications.  State governments would be the federal S-VAT, while federal organizations would pay the state S-VAT, both on the same basis relating to value added through payroll.  These organizations would not pay the S-VAT to themselves, however their personnel systems should contain a similar range of benefits.  

This schema provides a better explanation of how a Fair Tax might work on these levels, while also providing a rationale for adjusting government employee salaries and providing for non-governmental performance of services through the same type of alternative S-VAT programs.

Attachment: Tax Reform (with videos)

Attachment: Tax Administration https://youtu.be/igngee62T_I