New Zealanders Debate an Unrelated Business Income Tax
I am still trying to convince myself that an unrelated business income tax is either good or bad. In the United States, Congress enacted the unrelated business income tax to prevent unfair competition. The tax does not raise a lot of revenue but that might be because it is effective in keeping charities out of business. The question I still have is whether taxing feeders — businesses, the profits from which are devoted to charity — is a good thing or a bad thing.
I have read a lot of boring scholarship – including some that I wrote myself – in which authors state but never defend the rationale. We all just accept the “unfair competition” gospel without really thinking it through. The notion that businesses run by altruists with no hope of private profit but a modest tax subsidy will eventually dominate profiteers in the same industry just isn’t very convincing. Or at least it’s inconsistent with the notion that capitalism is the greatest system of economics because the hope for private profit generates the most innovation and hard work. Tax exempts were never going to corner the market because altruism can’t compete with greed.
Shelters and food banks certainly won’t ever run hotels and restaurants out of business. The only industries in which nonprofit organizations have real market share are higher education and health care. But government subsidies in those industries are so much more pervasive than just tax exemption, so market share can’t safely be attributed to tax exemption.
newsroom, a New Zealand online paper, reports that New Zealand is still considering the imposition of an unrelated business income tax. New Zealand actually has what we might call an “unrelated business income tax,” but it only applies to unrelated profits used outside the country. New Zealand charities can conduct all sorts of untaxed feeder businesses as long as the profits are used exclusively for charitable purposes within the country. Unrelated profits used to fund international charity are taxed. Those used for both domestic and foreign charity are taxed ratably by reference to the relative amounts spent domestically and internationally. The territorial requirement is apparently just a means to ensure the tax subsidy benefits New Zealand; it does not seem motivated by a desire to address supposed unfair competition.
New Zealand stakeholders make two arguments against a real UBIT I had not heard asserted here. But maybe that’s because we just assume UBIT is a normative. It’s not. We seem to be the only Statute of Charitable Uses descendant that has the tax. New Zealanders assert that taxing feeders and unrelated businesses is not normative and would (1) increase taxes for everyone else, not just the charity and (2) cause nonprofits to leave or not ever operate in New Zealand. Here is an excerpt from newsroom:
Ministers are “considering what changes could be implemented to ensure tax rules in the charities sector work fairly in practice and that any integrity issues or unintended loopholes are minimised” she says. Sue Barker, of Sue Barker Charities Law, says the legal framework to ensure charities are operating fairly and with integrity is already there – “we just need to use it”. Introducing a tax on business operations could have unintended consequences such as increasing government spending on community services while raising no additional revenue, she says. “What we could do is stop charities from raising funds, or stop them carrying out activities altogether. These essential services would likely fall to the Government to provide … and research indicates that charities provide these services more efficiently and more effectively than the Government.”
The change would set New Zealand apart from Australia, the United Kingdom and Canada, where charities do not pay tax on most types of income as long as it’s used for charitable purposes. Barker says this could contribute to an exodus of charities such as Sanitarium, which already operate in other countries. “Why would you stay here if you’re going to be taxed on your charitable funds when you know the exact same activity in Australia would not be taxed?
I have almost finally decided that there is no good reason to maintain an unrelated business income tax. I am not sure that an unrelated business income tax would cause an exodus. I would need some data to believe that. But I suppose some of the international NGO’s ought to prefer residence outside the United States. That seems very logical. The first argument might be better articulated from an efficiency standpoint. That is, an unrelated business income tax makes charities less efficient. The efficiency loss is an added cost which government pays for through taxes greater than the efficiency loss. That’s plausible, I guess.
The assertions New Zealanders make against an unrelated business income tax are elegant even if they are still unsupported by data. But since most former colonies think an unrelated business income tax is not normative, the burden of proof should be on us, who think it is normative. I hardly think the case can be made.
darryll k. jones