Ring-Fencing Bad Tax Policy
Abstract
This article examines the distortions caused by tax exemptions granted to nonprofit and member-serving organizations, which encompass a significant share of economic activity. Originally intended to support public welfare, these exemptions have expanded to benefit entities that operate like taxable businesses, creating market inefficiencies and eroding the tax base. The tax-free status of nonprofit hospitals, credit unions, and university investment funds shifts the fiscal burden onto other taxpayers, exacerbating economic imbalances. Reforming these exemptions—through stricter definitions of tax-exempt status and enhanced enforcement of unrelated business income tax (UBIT) rules—could generate substantial revenue while preserving protections for genuine charitable organizations. Drawing on best practices, this article argues that removing unwarranted tax privileges would enhance competition, broaden the tax base, and restore fairness to the tax system. Policymakers must act decisively to ensure all economic actors contribute equitably to the nation’s fiscal health.
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