Dear Editor,

Democrats recognize that after the $1.9 trillion ARP blowout, additional spending will need to be accompanied by significant revenue offsets, otherwise known as taxes. Progressives have also long argued for radical tax reform is a necessary tool for improving social equity. The political question is, who isn’t paying their fair share of taxes? 

Right on cue, Democrats in March introduced a version of the ‘wealth tax’ Bernie Sanders and Elizabeth Warren popularized during the 2020 campaign. The bill calls for a 2% annual levy on the assets of households and trusts with a net worth of $50 million to $1 billion, and an additional 1% tax (3% total) on the net worth of households and trusts above $1 billion. Advocates suggest the Ultra-Millionaire Tax Act (UMTA) would only hit the wealthiest 100,000 households and would produce $3 trillion in revenue over 10 years. 

Taxes like UMTA have not been used in the U.S. before, but have been tried in Europe. The administrative methodology differs markedly from income taxes, raising compliance challenges. Asset valuation is more complex than income measurement, for example, and a myriad of new tax evasion and avoidance options crop up. For these reasons, wealth taxes in European countries have generally seen disappointing results and many have been phased out in recent decades. 

Acknowledging these challenges, the UMTA proposal also includes radical changes to tax enforcement as well: 

A $100 billion increase to the IRS budget (there goes $1 trillion of revenue), 

A 30% minimum audit rate for taxpayers subject to the Ultra-Millionaire Tax,

A 40% ‘exit tax’ on the net worth above $50 million of any U.S. citizen who renounces citizenship. 

There is concern among economists that wealth taxes could discourage domestic saving and investment, reducing capital accumulation and weakening economic growth. According to a dynamic macroeconomic model published by the Tax Foundation, the UMTA would reduce long-run GDP by 0.37 percent. 

These complexities reduce the odds of UMTA becoming law in the near term, but support for radical tax reform among Democrats remains high. What other groups are not paying their ‘fair share’? I’ll offer a few candidates of my own: schools and churches. 

Both suggestions hinge on a debate about the criteria for 501(c)(3) non-profit status. This status provides many benefits, including:

Exemption from paying federal and state income taxes,

Exemption from paying federal and state unemployment taxes,

Ability to receive tax-deductible contributions, reduced postal rates, and

Eligibility for a larger number of government grants.

Most private schools (both preps and colleges) are categorized as 501(c)(3) non-profits. Several estimates indicate this tax status saves them $75-100 billion annually, meaning repeal could raise up to $1 trillion in revenue over 10 years. Several arguments can be made to revoke this treatment. 

First, private alternatives to public education should be privately financed as a matter of principle, particularly religious schools. Second, elite prep schools and colleges are engines of social inequity. Tuition increases outpace inflation every year, federal financial aid makes up a growing portion of tuition, yet applicants exceed capacity by orders of magnitude. Third, most elite institutions are quite wealthy, in part because of their access to government grants and subsidies. They have giant endowment funds (Harvard $41 billion, Yale $30 billion, Stanford $28 billion, Princeton $26 billion). Phillips Exeter Academy, with only 1,100 students, has a $1.3 billion endowment. If necessary, endowment resources could be used to determine tax status or rate. One can argue that perpetuating inequality is literally the business model that elite private schools operate by. So why are they tax exempt?   

Surprisingly, the GOP took a small step toward blowing up the ‘sacrosanctity’ of tax-exempt status for churches when they passed the Tax Cuts and Jobs Act in 2017. A little-noticed provision requires churches, hospitals, colleges, orchestras and other historically tax-exempt organizations pay a 21 percent tax on some types of fringe benefits they provide their employees. The provision was part of an effort to treat all organizations equally, in the context of an effort to eliminate business tax breaks for employee benefits like parking, client entertainment and meals. 

Arguments in favor of completely revoking tax-exempt status for churches are numerous. First, the exemptions violate the separation of church and state enshrined in the Establishment Clause of the First Amendment of the Constitution. Secular nonprofits like hospitals and homeless shelters deserve tax-exempt status because they do work that would otherwise fall to the government. Churches, while they may undertake charitable work, exist primarily for religious worship and instruction, which the US government is constitutionally prevented from performing.

Second, the lost revenue has to be replaced by others. As Mark Twain argued: “no church property is taxed and so the infidel and the atheist and the man without religion are taxed to make up the deficit in the public income thus caused.” US churches own an estimated $300-$500 billion in untaxed property. New York’s Independent Budget Office determined that NYC alone loses $627 million in property tax revenue annually. Lakewood Church, a megachurch in Houston, earns $75 million in annual untaxed revenue. 

Also, the tax code is incapable of distinguishing authentic religions from questionable startup ‘faiths’. In 2004 the IRS warned of an increase in schemes that “establish sham one-person, nonprofit religious corporations charging $1,000 or more per person to attend seminars.” In 2010 Oklahoma awarded tax-exempt status to Satanist group The Church of the IV Majesties. The Church of Scientology, which TIME described in 1991 as a “thriving cult of greed” was granted federal income tax exemption in 1993. The Church of Scientology’s annual income exceeds $500 million.

Finally, many churches simply refuse to play by the rules of 501(c)(3). Despite a 1954 law banning political campaigning by tax-exempt groups, many churches are clearly political advocacy organizations. Every fall, the Alliance Defense Fund organizes “Pulpit Freedom Sunday,” encouraging pastors to defy IRS rules by endorsing candidates from the pulpit. More than 500 pastors participated in 2011, yet none of their churches had their exemption status challenged.

Derek Ridgley
Nederland