The Effect of Tax Simplification on Educational and Charitable Organizations

The tax code in the United States historically has provided quite a favorable environment for nonprofit institutions. Not only are such institutions usually exempt from taxation, but contributions made to them are deductible in the individual, corporate, and estate taxes. Other tax provisions, such as the exclusion of scholarships and certain fringe benefits from income, the use of tax-exempt bond financing, and tax credits for research support, have also aided educational and other nonprofit organizations. Although there has been no comprehensive analysis comparing the impact of these various provisions, it is clear that the charitable deductions in federal taxes provide a subsidy for contributions and that private donations constitute a very important source of support for nonprofit institutions. Table 1 shows the relative importance of private donations to the nonprofit sector by type of organization. Educational and research institutions in 1980 received 15.5 percent of their operating revenues from contributions and another 5.5 percent from endowments, most of which were created by private gifts. Religious organizations, with some 90 percent of their revenues from these two sources, were most dependent on private giving; health services, with only about 10 percent, were least dependent by this measure. Most tax reform and simplification proposals currently being discussed would alter the favorable treatment of charitable contributions and nonprofit institutions. Motivated by dissatisfaction with the complexity and high rates of the present income tax, most proposals would