Nobody should be surprised that President Obama’s Internal Revenue Service targeted Tea Party groups. This is clearly corrupt and an abuse of power, but it’s what we should expect, given the nature of tax laws.
Tax-exempt status works on two levels: for the individual and for the group. In both cases, there are problems with the fact that the individuals and the groups need to claim tax-exempt status and can claim tax-exempt status.
Here’s the principle at play: the best way to reduce the threat of government abuse of power is make the government simpler and smaller.
First, groups’ tax-exempt status shouldn’t matter because groups shouldn’t pay taxes. Corporations aren’t people. They don’t get to enjoy profits. Corporate executives, employees, contractors, and shareholders get to enjoy the profits, at some point — and at that point they are taxed. Nonprofit, but non-charitable organizations (like these Tea Party groups), if they retain some earnings at the end of a year, don’t have to pay taxes. My answer: for-profit corporations shouldn’t have to, either.
Ending the corporate income tax would make moot questions about these Tea Party groups or which groups deserve non-profit status (Matt Yglesias explores the trickiness of them here). One upside would be to get the IRS out of the hair of these groups.
But charities (501[c]3 groups) are tax-exempt in another way: individual taxpayers get to deduct from their income money they donate to charities.
I think the charitable deduction is a good thing, but this is one cost of the deduction’s existence: it gets the IRS in the business of deciding who’s a charity and who’s not. And as we’ve seen, the IRS can abuse its power for political purposes.