“All Americans interact with voluntary or nonprofit agencies and activities regularly, although they are often unaware of this fact.”48 Still, the educational process must continue, for, as Mr. Gardner wrote, “The sector enhances our creativity, enlivens our communities, nurtures individual responsibility, stirs life at the grassroots, and reminds us that we were born free.”49 Mr. O'Connell's collection includes thoughts from sources as diverse as Max Lerner (“the associative impulse is strong in American life; no other civilization can show as many secret fraternal orders, businessmen's ‘service clubs,’ trade and occupational associations, social clubs, garden clubs, women's clubs, church clubs, theater groups, political and reform associations, veterans' groups, ethnic societies, and other clusterings of trivial or substantial importance”50); Daniel J. Boorstin (“in America, even in modern times, communities existed before governments were there to care for public needs”51); Merle Curti (“voluntary association with others in common causes has been thought to be strikingly characteristic of American life”52); John W. Gardner (“For many countries . . . monolithic central support of all educational, scientific, and charitable activities would be regarded as normal . . . [b]ut for the United States it would mean the end of a great tradition”53); Richard C. Cornuelle (“We have been unique because another sector, clearly distinct from the other two, has, in the past, borne a heavy load of public responsibility”54); John D. Rockefeller III (“The third sector is . . . the seedbed for organized efforts to deal with social problems”55); Waldemar A. Neilsen (“the ultimate contribution of the Third Sector to our national life—namely what it does to ensure the continuing responsiveness, creativity and self-renewal of our democratic society”56); Richard W. Lyman (“an array of its [the independent sector's] virtues that is by now fairly familiar: its contributions to pluralism and diversity, its tendency to enable individuals to participate in civic life in ways that make sense to them and help to combat that corrosive feeling of powerlessness that is among the dread social diseases of our era, its encouragement of innovation and its capacity to act as a check on the inadequacies of government”57); and himself (“The problems of contemporary society are more complex, the solutions more involved and the satisfactions more obscure, but the basic ingredients are still the caring and the resolve to make things better”).58
Consequently, it is erroneous to regard the charitable contribution deduction and tax exemption as anything other than a reflection of this larger doctrine. Congress is not merely “giving” eligible nonprofit organizations any “benefits”; the charitable deduction or exemption from taxation is not a “loophole,” a “preference,” or a “subsidy”—it is not really an “indirect appropriation.”59 Rather, the various Internal Revenue Code provisions that establish the tax exemption system exist as a reflection of the affirmative policy of American government to refrain from inhibiting by taxation the beneficial activities of qualified tax-exempt organizations acting in community and other public interests.60
(b) Other Rationales
There are, as noted, other rationales for tax exemption that pertain to charitable organizations. One of these, somewhat less lofty than that accorded charitable and social welfare organizations, is extended as justification for the exemption of trade associations and other forms of business leagues.61 These entities function to promote the welfare of a segment of society: the business, industrial, and professional community. An element of the philosophy supporting this type of tax exemption is that a healthy business climate advances the public welfare. The tax exemption for labor unions and other labor organizations rests upon a similar rationale.62
The tax exemption for fraternal beneficiary organizations also depends, at least in part, on this defense. A study of the insurance practices of large societies by the Department of the Treasury63 concluded that this rationale is inapplicable with respect to the insurance programs of these entities because the “provision of life insurance and other benefits is generally not considered a good or service with significant external benefits” to society. The report stated, however, that “tax exemption for these goods and services [insurance and like benefits] may be justified in order to encourage” the charitable activities conducted by these organizations. The inherent tax rationale64 “may” provide a basis for tax exemption for “certain” of these societies' services, according to the report. Further, the report observed that “[i]nsurance is not a type of product for which consumers may lack access to information on the appropriate quantity or quality that they need.” Therefore, the market failure rationale65 “may not be applicable” in this instance.
Other federal tax exemption provisions may be traced to an effort to achieve a particular objective. These provisions tend to be of more recent vintage, testimony to the fact of a more complex Internal Revenue Code. For example, specific tax exemption for veterans' organizations66 was enacted to create a category of organizations entitled to use a particular exemption from the unrelated business income tax,67 and statutory exemption for homeowners' associations68 came about because of a shift in the policy of the Internal Revenue Service (IRS) regarding the scope of tax exemption provided for social welfare organizations. The tax exemption for college and university investment vehicles was the result of Congress's effort to preserve the exempt status of a specific common investment fund in the face of an IRS determination to the contrary.69 As is so often the case with respect to the tax law generally, a particular tax exemption provision can arise as the result of case law, or to clarify it; this was the origin of statutes granting tax exemption to cooperative hospital service organizations,70 charitable risk pools,71 child care organizations,72 public safety testing entities,73 and qualified tuition programs.74
All of the foregoing rationales for tax-exempt organizations have been described in philosophical, historical, political, policy, or technical tax terms. Yet another approach to an understanding of exempt organizations can be found in economic theory.
Principles of economics are founded on the laws of supply (production) and demand (consumption). Using the foregoing analyses, exempt
