As a recent Wall Street Journal article explained, it is not “for-profit” and “non-profit” but “taxed” and “non-taxed”.
“Non-profit” has long been accorded an aura of sanctity and our politically correct colleges are turning out graduates who disdain “for-profits” and aspire to positions in “non-profits,” where they can better benefit the environment, the poor, etc.
Their confidence will be shaken if they consider the following.
The private, “taxed,” sector efficiently allocates resources to meet demand. Firms not providing a desired service fail; those productive serve the public interest, and the profit motive keeps expenses down. Any profits after a 35 percent corporate, 0-10 percent state and up to a 60 percent individual federal and state income tax rate represent a return on invested capital and provide capital for future investment.
Untaxed (“non-profit”) entities presumably make no “profit” from their activities. From an economic standpoint this is not true — else they would cease to exist.
However, the tax exemption has been extended to more and more entities as long as they proclaim they are “non-profit” — schools, hospitals, foundations — and they are competing with private sector equivalents.
Although high personal tax brackets and, here in the U.S., the highest corporate tax rates among developed nations, reduces incentives for maintaining efficiency, the tax exempt have much less incentive.
If public taxed corporations tend toward over-compensation of executives, how much more likely must it be in the case of non-taxed entities? Finally, why should not for-profits be as worthy of charitable donations as non-profits?
A case in point is the “Habitat for Humanity” project in Morris. If five new homes on former papermill property were an efficient allocation of scarce capital, a private sector entrepreneur would build them — the city would not have to spend $150,000 or more to buy and clear lots, even if repayment were promised.
The four hundred hours of “sweat equity” is not sufficient payment for a home and lot; volunteer help to build a house is unlikely to be as efficient as a private sector construction effort, and existing housing for rent or sale raises the question of how necessary this investment is.
The ability of Habitat to engage in such endeavors is due to charitable (and deductible) contributions to an untaxed corporation.
Why is Habitat not using these resources for the benefit of Haiti earthquake survivors still living in packing cases?