Differential
Taxation of Nonprofits and
the Commercialization of Nonprofit Revenues
Joseph
J. Cordes and Burton A. Weisbrod
Abstract
The effects of the favorable tax treatment of nonprofit
commercial activities are best understood in a framework which explicitly
accounts for the interaction between differential taxation and the
preferences of nonprofit executives who may be averse to commercial
activity, donors whose giving may be sensitive to NPO commercial
activity, and cost complementarities between NPO core activities
and the secondary money raising efforts. Within this framework,
differential taxation encourages NPOs to puruse commercial ventures
they would otherwise avoid, by providing excess financial returns
that NPOs can exploit because of their tax-exempt status. Empirical
analysis using data from the 1992 SOI public use file of 990 returns
indicates that the propensity of nonprofit organizations to undertake
both tax-exempt and charitable activities depends on the nature
of their primary mission-related output and size, on the relative
importance of government vs. private contributions, and on the size
of the excess return created by differential taxation of of nonprofit
and for-profit business. The results also show that organizations
that engage in taxable commercial activities are also more liklely
to allocate joint costs in ways that reduce their taxable income.
Joseph J. Cordes, Department
of Economics, George Washington University
Burton A. Weisbrod, Department of Economics, Northwestern
University
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