Publication Date

11-2024

Journal

Northwestern University Law Review

Abstract

Countless pages have been devoted to the question of why everyone should pay tax, yet its opposite has gone largely unnoticed: why should some people and organizations not pay tax? Our tax system exempts from ordinary income taxation a wide and diverse array of people and organizations engaged in significant economic activity—from parents providing childcare services for their family to consular activities and charities operating animal shelters—seemingly without a convincing explanation. Perhaps because of the dizzying diversity of tax-exempt activities, scholars and policymakers have avoided comprehensively or coherently justifying our exemption regimes.

This Article develops a novel normative theory that rationalizes and justifies our current tax exemption regime. Rather than conceiving of exemptions as subsidies or individual deviations from a normative base explainable by ordinary politics, this Article argues that exemptions are best understood as mapping the “limits” of tax. These limits are neither arbitrary nor merely a collection of individual subsidies to favored activities; rather, they are best seen as reflective of deeper collective sociopolitical judgments about the scope of the State and the public sphere.

This Article constructs the “Limits Theory” by explaining and justifying the three most significant exemption regimes: those exempting the nuclear family, other sovereigns, and charities. The nuclear family perhaps occupies the center of the private sphere; its location demands exemption due to its intimate and private—not public—character. Notions of comity and federalism buttress the exception for other sovereigns, cautioning against the taxation of a public sphere by other public spheres. Lastly, charities’ unique public–private hybrid character, oriented towards purposes aligned with the public sphere yet operated as private autonomous associations, justifies charities’ exclusion from the ordinary limits of taxation—limits that cover ordinary for-profit organizations that strive to both do good and do well. The collective sociopolitical judgments grounding these exemptions are neither novel nor idiosyncratic; in fact, they are traceable to the work of political theorists of all stripes seeking to define the public sphere, from Rawls’s liberalism to Nozick’s libertarianism and communitarianism à la Walzer or MacIntyre.

In developing a theoretical account, this Article does more than construct a coherent framework for thinking about tax exemptions more generally. Visualizing exemptions as limits rather than subsidies also allows us to explain and justify key common features of the exemptions—for example, the law’s insistence that the commercial character of an activity vitiates exemption across different exemption regimes, foreclosing the possibility of for-profit charities and supporting the taxation of commercial enterprises run by other states. But perhaps most importantly, the theory illuminates the direction for further examination and refinement of the law. It renders exemptions intelligible and coherent at a more granular level. It offers a common and normatively rich framework for scholars and policymakers to engage in more fruitful debates about old and new issues regarding the proper scope of current exemption regimes—for example, on whether the PGA Tour and the Saudi sovereign wealth fund deserve to lose their tax exemptions upon completion of their controversial combination.

Volume

119

Issue

3

First Page

571

Last Page

636

Publisher

Northwestern Pritzker School of Law

Disciplines

Law | Law and Society | Taxation-Federal | Taxation-Federal Estate and Gift | Taxation-State and Local | Taxation-Transnational | Tax Law

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