One of the worst things government can do is assume its actions won’t create any unintended consequences for those it governs.
When lawmakers increase taxes, for instance, they think they can do so without depressing economic activity. But people respond to incentives. If government imposes higher taxes, it creates an incentive for a person to work less, knowing he will not get to keep as much of his pay. That reduces economic activity.
The same is true of imposing new tax-filing rules.
Starting this year, even very small nonprofit organizations must begin filing tax returns with the IRS. Specifically, the new rule applies to nonprofits that have annual income of less than $25,000. Those that fail to file will lose their nonprofit status – no matter how noble the work they have done with the money they have raised. That essentially could shut them down, and shut down their worthwhile work.
At risk are organizations doing everything from fighting violence to raising money for cures for diseases.
Take a group called Chicago’s Turning the Tide, for instance. Weeks after Hurricane Katrina hit in 2005, the organization collected almost $1 million for the American Red Cross. When that much money was flowing, of course, it was reasonable that the organization filed a tax return to ensure that donations were accounted for properly.
But in the years since – with no similar disaster spurring it to seek donations – the group has raised very little money. It is biding its time, waiting to kick its fund-raising into high gear when the next disaster strikes. Now, however, because of the burdensome tax-filing rules that apply even when a nonprofit brings in little or no income, Turning the Tides may disband.
“I’ll talk to my attorney and team about what we ultimately need to do,” the group’s founder told The Chicago Tribune. “We might choose to wind it up.”
Think about that: Here is a generous organization that did lots of good after Hurricane Katrina. But the federal government has needlessly imposed new bureaucracy and paperwork, so the nonprofit may close altogether.
In fact, it is estimated that the tax-exempt status of 325,000 small nonprofits – many of which do excellent work – is at risk, thanks to this latest federal meddling. Some may forget the new filing requirement, and many more may simply disband to avoid the headache of completing extra tax forms.
Do you really believe government can enact tax laws without also making the “law of unintended consequences” take effect?