[dragonwriter]

> AFAIK the Red Cross is funded by voluntary contributions; in other words, people pay the Red Cross to do what it does, indicating that people find what it does worth doing. That meets my definition of "profit", but apparently not yours.

First, donations are revenue, not profit; profit is revenue minus expenses. It is somewhat amusing that a post which makes this error complains about others having a "faulty definition of what 'profit' means."

Second, the term "nonprofit" is the less-formal term for a certain class of tax-exempt entity because part of the requirement for that tax-exempt status is that "part of the net earnings [...] inures to the benefit of any private shareholder or individual", that is, that the organization does not return profits to anyone. [1]

> In a sane world the Red Cross would be a normal corporation that was selling the service of helping people. If they made a profit, so much the better: more money to reinvest in helping people better. As it is, they have to hide what would normally be "profit" in various expenses that amount to the same thing, reinvesting profits in helping people better--but it's less efficient because of the subterfuge.

Except that this is not the case, because there is no requirement for the Red Cross not to have excess revenue above its expenses, it just can't have shareholders or other individuals to whom that excess is distributed.

[1] 26 USC § 501(c)(3); similar language appears in other paragraphs of § 501(c) defining other categories of tax-exempt non-profits, though § 501(c)(3) is the most important, and the one relevant to the Red Cross; http://www.law.cornell.edu/uscode/text/26/501

[pdonis]

donations are revenue, not profit; profit is revenue minus expenses

Yes, I know that. See my response to ZenPsycho.

there is no requirement for the Red Cross not to have excess revenue above its expenses

This is a valid point (and thank you for linking to the actual law governing this). However, I don't think it makes much difference to the point I was making. For one thing, it amounts to admitting that the Red Cross can make a profit, and that therefore profit and helping people can go together, which was my original point in this subthread. Also see below.

it just can't have shareholders or other individuals to whom that excess is distributed

First of all, that's not the only limitation. They also have to limit their activities to those that qualify for tax-exempt status. The law seems to have quite a bit of language intended to make it difficult to evade that requirement. So there is still an assumption that certain kinds of activities are "more worthwhile", independently of the question whether they make a profit.

Second, if there is an excess, what happens to the excess? Some of it probably gets put aside as a buffer for times when receipts are down. But other than that, what else does the Red Cross do with it?

Based on their recent financials, this is purely a hypothetical question, since they are operating at a loss, from what I can see:

http://www.redcross.org/images/MEDIA_CustomProductCatalog/m1...

But let's suppose they had a surplus. Where does it go? They are limited in the uses they can put it to and still keep their nonprofit status. A regular for-profit corporation is not. So the Red Cross still has to cope with an added burden that it should not have to cope with (and would not have to in a sane world), and that added burden detracts from their ability to help people.

[dragonwriter]

> First of all, that's not the only limitation.

That's the limitation that's relevant to the name "non-profits"; there are several classes of tax-exempt non-profits, and that's the shared feature that makes them "non-profits" -- not that they don't have excess revenue over current expenses, but that they don't return profits to shareholders.

> So there is still an assumption that certain kinds of activities are "more worthwhile"

Well, yes, there are public resources being expended by way of a tax subsidy -- 501(c)(3)'s are not merely exempt from income taxes, but donations to them are tax deductible.

> Second, if there is an excess, what happens to the excess? Some of it probably gets put aside as a buffer for times when receipts are down. But other than that, what else does the Red Cross do with it?

All of it is put aside for future use.

> So the Red Cross still has to cope with an added burden that it should not have to cope with (and would not have to in a sane world), and that added burden detracts from their ability to help people.

Nothing stops you from forming a regular corporation and trying to do better than the Red Cross at what the Red Cross is intended to do. I suspect you'll find that the "burden" that you are talking about is far less than the benefit you would get from 501(c)(3) status. If that wasn't the case, no one would be starting 501(c)(3)'s.

[pdonis]

That's the limitation that's relevant to the name "non-profits"; there are several classes of tax-exempt non-profits, and that's the shared feature that makes them "non-profits" -- not that they don't have excess revenue over current expenses, but that they don't return profits to shareholders.

But all of those different categories of tax-exempt entities have restrictions on the activities they can engage in and still retain their status, correct? So the limitation on activities is a relevant limitation for this discussion.

All of it is put aside for future use.

Doesn't that seem inefficient? Surely there are more profitable ways of using at least some of that excess than just putting it aside for a rainy day.

Nothing stops you from forming a regular corporation and trying to do better than the Red Cross at what the Red Cross is intended to do. I suspect you'll find that the "burden" that you are talking about is far less than the benefit you would get from 501(c)(3) status. If that wasn't the case, no one would be starting 501(c)(3)'s.

Of course; that's obvious. If we as a society choose to play favorites, obviously that skews the playing field. But skewing the playing field doesn't make the existing Red Cross more efficient; it just transfers the tax burden to the hypothetical corporate competitor. That's not an argument for making the Red Cross a nonprofit: it's an argument for doing away with the skewed playing field.

In other words, the relevant comparison is not between the existing Red Cross and a hypothetical corporate competitor in today's world; it's between the existing Red Cross and a hypothetical corporate competitor in a sane world where society does not play favorites by giving special benefits to certain types of activities. In that world, a corporate Red Cross that didn't have to restrict its activities to meet some arbitrary social requirement might do better at helping people than the existing Red Cross does.

[dragonwriter]

> a sane world where society does not play favorites by giving special benefits to certain types of activities

I'm trying to reconcile the concept of a sane world with the concept of not having organized society "play favorites" and reward activities which are perceived to have social benefits.

The Tragedy of the Commons is not efficient.

[pdonis]

I'm trying to reconcile the concept of a sane world with the concept of not having organized society "play favorites" and reward activities which are perceived to have social benefits.

You can reward activities that are perceived to have social benefits without playing favorites. People could still donate to the Red Cross if the donations were not tax deductible, and the Red Cross could still operate if there were no such thing as a tax-exempt organization.

Also, when you say "perceived to have social benefits", whose perception, exactly, are we talking about? If you argue (I'm not saying you specifically are, but many do) that we need to give special benefits to the Red Cross because otherwise they wouldn't get enough donations, you are basically saying that other people's perceptions of what activities have social benefits differ from yours, but since yours is obviously better, you are justified in skewing people's perceptions of social benefit by giving them tax breaks for donating to the Red Cross.

Even if we leave aside the question of what justifies skewing other people's perceptions, in a sane world, you wouldn't have to do it anyway. People's perceptions of the social benefits of various activities would be sane, i.e., reasonably accurate, so you wouldn't have to trick them into paying for things they otherwise would not pay for--more precisely, doing so would be a net loss to society.

(I'm not sure it isn't a net loss to society even in our actual world, because I think most organizations that take advantage of tax-exempt status are not doing things which are as obviously beneficial to society as the Red Cross. But that's a different discussion.)