Even organizations that support such odious values as racism and homophobia are entitled, under the First Amendment to the Constitution, to espouse their values without threat of punishment by the government. Free speech is central to U.S. democratic norms. At the same time, the government has no obligation to subsidize bad speech. In Bob Jones University v. United States, the Supreme Court announced that the Internal Revenue Service (“IRS”) could constitutionally revoke the tax-exempt status of a religiously affiliated university because of its racist policy. The revocation was constitutional even though the racism derived from the university’s religious beliefs.
Although the conclusion makes sense—and may even be right— we argue that Bob Jones embraces the fundamental public policy rule for tax-exempt organizations that misunderstood the relationship between subsidy, tax exemption, and tax deductibility. As a result of the Supreme Court’s misunderstanding, it took the right route to arrive at the wrong place. By applying fundamental public policy to an entity’s qualification for exemption, we argue, the Supreme Court inappropriately imposes on minority speech and does so without preventing the subsidy of bad speech.
How did the Supreme Court err? It misunderstood tax exemption as reflecting a subsidy to public charities. Tax exemption does not represent a subsidy. As we will demonstrate, public charities do not belong in the corporate income tax base. Because they do not belong in the base, exempting them from paying taxes represents an accurate application of the government’s taxing power. Concomitantly, taxing public charities, far from fixing the misapplication of a subsidy, gets the tax base wrong. And when the tax base is wrong, taxes are both unfair and inefficient.
