A Millennial's View of the World

Author: Dan Millennial (Page 2 of 2)

Dan is an attorney in Los Angeles, California. He has a lifetime of experience as a millennial.

Re-examining tax exemptions for religious organizations in the aftermath of proposition 8

CWSL Scholarly Writing Paper
By Dan Revich

March 23, 2009


On November 4, 2008, the Proposition 8 ballot initiative was passed in California with a vote of 52.1% for and 47.9% against. The Proposition added to the California Constitution the statement “only marriage between a man and a woman is valid or recognized in California.” Approximately $39 million was raised by the campaign to support Proposition 8.

This paper will discuss how religious organizations influenced the movement to ban gay marriage, and more specifically how those organizations receive their funding. Federal tax law gives religious organizations tax-exempt status, and allows individuals donating to religious organizations to deduct large portions of those donations from their income taxes. The 1970 Supreme Court holding in Walz v. Tax Commission of City of New York found that tax exemptions for religious organizations are not in violation of the Establishment Clause of the 1st amendment to the United States Constitution , and gave taxing authorities the right to grant tax exemptions to religious organizations.

This paper will analyze the constitutionality of those tax exemptions, and re-examine whether they violate the Establishment Clause of the 1st amendment, using the test applied in Lemon v. Kurtzman as a framework for analysis.

Part I of this paper will provide a background to relevant issues, cases and laws relating to Proposition 8 and tax exemptions for religious organizations. Part II will analyze the legality of the religious involvement in Proposition 8. Part III will examine whether tax exemptions are in violation of the Establishment Clause of the 1st amendment using a Lemon Test framework as a basis for analysis.


Part A of the Background section will outline the federal laws governing tax exemptions for religious organizations. Part B will provide a background to the Walz case. Part C will provide a background to the Lemon test that will be used as a basis for analysis in Section III of this paper. Part D will outline the involvement that religious organizations played in the passage of Proposition 8.

A. Tax Exemptions for Religious Organizations

Section 170(c)(2)(b) of the Internal Revenue Code allows tax deductions for donations to “A corporation, trust, or community chest, fund, or foundation organized and operated exclusively for religious charitable, scientific, literary, or educational purposes…” Section 501(c)(3) of the code gives religious organizations tax exempt status, so long as “no part of the net earnings of [the organization] inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation… and [the organization] does not participate in, or intervene in… any political campaign….”

Under the current system, an individual in the 35% tax bracket receives 35% of any donation he or she makes to a charity as a tax deduction. For example, an individual who pays taxes at a 35% rate will receive $35 in tax deductions from the government for every $100 donated to charity. In the proposed federal budget submitted by the Obama administration, the maximum amount deducted would be reduced to 28% in order to raise money for health care reform. Once the law is in effect, an individual would only receive $28 in tax deductions for every $100 donated to charity.

B. The Walz case

In Walz v. Tax Commission of City of New York, the Supreme Court, under the opinion of Chief Justice Burger, upheld a New York state property tax exemption for property used exclusively for religious purposes. Walz, the owner of real estate in New York, sought an injunction to prevent the New York City Tax Commission from granting property tax exemptions to religious organizations for properties used solely for religious worship. Walz argued that the tax exemption indirectly required taxpayers to make a financial contribution to religious bodies in violation of the Establishment Clause of the 1st amendment, which states that “Congress shall make no law respecting an establishment of religion.”

The majority noted that to the framers of the United States Constitution, the “establishment of a religion connoted sponsorship, financial support, and active involvement of the sovereign in religious activity.” It discussed how the court had struggled to find a neutral course between the Establishment Clause and the Free Exercise Clause of the First Amendment, concluding that any judgment would turn on whether the “particular acts in question are intended to establish or interfere with religious beliefs and practices, or have the effect of doing so.” The court’s opinion will be discussed later in this paper.

C. The Lemon Test

One year after the decision in Walz, the Supreme Court decided the case of Lemon v. Kurzman. In Lemon, Rhode Island and Pennsylvania statutes providing state aid to church-related elementary and secondary schools were challenged as being in violation of the first amendment. The Court found that the subsidies were unconstitutional, in that they presented excessive government entanglement with religious institutions.

The significant aspect of this case is the three part test that the court created to determine whether government entanglement with religion is excessive. The court writes “we must determine the character and purposes of the institutions that are benefitted, the nature of the aid that the State provides and the resulting relationship between the government and religious authority.” I will use the Lemon test as a guideline to discuss the constitutionality of tax subsidies for religious organizations in section III of this paper.

D. Religious Support for Proposition 8

The full extent of religious support for Proposition 8 became public after the 2008 election. It is estimated that approximately half of the financial support in the Yes on 8 campaign came from Mormons. The Latter Day Saints (LDS) Church itself donated $55,000 in monetary and $134,774 in nonmonetary expenditures (mostly staff time by church employees) to support the Yes on 8 cause. Two weeks prior to the election, the Yes on 8 campaign issued an urgent appeal for donations. The campaign sent an e-mail to the 92,000 individuals who registered on the Yes on 8 website www.protectmarriage.com with an urgent plea for funds. It raised $5 million shortly after that appeal, including a $1 million dollar donation from Alan C. Ashton, a computer executive and grandson of a former LDS president.

It was not just the LDS church that gave money to the Yes on 8 campaign. The LDS church was actually the last major church to join the Yes on 8 campaign, according to the New York Times. The campaign was supported by the Catholic Church, Evangelical Christians, and a myriad of ethnic church groups. The full list of contributors to the Proposition 8 campaign is listed on a searchable website hosted by the San Francisco Chronicle newspaper. Entering a search of “Church” in the Contributor Name field for financial supporters of Proposition 8 yields a list of 75 supporters who made various financial contributions. The San Diego Rock Church, for example, which states “The Rock will be a global and highly trusted model of relevant and innovative evangelism” as its vision statement, donated $25,679.16 to the Yes on 8 campaign. The Grace International Church, based out of Texas, donated $6,301.63 to the campaign. These churches, funded by donations from their members, who in turn received tax breaks for those donations, funneled money into the campaign to end gay marriage.
Religious support extended beyond financial contributions.

It is estimated that 80-90% of the volunteers who canvassed door to door for the Yes on 8 campaign were Mormons. Canvassers were instructed to first determine if the voter believed that God created marriage, and then to emphasize that Proposition 8 was in conformity with God’s will if the voter did. If the voter believed that marriage was a creation of man, then canvassers were to emphasize that Proposition 8 was merely about restoring marriage law. The LDS Church announced its support of Proposition 8 in a letter that was read in every Mormon congregation, in which the church encouraged members to donate time and money to the Yes on 8 cause.

The impact that church sermons and rhetoric had on voters also likely contributed to the success of the ballot initiative. An acquaintance who attended the aforementioned San Diego Rock Church shortly after the vote claimed that the pastor gave a sermon about the importance of the passage of the law. The impact of numerous pastors, priests, and rabbis throughout California instructing their congregations to vote Yes was likely significant.

Finally, religious organizations have also played a role in the fight to prevent Proposition 8 from being overturned. The day after the passage of Proposition 8, a group of gay couples initiated a Petition for Writ of Mandate enjoining state officials from “enforcing, taking any steps to enforce, or directing any persons or entities to enforce” Proposition 8. The Petitioners argue that Proposition 8 is invalid, as it is not an amendment to the California constitution, but a revision.

Briefs in support of respondent (and intervener siding with respondent) were filed with the California Supreme Court by several religious organizations, including Kingdom of Heaven, California Catholic Conference, The United States Conference of Catholic Bishops, The Union of Orthodox Jewish Congregations of America and The Church of the Messiah.


A primary issue is whether the religious involvement discussed in the background section is in violation of current laws regulating political activities of religious organizations. Section 501(c)(3) of the Internal Revenue Code prohibits charitable organizations from undertaking in any political campaign activity, and requires that they only engage in minimal lobbying. There are three requirements that charitable organizations must meet in order to receive tax-exempt status: No part of the net earnings may benefit a private shareholder or individual; No substantial part of the organization’s activities may consist of lobbying or attempting to otherwise influence legislation, and; the entity may not participate in or intervene in a political campaign for any political office.

IRS regulations state that “the publication or distribution of written or printed statements or the making of oral statements on behalf of or in opposition to… a candidate” is prohibited. Organizations may participate in voter education, voter registration and voter encouragement, so long as they do not favor one candidate over another. Political candidates may speak to religious organizations, so long as the organization provides an equal opportunity for competing candidates to participate, does not indicate whether it supports or opposes the candidate, and does not use the event to fundraise. 501(c)(3) organizations can take positions on issues, so long as they do not favor one candidate over the other.

In Branch Ministries v. Rossotti , Branch Ministries Church challenged the IRS’s revocation of its tax-exempt status, which occurred after the church published an ad in USA Today and the Washington Times four days before the 1992 election. The ad urged Christians not to vote for presidential candidate Bill Clinton because of his views on social issues. The court of appeals for the District of Columbia found that the IRS’s revocation of the Church’s tax-exempt status did not violate the U.S. Constitution or exceed the IRS’s statutory authority. The court noted that withdrawal of tax exempt status only violates the first amendment if it is “…denie[d] … because of conduct mandated by religious belief, thereby putting substantial pressure on an adherent to modify his behavior and to violate his beliefs.” The Court stated that: “Although its advertisements reflected its religious convictions on certain questions of morality, the Church does not maintain that a withdrawal from electoral politics would violate its beliefs.” The court found that the burden of losing tax-exempt status was not constitutionally significant. It is clear that losing tax exempt status would place a burden on churches, as most of a church’s income is derived from donations.

A complaint was filed against the LDS church by Fred Karger, founder of the group Californians Against Hate, for violations of the California election law in supporting Proposition 8. California law requires that Churches disclose all contributions to political campaigns made by religious organizations. The complaint launched an investigation by the California Fair Political Practices Commission. The Church subsequently disclosed all contributions to California authorities, but claimed that “the filing is in no way prompted by an investigation by the California Fair Political Practices Commission.” Proposition 8 supporters also attempted to get an injunction to prevent donor lists from being made public, but U.S. District Judge Morrison England Jr. ordered that the names be released, arguing that disclosure laws are in place to protect the public.

Recent internet campaigns seek to file complaints with the IRS to remove the LDS church’s tax exempt status because of its support for the Yes on 8 campaign. However, as Barry Lynn, president of Americans United for Separation of Church and State asserts, “while the tax code has a zero tolerance for endorsements of candidates, the tax code gives wide latitude for churches to engage in discussions of policy matters and moral questions, including when posed as initiatives.” The LDS Church would only lose its tax-exempt status if a substantial part of the Church’s funds went towards political activities. Generally, charitable organizations that spend less than 10% of total revenues on non-charitable activities will not lose their tax-exempt status. The LDS church is so large that the amount spent on the Proposition 8 campaign would not meet the 10% threshold.

Thus, under current tax law, it appears that the involvement of religious organizations in the passage of Proposition 8 was within the confines of acceptable political activity, and was therefore not in violation the law. Supporting the Yes on 8 campaign did not amount to actually supporting a particular candidate, but simply supporting a political cause. I would argue that religious organizations are inherently political, and therefore attempting to stifle their political activities is inevitably futile. The free reign of religious organizations in their political activities would not be a problem but for the fact that religious organizations receive tax-exempt status. The alternative to attempting to control what religious organizations do in order to receive tax-exempt statues would be to simply remove that status completely.


This section will discuss whether tax exemptions for religious organizations satisfy the three prongs of the lemon test. Part A will discuss the nature of the aid that the state provides, examining whether tax exemptions for donations to religious organizations are equivalent to government subsidies. Part B will examine the resulting relationship between the government and religious authority, discussing whether tax exemptions for religious organizations serve to establish a state religion. Part C will examine the character and purposes of the institutions that are benefitted, discussing whether religious organizations are beneficial to society.

A. Are Tax Exemptions for Religious Organizations Equivalent to Government Subsidies?
“The nature of the aid that the state provides”

In the Walz case, the majority argued that “The grant of a tax exemption is not sponsorship since the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state.” The court used the analogy of libraries, art galleries and hospitals to show that other organizations receive tax exempt status, but are not considered arms of the state.
In his dissent to Walz, Justice Douglas argues against the claim that a tax exemption is not a subsidy. He makes the analogy of giving a federal grant to a church to construct an edifice, and claims that a tax exemptions would serve the same purpose. Douglas refutes the majority’s argument that many other private institutions receive government subsidies, arguing that these organizations represent “social welfare programs within the reach of the police power.”

In Mueller v. Allen, taxpayers fought a tax deduction that was available for parents of children attending sectarian schools. In a 5-4 ruling, the majority, led by Justice Rehnquist, argued that “…financial assistance provided to parents ultimately has an economic effect comparable to that of aid given directly to the schools attended by their children. It is also true, however, that under Minnesota’s arrangement, public funds become available only as a result of numerous, private choices of individual parents of school-age children” . He continues “Where, as here, aid to parochial schools is available only as a result of decisions of individual parents, no ‘imprimatur of State approval’… can be deemed to have been conferred on any particular religion, or on religion generally.”

In his dissent to Mueller, Justice Marshall argues that “By ensuring that parents will be reimbursed for tuition payments they make, the Minnesota statute requires that taxpayers in general pay for the cost of parochial education and extends a financial ‘incentive to parents to send their children to sectarian schools’.” He continues that “it makes no difference whether the qualifying ‘parent receives an actual cash payment or is allowed to reduce … the sum he would otherwise be obliged to pay over to the State.”

When applying Marshall’s arguments to tax exemptions for donations to religious organizations, it is clear that the same logic applies. Taxpayers in general pay for the operating costs of religious organizations because of deductions, and individuals are given a financial incentive to donate to and support religious organizations.

The true private choice doctrine discussed in Mueller has been upheld by the U.S. Supreme Court as recently as 2002, in Zelman v. Simmons-Harris. In Zelman, The court stated that “…our jurisprudence with respect to true private choice programs has remained consistent and unbroken. Three times we have confronted Establishment Clause challenges to neutral government programs that provide aid directly to a broad class of individuals, who, in turn, direct the aid to religious schools or institutions of their own choosing. Three times we have rejected such challenges.”

In his dissent to Zelman, Justice Stevens argues that “the voluntary character of the private choice to prefer a parochial education over an education in the public school system seems to me quite irrelevant to the question whether the government’s choice to pay for religious indoctrination is constitutionally permissible.”

The private choice doctrine attempts to distinguish tax exemptions from government expenditures. However, even Justice Rehnquist admitted that those tax exemptions lead to the same effect that would arise if a direct government subsidy were provided. The only difference is that individuals are given the ability to dictate state expenditures based on their private decisions.

The government’s provision of a tax deduction for a donation to a religious organizations is financially equivalent to a government’s provision of a direct financial subsidy to that same organization. By refunding $35 for every $100 that an individual gives to his church, the government is essentially contributing $35 to that church for every $65 donated by the individual. By refusing to collect $10,000 in property taxes from a church that the it would otherwise collect from another tenant, the government is giving $10,000 to the Church to spend that the Church would not otherwise have. It is thus clear that the aid that the government is providing to religious organizations through tax incentives is economic in nature, and is functionally equivalent to the provision of direct subsidies.

B. Do tax exemptions for religious organizations establish a state religion?
“the resulting relationship between the government and religious authority”

In the Walz opinion, Justice Burger argued that “nothing in this national attitude toward religious tolerance and two centuries of uninterrupted freedom has given the remotest sign of leading to an established church or religion…”. The Court reasoned that the state law challenged in Walz did not single out any particular religion, and therefore the “federal or state grants of tax exemptions to churches were not a violation of the Religion Clauses of the first amendment.”

I submit that the majority in Walz is incorrect in arguing that the United States does not have an established religion because of tax subsidies. The United States government is subsidizing religious organizations with billions of dollars of taxpayer money. The government is giving far greater amounts of funds to certain religions because those religions already have greater numbers of practicing members who donate more money.

The court in Zelman affirmed the reasoning that “We would be loath to adopt a rule grounding the constitutionality of a facially neutral law on annual reports reciting the extent to which various classes of private citizens claimed benefits under the law.” To me, it would not be loath, but diligent to determine where money that would otherwise be in State coffers is being distributed to.

Donations to religious organizations accounted for approximately 35% of total donations in 2004 (down from 53% in 1985) . They account for between 45% and 53% of total household giving. It is estimated that households alone gave $83 billion to religious organizations in 2002 . If those households deducted those donations at a 35% deduction rate, it could amount to approximately $29 billion dollars in personal income tax deductions. That’s $29 billion dollars of funds going to religious organizations that would otherwise be in the hands of the government, or in the hands of other charitable organizations. Of the estimated $83 Billion, approximately $60 billion went to Protestant organizations (72%), $9 billion to Catholic organizations (11%), $3 billion to Jewish organizations (3.5%), $3 billion to non-denominational religious organizations (3.5%), $2 billion to LDS organizations (2.4%), and $600 million to Islamic organizations (0.7%).

The government has established Christianity as the religion in America via these exemptions. The figures above show that 72% of household donations are given to Protestant churches and 11% to Catholic churches. Billions of tax dollars that would be in government coffers if these tax deductions did not exist are being funneled to Christianity, allowing it to claim its role as the dominant religion in America.
The major exception to this is in Utah, where the Latter Day Saints Church is the established religion. Much of the hundreds of millions of dollars that the LDS church receives in government subsidies through tax exemptions are being funneled in to it in Utah, where the church is headquartered. This allows the church to maintain its power in that State, and have an abundance of control over state law.

In his dissent, Justice Douglas reframes the question presented in the Walz case. “The question in this case is whether believers organized in church groups can be made exempt from real estate taxes, merely because they are believers, while non-believers, whether organized or not, must pay the real estate taxes.” He argued that one of the best ways to establish one or more religions is to subsidize them with a tax exemption. He stated “government may not provide or finance worship because of the Establishment Clause any more than it may single out ‘atheistic’ or ‘agnostic’ centers or groups and create or finance them.” He concluded that the New York state-property-tax exemption treated believers and nonbelievers differently because of the articles of their faith. Since the Establishment Clause was intended to keep the government neutral not only between sects, but between believers and nonbelievers as well, he found the exemption to be unconstitutional.

The majority in Walz argued that by removing tax exemptions, the role of government’s involvement in religion would be expanded, because it would give rise to tax valuation of church property, tax liens, tax foreclosures and the conflicts that would follow. It argued that there is less involvement between church and state in foregoing taxation than there would be if the state collected taxes.

I would argue that if the government treated churches as any other private, mutual benefit non-profit, such as a country club, which does not receive tax exempt status, the involvement would be similar to what it is currently. There is no movement arguing that the government has too much involvement in taxing country clubs, and similarly there would not be too much involvement if the government taxed religious organizations, or collected taxes from donations thereto. Although the right of free exercise to join country clubs is not protected under the religion clauses, that right is protected under freedom of association. Yet there is no movement arguing that individuals’ right to freedom of association is hampered by the fact that their country club must pay taxes.

If a church cannot pay its taxes and faces a foreclosure, then that church does not have enough financial support from its members, and should be allowed to fail like any organization that is unable to raise revenue. Enforcing tax subsidies requires a lot of government involvement, including monitoring and registering religious organizations so that they maintain their tax exempt status, and distributing tax refunds to individuals who make donations to religious organizations. The amount of government entanglement necessary to tax religious organizations would not be significantly different from the amount of entanglement under the current system.

Under the current state of tax exemptions, the state is supporting one religion with billions of dollars, and prioritizing its financial subsidies to other religions based on the relative wealth of individuals who belong to those religions and how much money those individuals contribute. Through these tax exemptions, the law has established Christianity as the American religion, and has propped up religion in America.

C. Are religious organizations beneficial to society?
“the character and purposes of the institutions that are benefitted”

In Walz, the majority justified tax exemptions for religious organizations because the State considers religious organizations to be “beneficial and stabilizing influences in community life”. In his concurrence, Justice Brennan argued that tax exemptions for religious organizations served to carry out secular purposes and not “essentially religious purposes.” He claimed that the state encourages religious activities because religious organizations contribute to the diversity of the Nation, and that there is no non-religious substitute for religion. Essentially, he believed that religion is a good thing, and therefore that it is justifiable for the state to support it.

In his dissent, Douglas refutes Justice Brennan’s argument that religious organizations perform many secular purposes by arguing that a ‘church qua nonprofit charitable organization’ is so intertwined with the ‘church qua church’ that the welfare activities it undertakes may in fact “merely be a phase of sectarian activity.” “Its sectarian faith sets it apart from all others and makes it difficult to equate its constituency with the general public. The extent that its facilities are open to all may only indicate the nature of its proselytism.” In other words, religious organizations may undertake in beneficial secular activities, but the root of those activities is entrenched in the perpetuation of the religion and its religious dogma. He writes: “…Subsidies either through direct grant or tax exemption for sectarian causes, whether carried on by a church qua church or by church qua welfare agency, must be treated differently” from subsidies for secular public welfare institutions.

The majority and concurring writers in Walz tended to operate under the assumption that religion is in fact good for society. However, It is the same religious organizations that claim to be authorities on morality that made extreme efforts, and succeeded, in supporting the cause to convince a majority of Californians to vote for a law that limits the rights of a minority of individuals in Californian society. Based on religion’s effect on Proposition 8, it is apparent that religion may not in fact be good for society. Although some religious organizations may have actually been against Proposition 8, the facts indicate that the majority of religious activity attempted to support the Proposition.

Proposition 8 exposes some of the negative influences that religion has on society, but it only represents the tip of the iceberg. Many religious organizations make efforts to subvert science, enforce outdated and unrealistic moral viewpoints, and in extreme cases provide refuge for sexual deviants or even terrorists.

Although many religions may perform altruistic secular services, Justice Douglas makes a strong argument that many of those services are simply used as a method of proselytizing. Religions have self-preservation as their foremost goal, which is why they have been able to flourish for thousands of years. Part of maintaining their power involves gaining public support, which they do by performing altruistic acts. These same altruistic acts could be performed by secular organizations, or even by organizations like the Red Cross, which are affiliated with religious organizations, but are not formed for religious purposes. Non-religious services performed by religious organizations could be performed by these secular, religiously affiliated organizations.

Religion is becoming more and more irrelevant as science progresses, and the tenets of religious dogma are continuously being attacked for their lack of a basis in reality. Richard Dawkins’s 2006 best seller The God Delusion makes a strong case against the primary tenet held by most religions, that of the existence of an invisible, all-powerful god. Religions may have represented a stepping stone in the advancement of human civilization, but science has advanced to a point in which humans no longer need to resort to the supernatural to explain earthly phenomena. The existence of tax exemptions allows religious organizations to flourish, and prevents the advancement of viewpoints that can be legitimately supported by scientific knowledge.

The government should not be directly or indirectly supporting religious organizations with taxpayer dollars under the guise that they are promoting the public welfare. By subsidizing religion via tax exemptions, the government is prioritizing religious belief over atheistic or agnostic belief. Although atheists and agnostics could organize atheistic religions that also receive tax exemptions, this is antithetical to the beliefs of many atheists, who would not want to equate themselves with religious organizations. Atheist organizations do not have the ability that religious organizations do to convince members to donate to them in return for receiving advantages in the afterlife. They have less ability than religious organizations do to proselytize and gain more donations, as most religious doctrines are designed to recruit non-believers under a theory of future salvation, whereas the precepts of atheistic beliefs are much more difficult to use as a recruitment tool. It is thus apparent that atheist and agnostic beliefs are disadvantaged by the organizational structure that federal law demands in order to receive tax breaks.

Attitudes towards religion are increasingly swaying in favor of anti-religious sentiment. A recent study found that only 75% of Americans call themselves Christian, compared to 86% in 1990. The only remaining stronghold is in the evangelical religious sector, which has actually risen in popularity from 200,000 individuals claiming to be evangelicals in 1999 to 8,000,000 in 2009. This is probably attributable to the fact that religion is increasingly having to resort to fundamentalism in order to survive, as fundamentalist religions are better able to fight against secular, external influences. It is still likely that religion will continue to flourish, however, so long as the government is supporting it with tax exemptions.


Although it is important that individuals have the right to choose their religion, it is also important that individuals have the right to not choose any religion. The government prioritizes religious beliefs by giving religious organizations tax exemptions, dispensing a disproportionate amount of funds to Christian organizations, and funding other religions based on the number and relative wealth of their members. These actions have led establishment of a state religion in violation of the Establishment Clause of the first amendment.

The influence of religious institutions in the passage of Proposition 8 should give America a wakeup call. Religious organizations do not benefit the public, but rather serve their own interests, impede civil rights, and stifle scientific advancement. They should be treated as mutual benefit organizations that serve only their members, not as public benefit ones that serve society as a whole.

Accordingly, the law should not allow religious organizations to receive tax exempt status. Charitable organizations should be distinct from religious ones, and should be monitored to ensure that their actions are charitable and not religious in nature. Individuals and corporations should not be able to receive tax deductions for their donations to religious organizations. Finally, churches should be forced to pay property taxes like any other owner of property, and should face the same consequences for nonpayment.

Why America Needs The Public Option

The health care reform debate has been at the forefront of the national media spotlight since Americans got tired of talking about the economy. What amazes me is how few economic discussions are involved in assessing what should be done to fix America’s broken health care system. Instead, the discussions focus on hyperboles, emotions, and a whole lot of fear mongering. This is my analysis of the situation.

Part I: The Problem

Profit Maximization
Insurance companies are corporations. Corporations have one underlying goal: to maximize profits for their shareholders. This is not necessarily a bad thing, but it is a fact. Insurance companies are not in business to make sure everyone is insured, they are in business to sell policies and make money.

Think about insurance policies like TVs. If it costs you $50 to make a TV, but you can sell just as many for $100 as you would for $50, it would be stupid not to sell the TVs for $100. Let’s say you can sell ten TVs for $100. That’s $1000 in TV revenues and $500 in costs, with a profit of $500. What if you could sell eight TVs for $200, with two fewer people buying TVs because they’re too expensive? That’s $1600 in revenues and $400 in costs, with a profit of $1200. It would be stupid not to raise the price to $200. But what about those two poor suckers who don’t have TVs anymore? Well, they’re just TVs so it’s no problem.

Health insurance operates in the same manner. Insurance companies are incentivised to charge higher and higher rates, up to the point where profit is maximized and any increase in price will cause companies or individuals purchasing the insurance to drop coverage at a loss to the insurer. But, unlike with TVs, not having an insurance policy means risking sickness, death or bankruptcy. This makes health insurance highly inelastic, in that a large increase in price will cause only a few people to drop coverage. Letting people die by forcing them to drop coverage because costs are too high is thus built into the private system.

Market Power
In a purely competitive economy, insurance companies would not be able to charge rates as high as that which would maximize profits, because other companies would charge cheaper rates. Going back to the TV example, imagine if your competitor sold similar TVs for $100. Lets say that if you charged $200, you could only sell 2 TVs with a profit of $300, which is less than the $500 you would make if you sold them for $100. It would make sense to buy your competitor out so that you can jack up the price to $200 and sell just as many TVs. Or, you could talk to your competitor, and agree to both sell the TVs for $200. Or, even better, you could buy the factory that sells the TVs to your competitor, make that company stop selling to the competitor, then jack up the prices and watch your competitor fizzle out. This is called gaining market power, (monopoly power if you are the only seller).

Most of the health industry is not competitive. There are a limited number of health providers, and they collude on prices. Healthcare companies gain market power in a way that is similar to the third example in the previous paragraph. The factory producing TVs is like a hospital providing health services. Insurance companies often own hospitals, or have exclusive agreements with hospital operators. They make sure no other insurance companies have access to those hospitals, or make agreements with other companies to charge the same prices for access to those hospitals.

Insurance companies will charge rates that are as high as they possibly can, and squeeze people out of coverage. In a recession, more people and businesses are forced to drop coverage because they don’t have jobs. Insurance companies raise rates to compensate for having fewer customers, because they know that the remaining customers will fork over more money for an essential service like health care.

Pre-existing conditions
Insurance companies are also disincentivised from providing coverage to people with pre-existing health conditions, the people who need health insurance the most. Think about it like a life insurance policy. Would you sell a policy for $100 a month that paid out $100,000 to someone who was likely going to die in 2 months? That would be stupid, since you know you would lose almost $100,000 on the deal. Similarly, health insurance companies would not provide coverage to someone who has suffered from cancer, since that person is likely to rack up a lot of medical bills if their cancer comes back. Health insurers are in the business of risk, and sick people present too high of a risk.

Society loses
The result of all of these issues is that society loses. Health care should not be a scarce commodity like TVs. It should be a universal commodity available to all. Anyone who disagrees with this thinks that people should die because they are poor. This is a viable argument that can be made: if you can’t afford health insurance, then you should die if you are sick. We live in a capitalist system, and people who haven’t figured out how to manipulate the system to maximize their financial gain should die. This argument is completely inhumane, and I can’t understand the thought process of those who make it.

Many would argue that under the current system, hospitals are forced to provide emergency coverage, and therefore the poor do get care. But, many are forced to go into bankruptcy because of this situation, which prevents them from having an equal opportunity to participate in the capitalist system. Further, there is more than emergency coverage necessary to have proper health care. What about diseases or operations? What about checkups that can prevent or catch sickness early? What about insane deductibles and denials of coverage for those who do have healthcare? Everyone should have a right to a basic level of health care. Lack of money should not be grounds for receiving the death penalty.

Why has nothing changed? A problem that has persisted due to the current system is widespread involvement of insurance companies in spending money to sway people to support their companies and the current system. Again, this is just a part of the system. If your company is making $1 billion a year in profit, it’s worth $100 million to pay someone to make sure that you keep making that profit if you only will make $500 million a year in profit if you don’t make the payment. It’s worth $400 million in savings to spend that $100 million.

There’s no point in blaming insurance companies for spending hundreds of billions of dollars to fight the public option by giving money to lawmakers and spending money on expensive advertisements to sway public opinion in their favour. They are private companies, and those funds are a worthwhile investment. After all, it works. As of the writing of this article, the insurance companies have almost completely squashed the public option as a legislative solution to the health care problem. But, in reality, the public option is the only solution.

Part II: The solution

The Band-Aid
Any solution without a public option is essentially a band-aid. The current solution being sent through the senate serves to force insurance companies to take losses on people with pre-existing conditions and the poor who can’t afford insurance. The government would have to subsidize those losses in some way shape or form. Prices will keep going up, and inevitably the taxpayer will have to pay. These band-aid solutions are just another way of funnelling taxpayer money to shareholders of insurance companies. The poor will likely receive inferior and inadequate coverage.

Medicare and Medicaid are essentially band-aid solutions. Health insurance is provided to seniors or the poor with billions of dollars of government handouts. Medicare costs continually increase because basic health care costs continually increase. These costs put a greater and greater burden on the taxpayer, and lead to trillions of dollars in government debt.

The Public Option
A public health insurance provider would have a different incentive system from a private corporation. Rather than maximizing profits to shareholders, a public insurer would want to minimize profits, or even take losses, so as to make sure the maximum number of people are able to get the best possible coverage. A public organization’s incentives are directed towards pleasing voters. Thus, the more happy voters, the more support for the organization. The more people that have coverage, the more happy voters.

The public option is like a competitor selling TVs for $50, or even $40. What are you going to do if your competitor is selling TVs for $40 that cost you $50 to produce? Well, you either go out of business or build a better TV that you can make money off of.

The public option would force insurance companies to sell better and cheaper plans that would compete with the public plan. The public plan would slowly swallow up the cheap and inefficient side of the health coverage market. Many employers would switch their coverage to the public option to cut costs. Private options would be a premium service offered by certain employers. They would be forced to compete with public providers.

This scenario would be better for America. Employers would be able to see more profits because they can save money on giving health care to their employees. All Americans would be covered, and not be forced into bankruptcy to survive sickness. Medical costs would go down because the government insurer would be able to bargain with medical providers to lower medical costs. Doctors will still be rich, just not as rich.

Many people are afraid of this scenario unfolding because they think it represents socialism. Perhaps a complete government takeover of healthcare, hospitals, and the destruction of private competition as exists in Canada and other countries would be socialistic. But just providing a government option that competes with the private options is no different from a public school system, or a public parcel delivery system. Private schools have to offer an education that is better than the public system can offer. The public system thus encourages better education for all.

Some things are best done by governments, who serve the best interests of society, not their shareholders. Coming from Canada, it is astounding for me to hear the hell that Americans go through just to get health care. When I needed health care in Canada, I went to the hospital or doctor, filled some paperwork out, and showed my government insurance card. That was it. No bills, no questions, no deductible. Nothing. Just health care. Which is not to say that the Canadian system is perfect, but it is much better than a system where poverty is a death sentence.

Health care should be a right ensured by the government, not a purchased commodity like TVs. Americans need to stop listening to the rhetoric presented by the insurance companies. These companies are fighting for their lives. Fortunately for them, the people in charge of making the decision to put a public option in place are corrupt and ignorant, and will shift their position in return for kickbacks that will get them re-elected.

The only way things will change is if American support for the public option increases, and the only way that will happen is if Americans get educated about the issue, and realize that the public option will make life better for everyone except the shareholders of insurance companies.

How The Recession Happened

1. The Olden Days
Dave needed a place to live, had a job with a steady income, a good history of paying back any money he borrowed, and a little bit of money saved up. Unfortunately, he didn’t have enough money to buy a piece of property outright. So, Dave went to his bank and said “let’s make a deal. You lend me the rest of the money to buy this property, and I’ll pay you back in monthly instalments over the next 20 years, plus some extra money every month (interest). If I don’t pay you back, you can take my property and sell it, pay yourself whatever I still owe you and I’ll get the rest” The bank agreed, knowing that Dave was a good guy and would pay them back. Plus, if he didn’t, they could just take the property, sell it, and get their money back. The bank got their money from cash they were holding on to, and borrowed the rest from a bigger bank or the country’s central bank. Dave got his house, and was happy. The bank was paid back over 20 years, and made a nice profit.

Alice had no money saved up, a crappy job, and didn’t pay back money she borrowed. Alice wanted her own place too. She went to the bank, but was denied because they didn’t think she would pay them back.

2. Mortgage Backed Securities
One day, a bunch of investment bankers had a great idea. Instead of getting the money to give Dave to buy his property from money already in the bank’s hands, they would get a bunch of Investors together to put money into a pot. Dave would get his loan from the pot of investor money. Then, whenever Dave made his payments, the bank would take a chunk for themselves, and the investors would get the rest. These investments would be called “mortgage backed securities” because the investments were backed by mortgages.

This worked great for a while, except eventually the investors started to get angry because they weren’t making enough money. The bank had a great idea. They would give a loan to Alice so she could buy her property too. Because they were worried that Alice wouldn’t pay them back, they charged her a lot of extra money in interest on top of what she owed. If Alice couldn’t pay the full amount, they would just add what she couldn’t pay to the total amount she owed. If she stopped paying, they would sell the house, and hopefully it would be worth more. The bank then bundled a whole bunch of loans to people like Alice and made the bundles into an investment that investors could invest in.

The bank took their investments to a rating agency, and asked the agency to tell them how risky the investments were. The rating agency looked at the bundles of mortgages to people like Dave, and said they were not risky, and gave them a good rating. They looked at the investments to people like Alice and said they were very, very risky, and gave them a bad rating.

The banks needed more money. They decided to take a bundle of loans to people like Dave, and a bundle of loans to people like Alice, and put them together into an even bigger bundle. They then went back to the rating agency, and asked how risky these loans were. The rating agency thought that this big bundle would really spread out the risk, since there were so many little bundles in it, and gave the bundles a good rating.

The rating companies screwed up, because the risky investments were still risky, they were just in a bigger bundle. Investors flocked to these big bundles, thinking they were not risky, when they really were, and bought them in large quantities.

3. Credit Default Swaps
The investors were worried though. What if they lost money on their bundles? Insurers like AIG came along and had a great idea. The investors would pay money to AIG. In return, if the investors lost any money on their bundles, AIG would pay them back whatever they lost. This was called a credit default swap. AIG was confident that people could only lose a little bit of money on these investments, since they were all backed by hard, tangible, real estate. Historically, real estate prices had never gone down very much, and had a steady increasing price trend.

Banks all over the world bought billions of dollars of these big bundles of mortgages. They invested all of their money in them, and were so happy that they were getting so rich. Plus, if they lost money, they had insurance.

4. The Beginning of the Collapse
Dave started making more money, and decided that he was going to buy a nicer house. He sold his house and went to buy a bigger one. He found a house he really liked, and put an offer on it. But, it turned out that Alice made an offer on the same house that was $100,000 higher, and got the house. The investors gave the bank money to give to Alice so that she could buy the house.

One month later, Alice didn’t make her payment on the house, and the bank took it back. They put it up for sale again at the amount that Alice had bought it for to get their money back. But, no one would pay that amount. Dave came back in with his offer that was $100,000 lower. The bank did not get any other offers and had to give Dave the house.

Now, the bank had lost $100,000 that it owed to investors!

All of the sudden, the prices of houses everywhere started going down. Alices all over America stopped paying, and banks lost billions of investor dollars. Real estate prices started tanking. In the past prices had never gone down much because they never got too high. They never got too high because loans were always made to low-risk people like Dave. But prices got too high because anyone, including people like Alice, could get a loan for however much they wanted.

The investors asked for their money back from the banks, but the banks didn’t have it. The investors then went to AIG and said “I want my insurance money”. AIG started paying out insurance money.

By the end of 2007, this caused the American economy to stop growing. It slowly started to decline, but the problem got worse. Eventually AIG had no more money to compensate investors and banks, and the banks were losing billions of dollars.

5. Lehman Brothers
One of these banks was Lehman Brothers. Lehman had been in business for a long time, and lots of people put their money in Lehman thinking it was safe. Lehman realized that they had no more money because they had too many investors trying to get money back. Lehman owed billions of dollars to these investors, but didn’t have it . Lehman asked the government for help, but the government at the time (Republican) did not want to interfere with the free market, and decided to let Lehman fend for itself. Lehman realized that it couldn’t pay money back, and went bankrupt.

6. The Catastrophe
Banks and investors all over the world were terrified. If investments in a secure bank like Lehman were unsafe, then any investment could be unsafe. Investors decided that they wanted all their money in cash, and really safe investments, because they didn’t want to lose it. So they all started selling all their shares and bundles of mortgages. But, no one wanted to buy their investments at a regular price, so they had to sell them at a really low price.

These lower prices caused the stock market to start crashing. People started selling stocks in regular companies that had nothing to do with investments because they were worried about their money. This sent share prices crashing. People who were just regular investors saw their share prices crashing, and decided to sell before prices got too low. This sent prices even lower.

This could have spiralled into another great depression. If more banks went bankrupt, and more investors lost more and more money, then all sorts of companies would go bankrupt. Banks owed hundreds of billions of dollars and had no way to get that money. It appeared that civilization as we know it could come to an end.

7. How the world was saved
The federal government saw this problem happening and realized that something had to be done. They knew that if the banks kept making loans like they did in the olden days they would surely make money again. So, Treasury Secretary Paulson decided to loan money to all the big banks and to AIG to compensate them for all the money they lost in the crisis. Paulson convinced president Bush, and a majority of congress that this was a good idea. The media called this a bailout, but it was really necessary to prevent another great depression.

With the billions of government dollars in hand, the banks could pay their investors back, and pay for all the losses that were occurring. Countries all over the world undertook similar bailout plans to keep their banks from going out of business.

8. Why there was still a recession
Unfortunately, the damage done was already severe. The banks had lost so much money that they didn’t want to make loans to companies and lose more money. Companies were losing money, and realized that the only way they could save money would be to cut costs. They started laying off workers and shutting down operations.

People who lost their jobs stopped spending money, and lived off of unemployment insurance. People who did have jobs got paranoid, especially after losing so much of their investments when the market crashed, and started putting away any last penny they could. This meant that stores and companies were selling less stuff and making less money. Stores had to shut down and lay off more workers.

9. The Aftermath
Although the recession is/was the worst since the great depression, the new Obama government and the Federal Reserve have fought to end it. The reserve made it very easy for banks to borrow money to lend out to good customers like Dave, charging really low rates of interest to banks, and making lots of money available.

The federal government’s stimulus package was designed to give the economy a boost at the other end, by creating actual jobs, extending unemployment benefits, and spending money on government programs.

In the end, this recession will be looked at as a wakeup call in the history of modern human civilization. The free market works brilliantly when it is monitored and regulated. But, it has the capacity to spiral out of control when people make the wrong decisions. If it was not for secretary Paulson and the TARP bailout, the free market would have self destructed, and would have taken years to correct itself.

This recession has been horrible, and has negatively affected the lives of millions. However, it would have been much worse if it were not for the bold and swift actions of the responsible bodies, guided by hundreds of years of economic thought. Hopefully, we can learn from these mistakes, and try to make sure something like this never happens again.

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