Pittsburgh Tax Review, Vol. 4, No. 1 (Summer 2006), pp. 1-54


Part I of the article presents Robin Paul Malloy's Law and Market Economy Theory (“LMT”) as an example of the basis for a normative explanation of the charitable tax exemption. LMT addresses the relationship among law, markets, and culture. Thus, using LMT, this part demonstrates how traditional law and economic analysis, premised on self-interest and wealth maximization, simply does not capture the essence of the many values that impact the marketplace and the market exchange process. Instead, LMT approaches legal analysis in a broader market context and is premised on the need to promote a process of sustainable wealth formation as opposed to maximizing wealth. As an illustration of the difference between traditional law and economics and LMT, Part I addresses the way in which LMT is compatible with Critical Race Theory in discerning normative rationales for law that enable richer reflections of justice, fairness, and equality that are not necessarily connected to positive economics or efficiency.

Part II of the article presents a theory of the charitable tax exemption that is line with LMT and based on the value of diversity. “Contextual diversity,” as explained herein, references alternative understandings of LMT to build on insights of traditional economic analysis and present an alternative value-based rationalization for the charitable tax exemption. Part II concludes by explaining that using contextual diversity as a principal value-based rationalization for the charitable tax exemption not only captures the essence of the exemption, but it also provides direction for potentially reforming and re-inventing various aspects of tax-exempt charity law.

Part III of the article provides a detailed outline of the charitable tax exemption-explaining both the affirmative and negative aspects of the exemption. The purpose of this detailed outline is to position the exemption as not simply a financial “free pass” on the obligation to pay income tax. Rather, the charitable tax exemption is the gateway to an alternative way of operating an enterprise, with many burdens and benefits flowing therefrom that often have nothing to do with economics or efficiency. Instead, these non-economic aspects of the charitable tax exemption often concern the many non-economic aspects of justice, fairness, equality, political authority, and other basic normative principles. Tax-exempt charities are not like private for-profit firms that measure success by bottom-line profits; nor are they like public entities that measure success by voter support or re-election. Tax-exempt charities measure success by how well their missions are accomplished. Measuring success in this way is inherently “more of a normative judgment than it is for a private entity” or a public entity “because there are fewer external market indicators available” for determining a charity's success.

Part IV builds on Part I by demonstrating how the predominant traditional theories of charitable tax exemption just do not capture the full essence of the normative aspects of the exemption. Part IV analyzes the traditional theories promulgated prior to 1990 which rely principally on economic efficiency as a guidepost for discerning an appropriate rationale. While these traditional theories have a sexy “law and economics” appeal, the article demonstrates how they fail to fully explain many non-economic aspects of the charitable tax exemption. Finally, Part V briefly identifies some of the implications of contextual diversity theory on the structure of tax-exempt charity law.