What should regulatory burdens look like in the secular world?

It’s a tale as old as Constantine: churches benefit from tax-exempt status. In medieval centuries, the church was often configured as an essential extension of monarchy: critical for upholding the myth of divine royalty, and key for delivering social welfare in societies with few other dedicated institutions. In Britain’s North American colonies, taxation itself became a complex question. While many in what is now the US wanted more direct dominion over local land and its inhabitants, churches retained their original, European tradition of tax exemption on property and income. How could that schism hold?

Uneasily, as it turns out. In 1875, President Ulysses S. Grant called for the abolition of such exemptions, noting with concern the sprawl of churches on state land:

In 1850, I believe, the church property of the United States which paid no tax, municipal or State, amounted to about $83,000,000. In 1860 the amount had doubled; in 1875 it is about $1,000,000,000. By 1900, without check, it is safe to say this property will reach a sum exceeding $3,000,000,000. So vast a sum, receiving all the protection and benefits of Government without bearing its proportion of the burdens and expenses of the same, will not be looked upon acquiescently by those who have to pay the taxes.

President Ulysses S. Grant, “Seventh Annual Message”, 1875

This was a heated argument in a country with a First Amendment that begins “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof”. Did mixing tax law with religion not open the US to the risk of future religious partiality in government?

In 1894, Congress passed the Wilson-Gorman Tariff Act, which sheltered “corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes.” The next year, in “Pollock v. Farmers’ Loan and Trust Company”, the Supreme Court struck down direct taxation as unconstitutional, full stop, which also did away with the aforementioned exception. In 1913, however, the modern Revenue Act returned direct taxation to the country, and at that time reinstated a version of the church exemption. The US experiment, still deeply divided over how to delineate itself from England, was nevertheless content to replicate medieval notions of the church as a special actor in relation to the state.

But what about abiding concerns around separation of church and state? In 1934, Congress expressed overt concerns about political encroachment from tax-exempt charitable organizations, stating that “no substantial part” of such an organization’s work could be used for legislative ends. The 1954 Johnson Amendment then tried to address the matter by “absolutely prohibit[ing]” any recipient of tax-exempt status “from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.”

The very next year, though, President Dwight Eisenhower put “In God We Trust” on the US dollar: a return to a practice started in 1864, when Civil War thinking had many leaning into religion as a defining feature of US identity, and a reminder that this country’s government has always struggled to keep a strict divide between religion and politics amid the murk of economic life.

That struggle intensified in the 1970s, with a huge uptick in campaigning expressly to curry the support of religious institutions and their constituents. And it continues well into the 21st century: In 2017, the currently triply indicted President Donald Trump published “Promoting Free Speech and Religious Liberty”, an executive order asserting a commitment to protect religious political speech from loss of tax-exempt status. With that tax-exempt status, churches and their representatives have become significant forces in politics: again, echoing the role the European church in medieval eras, as a regulatory authority propping up those in royal office.

Is this a uniquely US problem? Not exactly. But when held in contrast with other states of religious exception, a much deeper and binding issue arises.

In Canada, public taxes pay for Catholic school boards, though the push to end land exemptions saw some success just this year thanks to First Nations, Métis, and Inuit advocates. In the UK, religious exemptions are so convoluted that a recent push for humanism to be considered a religion was cited as a win for secular equality. This is in a culture that grants tax-exempt status to the Churches of England and Wales, in a world region where many countries still have mandatory church taxes: as in, taxes paid to the church with which a citizen is aligned.

The deeper issue is this:

We’re often pushing for churches to “pay their fair share” in countries that still routinely split the right to tax (or tithe) between religious and state bodies.

Worse yet, many countries offer loopholes to help citizens shirk their regulatory burdens well outside religious exceptions. We have a well-honed sense of injustice that emerges whenever a tax-exempt religious enterprise encroaches on political life. But do we also take on secular organizations and industries that have found ways to, as Grant put it, “receiv[e] all the protection and benefits of Government without bearing its proportion of the burdens and expenses of the same”?

And can we ever really crack down on the religious exceptions without reckoning with the problem for our states holistically?

Secular states of exemption

Early in the Great Recession of 2007 to 2009, most of the public was still trying to get a handle on what had caused the downfall of our markets, taking out their savings, homes, and livelihoods. Most simply didn’t have the financial literacy to do much but trust in their politicians, bankers, and other financial advisors. Many movies would later try to explain the hucksterism that allowed Wall Street to get away for years with building a house of cards on bad mortgage debt and other such carelessly repackaged financial products. More pressingly in the moment, though, was a deep sense of outrage over US plans to bail out institutions considered “too big to fail”, while individuals were rarely if ever granted similar aid amid collapse.

In 2008, President George W. Bush signed a $700 billion dollar bailout, as part of the Emergency Economic Stabilization Act, to purchase bad assets in the wake of major bankruptcies and takeovers. When President Barack Obama took office the next year, he continued overseeing the recovery, and assigned Tim Geithner to the Treasury. Years later, Geithner would acknowledge how unpopular this decision was, and how frustrated the public was with Bush’s bailout (under Obama), especially when it wasn’t joined with any real consequences for the senior bankers who had brought financial strife to average US citizens in the first place.

But if anyone thought that the Recession would yield a more robust return to state oversight, they were sorely mistaken. The impulse to game the system to maximize personal profit hadn’t disappeared just because a few bankers had brought about system-wide collapse with long term consequences for everyone else.

Indeed, even in collapse, some financial types knew perfectly well how to make a buck. Hedge fund manager John Paulson bet against the US housing market and made his firm around $20 billion during the Recession. JP Morgan’s Jamie Dimon leveraged the lows of that era to make investments that would triple the company’s shares over the coming decade. And Warren Buffett, who also made out splendidly in disaster, famously advocated “buy[ing] American” in the middle of the Recession, under the operating principle that one should “be fearful when others are greedy, and be greedy when others are fearful.”

Which might be fine and dandy for a thriving economy, if there weren’t also a wealth of tax code workarounds that many of the richest US citizens (or at least their fund managers and accountants) not only knew how to leverage, but also strove to protect politically. As a 2021 government study illustrated, the top 400 wealthiest US families paid an average individual income tax rate of 8.2% for the period of 2010 to 2018: well below the rate paid by lower earning families.

More importantly, though, that study included a facet of wealth often overlooked in discussions of financial inequality. Due to a tax loophole called the “stepped-up basis”, people can accumulate wealth simply by holding assets that gain value over time, and never pay tax on them unless they’re sold off in the original owner’s lifetime. This little trick can help families build greater wealth generationally, while also improving financial standing enough to secure loans for further investment, take greater market risks, and otherwise grow in personal agency.

It’s easy to make money when you have money, as the old saying goes.

And it’s really easy to keep that money if the tax system lets you, too.

21st century tech and financial loopholes

After the Recession there were pushes for more market regulation. Far from fixing the problem, though, some of those pushes only hastened us into our current financial precarity. Imagine you’re an investor who wants to make a quick buck, and the state is vowing to make public investment even more rigorously regulated. Higher standards! More oversight! Your money might be safer, but you also can’t take the same risks necessary to profit spectacularly.

So what’s a body to do?

Crypto exchanges were and to some extent remain a significant part of the public’s interest in finding alternative approaches to wealth accumulation and management. Part of the allure was a moral grift: the claim that cryptocurrency would help people amass wealth quickly… you know, for philanthropic purposes. The sooner we make money, the sooner we can help to save the world, right? Never mind the huge environmental issues with current crypto processing, or concerns about its role in organized crime and oppressive states: the only reason someone might be against this new exchange is because they want you trapped in the stodgy old public banking system. The same one that brought about the Recession, remember?

READ: Trust us: The problem with crypto-billionaires and effective altruism

The problem is that philanthropy has long been its own, highly gamified way to avoid paying taxes. The same part of the US tax code that allows churches tax-exempt status as charitable organizations, IRC Section 501(c)(3), also governs nonprofit foundations ostensibly dedicated to benevolent giving. But it wasn’t until 1969 that a Tax Reform Act established a baseline for how much such organizations had to spend in a given year, to continue to enjoy tax-exempt status. Even then, it took further tweaks in 1976 to clarify the lowest threshold: a mere 5% of total assets annually, making the formation of a charitable foundation a decent way to shelter large sums of money from taxes that could easily amount to more than 5%.

That 1976 Tax Reform also tried to re-litigate the question first raised in 1934, around what constituted a “substantial part” of a charitable organization’s labor, when it came to more direct action in political affairs. Meanwhile, the 1969 Act also increased individual limits on how much a person could give to charity for tax credits. From both secular and religious sides, then, the concern was similar: a desire to reduce one’s personal tax burden, and to maximize personal agency (politically, or through choice of financial donation) in the process.

But the evasion of regulatory burdens, and the increased ability to unduly impact legislative proceedings, runs deeper still. It’s not just that Citizens United v. the Federal Election Commission (2010) reversed a century of campaign finance restrictions, and in so doing made it easier for corporations to impact elections. Nor is it just that “super PACs” and “dark money” groups, filing as 527 organizations or as 501(c)(4) social welfare and (c)(6) trade associations, are all capable of significant political encroachment without being subject to the same taxation.

It’s that the whole economy has been shifting toward privatized investment and market control, and federal regulation is scrambling to catch up. In the last decade, we’ve seen private equity surge. One of the most glowing private equity reports, in 2021, even boasted of the industry’s ability to flourish amid pandemic:

We noted [at COVID-19’s outset] that the deal market was showing surprising strength as massive government stimulus kept economies and markets humming around the globe. But the pace of recovery has been extraordinary, and, by almost any measure, 2021 is setting up to be by far the best year in the industry’s history.

It’s always dangerous to forecast the next six months based on the year’s first half, but private equity deal value, exit value, and fund-raising are all on pace to approach or cross $1 trillion by year-end (see Figure 1). If that bears out, the industry will have essentially tripled in size over the 10 years starting in 2011, powering through what turned out to be a brief Covid-19 shock. Private equity’s supersizing has created ever larger funds doing ever larger deals. And given that the industry’s mountain of dry powder stood at a new record of $3.3 trillion as of June 30 (around $1 trillion in buyout funds alone), there’s plenty of fuel left to drive new activity.

“Private Equity’s Wild First-Half Ride”, Bain & Company, 2021

That “dry powder” is liquid assets that fund managers have on hand to buy out a company, often in ways that saddle the acquisition itself with debt, so they can focus on short-term overhauls that sometimes help a new or struggling business flourish, but also often find the acquisition stripped of internal assets, or leveraged for loans, to boost shareholder profits quickly. With all this fresh debt, or once gutted of all original value, the end result for the acquisition is often downsizing or bankruptcy: not a problem for the private equity fund, so long as it gets its payout first.

Such predatory practices have lately met with heightened scrutiny by the US Securities and Exchange Commission, which has a fairly lax history of regulatory oversight when it comes to such financial players, and is currently attempting to improve transparency and disclosure rules, if nothing else.

But even as rising interest rates from the US Federal Reserve attempt to cool inflation and manage market outcomes in general, private equity (an industry that thrives on lower interest rates) has already found its evasive recourse: private credit, a market that surged 89% year-over-year in global markets in 2022. In practice, this means more private hands investing in private funds to buy public companies and take them private (or catch them before they go public), to sequester any remaining financial value for themselves.

Are we ready for what such a heavily privatized world would mean?

Or what it already does?

Financial grifts know no creed

Secular folk are often the first to notice the injustice of any tax code that exempts religious actors from shared regulatory burdens, while giving their organizations great laxity when it comes to activities directly shaping political and public life.

But the grifts excused by contemporary taxation run far deeper. They’re present in a long history of other charitable organizations used either as tax shelters or to allow rich individuals and even whole businesses to bypass democratic deliberation on how best to improve our societies. They show up in other organizations, corporate and associative alike, that are also given broad tax-code license to impact electoral processes without paying their fair share.

And most of all? They show up in tax-code loopholes that create individual, familial, and generational wealth disparities, which in turn have allowed for the emergence of all this “dry powder” in private equity, along with ready funds in private credit, or redirected through infrastructure projects (some of which transpire in autonomous zones to avoid taxation too).

READ: “Don’t let the Saudi Arabian megacity fool you: We’ve been here before”

Trying to regulate such intricate financial industries brings to mind an expression about horses and barn doors: it’s not going to be easy, any more than trying to protect against further crypto-creep in our banking institutions and government agencies. The more the government tries to crack down now, by being tough on high-risk (sorry, “high-yield”) investment ventures, and otherwise requiring more disclosures and on-hand securities, the more that many of means will simply find other places to redirect their already substantial holdings. Sometimes through religious fronts. Sometimes through secular ones.

The one benefit to secular citizens having such a seasoned history of pushing back on religious forms of the grift is that we have also, in the process, already advocated for at least a slice of the world we want to live in instead. A world, that is, where people are not exempt from their responsibility to a social contract that protects them and in which they’ve reaped such rewards.

We could, of course, go the other way—and arguably are—by suggesting that if religions can exploit tax systems, surely everyone else should be allowed to, too.

But we’re already seeing the results of such a nihilistic, “nothing really matters, everyone for themselves” approach to state finance: in job security, in overall economic precarity, and in our ability to advance the collaborative projects most desperately needed to combat climate change and improve human lives.

Is this really the world we’re fighting for, when we criticize religious hypocrisy? Or is there a more prosocial vision of community we could invest in instead?