Creating a Tax Space for Social Enterprise

Abstract

While still relatively few in number compared to traditional nonprofit and for-profit organizations, the rise of social enterprises represents a possible disruption of not only existing models of doing business but also areas of law that in many respects have seen little fundamental change for decades. One such area is domestic tax law, where social enterprises currently find themselves subject to the rules of for-profit activities and entities. Here, both scholars and policymakers are beginning to ask whether it is either necessary or desirable to modify existing tax provisions to better accommodate social enterprise: that is, whether to create a distinct tax space for social enterprise.

This chapter considers some of the initial answers to this question and places them within a larger, tax theory framework in order to advance consideration of this emerging issue. As preliminary matters, I first consider how best to define the term “social enterprise” for purposes of addressing this issue and then describe some of the existing and proposed tax law provisions specifically relating to social enterprises. I dedicate the remainder of the chapter to exploring whether a high-level, theoretical consideration of possible tax provisions focused on such enterprises provides any insight into what provisions may be worth pursuing. Relying primarily on a tax subsidy approach, I conclude that while tax law could be used to incentivize investment in, commitment by, or selection of legal form by social enterprises, limited data and uncertain prospects for designing specific tax provisions that would be likely to achieve the desired goals caution against significant changes at the federal level at this time. Instead, I recommend pursuing experimentation at the state and local level with such provisions to help determine how best to achieve these goals through tax law.

Keywords: tax, social enterprise, hybrid, benefit corporation

JEL Classification: K34