Prop Up the Heavenly Chorus? Labor Unions, Tax Policy, and Political Voice Equality

Abstract

Labor Unions are nonprofit organizations that provide laborers a voice before their employer and governments. They are classic interest groups. United States federal tax policy exempts labor unions from the income tax, but effectively prohibits labor union members from deducting union dues from the individual income tax. Because these two policies directly impact the political voice of laborers, I consider primarily the value of political fairness in evaluating these tax policies rather than the typical tax critique of economic fairness or efficiency. I apply a model that presumes our democracy should aim for one person, one political voice. For the model, political voice means the ability of citizens to participate in setting and discussing the political agenda and to vote on any final decision. In a modern democratic state, citizens largely depend upon organized interest groups to fulfill this role of political voice. In the Article, I demonstrate that tax policy applicable to labor unions likely modestly harms political voice equality. We allow almost all nonprofit interest groups to obtain tax exemption whether they face collective action challenges or not. This subsidizes interests that would organize without government assistance and fails to provide much support to those politically weak interests. A more neutral treatment would be to end tax exemption for both business interests and labor interests. Additionally, although the case is weak, we could maintain tax exemption for labor interests alone in order to modestly correct a political voice inequality associated with labor. Finally, we should allow union members to deduct union dues above the line to offer parity with the treatment of a businessman’s dues.

Keywords: Labor Union, 501(c)(5), Political Equality, Tax Exemption, Nonprofit, Tax Policy, Internal Revenue Code, Political Voice Equality

JEL Classification: K31, K34