Presidential hopeless Beto O’Rourke has been castigated by the Right and the Left and even by atheists for his statement at the October 10 Democratic debate that religious organizations that discriminate against same-sex marriage should have their tax-exempt status pulled. Yet nobody seemed to notice that O'Rourke had also unintentionally admitted that taxes are a tool to punish citizens who fail to follow the dictates of the state.

Imposing higher taxes or lowering them is how politicians can get campaign contributions or votes.

For 137 years after the Declaration of Independence, no American paid a federal income tax. The government raised revenue solely through tariffs and other indirect taxes, and the Constitution had to be amended in 1913 for a direct tax to become legal. Churches retained their exempt status, but the income tax was levied on everyone else.

So imposing higher taxes or lowering them is how politicians can get campaign contributions or votes. And it’s often the case that the threat of high taxes is the most effective way for politicians to get firms to do what they want. For example, in his book Crony Capitalism in America, investment manager Hunter Lewis cites the case of two Democratic senators who were planning to introduce a new tax on hedge funds.

Tax Exemptions for Religious Groups

As a result, the Democratic Party got twice as much in campaign contributions from Wall Street hedge funds as did the Republicans in 2008-2009, and the proposed plan never made it to the Senate floor. Lewis argues that this is why

the tax code keeps getting longer and longer and more impenetrable…the more complex and vague it is, the easier to trade special deals and provisions for campaign money or assistance.

Religious organizations have enjoyed tax exemptions precisely to avoid such shady political dealings. This is not to say that there wasn’t a political motive: By not taking taxes from religious groups, politicians hoped to gain the bloc vote support from them. But the ostensible justification for exemptions is that religious organizations provide services that improve societal welfare and so contribute to the public good in a manner that pays for the lost tax revenues.

But doesn’t this logic also apply to secular organizations and, indeed, to individual citizens? After all, successful businesses by definition supply goods and services that contribute to people’s welfare. If the business is not serving people’s welfare (as defined by the person who patronizes the company), customers stop buying their goods and services and the company closes down. When the government imposes taxes on a business, this adds to the company’s expenses and may even distort competition between firms, which means that customers’ needs are not met as efficiently as they might have been.

One left-leaning commentator even applied this same logic to religious organizations to argue in favor of churches not having to pay taxes.

For many religious institutions, this is a legitimately existential issue—paying property taxes, business income taxes (assuming they do more than break even), and losing the ability to collect tax-deductible donations would be a massive financial blow,

wrote Jordan Weissmann in Slate.

Separation of Church and State

But what does this mean except that such groups don’t have enough adherents in order to meet their expenses and pay taxes? By standard business criteria, these religious organizations don’t have enough customers to justify their existence. Yet the criterion for firms is that they must have enough customers to meet all their overheads and still give money to the state. Nonetheless, Weissmann’s basic point isn’t wrong in the sense that churches are thriving partly because of their tax-exempt status.History shows that the separation of church and state is a principle that helps a nation to maintain progress and peace.

A 2008 study by Jonathan Fox and Ephraim Tabory that measured state regulation on religion in 81 countries found that the more a government intervenes in the religious market, the fewer people attend church and the less likely they are to describe themselves as religious. Thus, the fact that the Lutheran religion is the state church in Denmark, Sweden, and Norway may explain why these countries score highest in surveys on secularism, whereas in the religious free market of the United States religiosity is highest in any developed nation and evangelical pastors are multi-millionaires.

While the spiritual goods provided by religion are important, so are the actual and psychic goods provided by the free market. The Heritage Foundation in its 2019 Index of Economic Freedom notes that

People in economically free societies live longer, have better health, are able to be better stewards of the environment, and push forward the frontiers of human achievement in science and technology through greater innovation.

Economies rated “free” or “mostly free” enjoy incomes that are more than twice the average levels in all other countries and more than five times higher than the incomes of “repressed” economies.

History shows that the separation of church and state is a principle that helps a nation to maintain progress and peace. Economics shows that the separation of state and private sector should be just as sacrosanct.