Robert E. Wright: How Nonprofits Became Tax-Exempt

Robert E. Wright is the Nef Family Chair of Political Economy at Augustana College in South Dakota and the author of “Corporation Nation,” which will be published in December by the University of Pennsylvania Press.

The uproar over allegations of politically motivated investigations by the Internal Revenue Service shouldn’t be surprising given Americans’ long love affair with nonprofits and their strong disdain of partisanship, especially within bureaucracies.

After independence, and especially after ratification of the Constitution, Americans began forming businesses, charities and other associations at unprecedented rates. Unshackled from British law and the threat of monarchical tyranny, they sought to invest in long-term stability, and in each other, in ways that required the establishment of large and lasting organizations.

To create these institutions, early Americans adapted corporate laws from Britain. At first, incorporation required both for-profit and nonprofit organizations to obtain a charter from state governments. Charters were special laws passed by state legislatures and signed by governors under the rules of state constitutions.

Before the Civil War began in early 1861, more than 22,000 businesses and untold numbers of churches, charities, promotional associations and other nongovernmental organizations incorporated....