Divine Loophole

Taxes, by their nature, distort economies. Sales taxes increase prices and thus discourage buyers, while tariffs allow inefficient industries to flourish at the expense of the public in general. But the corporate income tax is surely the most distorting of all. A corporation, after all, is nothing but a wealthcreating machine, a means whereby individuals pool their resources, talents, and labor in order to create more wealth collectively than they could create individually. Taxing these entities directly—as opposed to taxing each stockholder for his or her share of the profits—might make political sense, but it is economic lunacy.

The original corporate income tax law at least was relatively simple. The push and pull of politics over the last seventy-five years, however, has produced a monster. Just complying with the law (in other words, filling out the tax forms and providing supporting documentation) now costs U.S. corporations eight billion dollars a year. The total cost of complying with the U.S. tax code is about one percent of gross domestic product. The Chrysler Corporation, for instance, employs fifty-five tax specialists who do nothing but labor over the company’s federal tax return, which in 1991 was a pile of forms and documents six feet high. The IRS, meanwhile, has nine full-time staffers perpetually auditing Chrysler.

For small companies—the cutting edge of the economy—it is far worse. It is estimated that companies with less than $1,000,000 in assets spend on average $390 complying with the tax code for every $100 they actually pay in taxes.

These are major distortions, ones that threaten the country’s future prosperity. But there are also sundry minor distortions created by the corporate income tax. Consider the fact that some highly profitable operations pay no taxes because they belong to nonprofit institutions. This, needless to say, gives them a great advantage over any less favored competitors.

Most Americans, for instance, think of the National Geographic Society as an eleemosynary institution that has greatly extended human knowledge of the universe. Indeed, that is exactly what it is. But book and magazine publishers also see it, equally correctly, as a major publishing empire. The society’s books and atlases compete with those published by TimeLife, Rand McNaIIy, and others. Of all American magazines, only Reader’s Digest and TV Guide have larger circulations than National Geographic. But unlike them, National Geographic pays no income taxes on its advertising and circulation revenues.

Highly profitable non-profit institutions have a history in this country far older than the income tax, of course. In fact, at least one, the Episcopal Parish of Trinity in New York City, has been in existence for nearly 300 years. Its magnificent neo-Gothic brownstone church has long been a symbol of WaIl Street, at whose western end it stands. That is an appropriate setting in more ways than one, for Trinity is probably the richest parish in the world.

Trinity’s vast wealth, however, has nothing to do with its proximity to the country’s financial center. Trinity got rich the old-fashioned way: through the grace and favor of a reigning monarch.

Trinity Parish was established in 1697 by a royal charter from King William III and remains today one of a handful of institutions in this country that are still governed by such an instrument. The charter called for an annual quittent to the king of “one Pepper Corne as desired,” but the crown, it seems, never desired it. (Nonetheless, in 1976, when Queen Elizabeth II visited the church during the bicentennial celebrations, the church voluntarily coughed up the back rent: 279 peppercorns.)

The charter, to give the parish an income, also gave Trinity the ownership of any whales that washed up on the beaches of New York Province. At the turn of the eighteenth century beached whales were a very valuable commodity, with their oil, baleen, and tons of meat. Today the church is just grateful that the authorities don’t send it a large bill every time New York State has to cope with a dead leviathan.

But dead whales were, at best, an erratic source of income. It was William III’s successor, Queen Anne, who made the real fortune of Trinity Church. Queen Anne was the last of the Stuart monarchs and is not much remembered today. But she was, like many of the Stuarts, sincerely religious and, unlike many of the Stuarts, sincerely devoted to the Church of England.

It came to her attention that a piece of real estate lying north of the small, far-off, and utterly unimportant seaport of New York had come into the possession of the crown. In 1705, Queen Anne decided to give it to Trinity Church as an endowment. Known as the Queen’s Farm, much of it was swamp and woodland. At the time, it was yielding an annual rent of only 36 pounds, about what a modest successful tradesman of the time might earn in a year.

As long as New York remained the small place it was in Queen Anne’s day, the value of the Queen’s Farm remained equally small and Trinity Church was much like most other struggling young American churches. But even in the eighteenth century, Trinity used its resources for worthy causes. As new parishes were established in New York and New England, Trinity contributed to their endowments. By the middle of the nineteenth century, more than ninety had been fostered by Trinity, which has long been known as the Mother of Churches. When King’s College (now Columbia University) was established in 1754, Trinity deeded it a portion of the Queen’s Farm as its original campus.

Then the Erie Canal opened in 1825. It quickly became the principal means for moving the produce of the burgeoning Middle West to the East Coast, and the situation of the city of New York and thus Trinity Church was utterly transformed.

Within a few years, New York had become the greatest boomtown the world has ever known, adding on average ten miles of developed street front per year as the city began its headlong rush up Manhattan Island. As it did so, it engulfed the Queen’s Farm, and the value of the land soared. In only a few years what had once been fields, woods, and swamp became 275 acres in the heart of the country’s largest, richest city. And Trinity Church became one of the city’s greatest landlords.

To give just one example of how this transformed Trinity’s circumstances, consider this. In 1767, the church leased about a tenth of the Queen’s Farm to Abraham Mortier, paymaster for British forces stationed in New York. He paid £52 a year for the ground lease, a lease that ran, as was not uncommon in those days, for ninety-nine years. Although there was a modest escalator clause, by 1866, when the Mortier lease expired, Trinity was receiving only $269 a year in rent from the land. The following year, however, having negotiated a new lease, the church rented the property for $138,586, a 50,000 percent increase in income.

With this sudden and vast wealth, by the turn of the twentieth century Trinity Church was an ecclesiastical empire with eighty-five hundred communicants and nine chapels scattered around New York City besides the main church itself. Thirty clergy were on the staff. In addition, the church ran schools, clinics, and missions and aided other churches, many of them not even Episcopal. It was almost a diocese within a diocese.

Naturally, this wealth attracted many people who wanted to claim it for their own. As early as 1833, descendants of the original seventeenth-century owner of the farm sued to obtain title, claiming it had never properly passed into the possession of the crown and therefore Queen Anne had had no right to give it to the church.

They lost the case, but with everincreasing billions at stake, others have been trying ever since. Indeed, so many have tried that the church now uses a form letter to respond to the endless stream of claims. More than one New York confidence man has gone to jail not for selling the Brooklyn Bridge but for selling fake deeds to the Queen’s Farm.

Unlike all the other of New York’s early churches, which followed as their congregations moved uptown, Trinity remained on its original site. In 1846, it built the present church, the third on that spot. Being already the richest parish,-the new church was the city’s grandest. For the next thirty years it was the tallest building in the city. But, because of the shifting population, Trinity has long been in close proximity to some of the city’s poorest neighborhoods. As its affluent old New York parishioners died off or moved too far uptown, the congregation has slowly changed. Today, a substantial portion are black immigrants from the British West Indies and elsewhere who come by subway from Brooklyn and New Jersey.

Regardless, despite a congregation that is now mostly in very modest circumstances, Trinity Church continues to use its vast patrimony productively. Having, over the last three centuries, aided or endowed no fewer than 1,642 institutions, it still gives away $2,000,000 a year to worthy causes while maintaining a very active ministry, including extensive television and radio programming.

Trinity even pays taxes. It voluntarily pays all the real estate taxes on its income-producing properties as its contribution to the city whose greatness made Trinity’s gift from Queen Anne so very profitable.