Autobiography - The Galindo Group

Ram Galindo THE MAKING OF AN AMERICAN Page 219
organizations whose end products never directly reach the intended beneficiaries. I find
it impossible to justify tax-exemption for institutions such as recreational clubs, “nonprofit”
hospitals, electric cooperatives, credit unions or other similar organizations that
unfairly take market share by indiscriminately selling their services among the same
socioeconomic groups as their tax-paying counterparts.
The proliferation of tax-exempt organizations carries a social cost that to my knowledge
has not yet been quantified. This could no doubt be a good doctoral plan for a candidate
for a Ph. D. degree in economics. The loss of revenue to government coffers at all
levels due to this discriminatory practice is very appreciable. The specific example of
Aerofit that I reviewed in detail in Healthy Mind in Healthy Body (Chapter 3) is but one of
many egregious similar cases. This phenomenon is better explained by following the
example of other health fitness companies.
The analysis of a case in point is very illustrative. In the city of Houston there are many
examples of two health fitness clubs operating in the same neighborhood. They both
serve the same population and their typical customer profile is identical. Neither does
appreciable charity. Both are equal opportunity and don’t discriminate on any basis.
One is tax paying and the other is not. The latter could be a tax-exempt YMCA, Jewish
Community Center or church affiliated club. Both have upscale physical plants and
provide similar services and both charge the same monthly fees for membership to the
facility. Neither has a recognizable number of free or “charity” memberships. Yet the
former is heavily taxed and the latter is exempt from most taxes. The public doesn’t see
it, but the differences for the owners are fundamental and are diametrically opposed to
the genius of America I define in the first chapter of this book.
To start, the private owner raised his investment capital from persons who expect a
return. The tax-exempt received its investment capital from “donors” who wrote off their
donation as a charitable deduction. These donors will not be upset if their club doesn’t
send them any reports and they certainly don’t expect to receive a dividend. The private
owner is soon in trouble with his/her investors if that is the case. If the investors receive
a dividend, they must pay income tax, thus infusing money into federal government
coffers. The tax-exempt donors contribute nothing even if their club is successful. If it is
not, they most likely will contribute again to bail it out, reducing once more the amount
of taxes they would otherwise have to pay.
The private owner usually has a bank loan that must be serviced. Interest and principal
must be repaid. In the “for profit” sector, it costs dearly to use somebody else’s money.
If the loan is not repaid, not only is the facility lost to the investors but the guarantor of
the loan will also suffer additional losses. To its great advantage, the tax-exempt
counterpart rarely has the expense of investment capital debt and its executives never
take any personal financial risk. I have never heard of a “tax-exempt” executive
personally guaranteeing a loan for his/her organization.
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