On the basis for non-profit organizations
Earlier today, Tyler Cowen (answering a reader request to comment on under- and over-researched topics in economics) suggested the economics of non-profit organizations as an under-researched topic. Matthew Yglesias did a little follow-up. One of Cowen's commenters made one of the less-well-informed comments I think I've ever seen: "The non-profit sector is an artifact (or maybe excrudesence) of the tax code. Get rid of that and it goes away."
This betrays an appalling lack of knowledge of the development of a large chunk of the US economy, a sector dating back well into the 18th century, if not further.
Hospitals (and this is true for Europe as well) in the US have been, from their beginning, largely off-shoots of charitable organizations, most often religious organizations. Catholic hospitals are, of course, well-known, but the Methodists, the Baptists, the Presbyterians, the Jews, the Lutherans, and clearly others as well, have long sponsored and supported hospitals. Local, and sometimes state, governments have also established and supported hospitals as well. Yes, for-profit hospitals have become a presence in the last quarter century, but they are still a fairly small minority of the total.
In general, non-penal institutionalized care facilities (nursing homes, orphanages, etc.) have been created and run by not-for-profit organizations.
Education at all levels has also been largely a not-for-profit (or local and state government) activity. Private, not-for-profit institutions dominated higher education, in particular, until the Homestead Act (1862) provided states with strong incentives to create the "land-grant" universities. Privately-run, profit-motivated institutions have largely focused on training--apprenticeship programs (run by individual firms, industrial organizations, and unions, often in cooperation with employers); narrowly skill-focused "schools (beauty colleges, truck-driver schools); technical institutes (DeVry Technical Institute, ITT Technical Institute, and, one from the city in which I grew up--Indianapolis, Mallory Technical Institute). All these profit-motivated places have one thing in common. They do not emphasize intellectual development, or scholarship; they all emphasize acquisition of narrowly-focused, immediately job- and employer-focused skills. (And, yes, states and local governments did get into this as well; in Indiana, the Indiana Vocational Technical College, before it morphed into a community college system, did this kind of training.)
Other private activities operated by not-for-profit entities include such things as the YMCA/YWCA/YMHA movement, providing places for young people to live and gather, with (subsidized) places to live and eat, and with organized activities, generally with some religious overtones. These could be national movements, or local. In Chicago, for example, the Parkway Eleanor Foundation (founded in 1898) provided housing, meals, and activities for young women on their own in Chicago.
The entire settlement movement of the late 19th century, perhaps epitomized by Hull House (also in Chicago) allowed immigrants, and other struggling people, access to various forms of education, culture, and social services.
With much of this, the emphasis was not just on the education, or the housing, or the social services, but on the provision of some moral or ethical guidance, more or less heavy-handed, depending on the inclinations of the organizations involved. So, yes, young people on their own could find housing (and most of them did), but the organizations like the Ys provided housing--and something else. Elementary and secondary schools, and colleges and universities, founded largely by various churches, provided education--and something else. Hospitals and other custodial institutions provided care--and something else. And that something else was not something that would have been provided by profit-motivated entities. (And I write this as someone who has as little contact with organized religion as I possible can.)
The current tax breaks were not the source of these developments, and removing the tax breaks won't (and shouldn't) put an end to them. They have fulfilled a role, and will continue to fulfill a role, that profit-motivated business firms cannot. To refer to them as an "excrudesence"* of the tax code is both wrong and ignorant.
*Clearly, the poster meant "excresence"--"an abnormal outgrowth, usually harmless, on an animal or vegetable body."