From the point of view of government, a surplus is a temporary surplus that must be directed to achieve the organization's basic purpose. Tax-exempt organizations are also not allowed to run businesses that are unrelated to the public good they are trying to achieve. The rationale for income tax exemption Exemption is a tax relief measure. It is also a tax expenditure, in that it requires the government to forego revenue, which could have been collected for government purposes through the tax system. It is also a measure to produce administrative efficiency and economy in public administration, particularly where it would cost the government more to collect the tax than it would realize for its efforts.
Exemptions serve both goals of tax expenditures and efficiency.
That is, exempting certain kinds of organizations from income tax permits citizens to form and finance the organizations they need for community well-being. Therefore the income tax exemption allows citizens to allocate their resources to meet community needs, where exempt organizations can achieve the public good better than government can. This argument rests on beliefs about democratic development and civil society. The philosophical argument is challenged from time to time by boundaries of personal benefit. In small communities of mutual benefit, some break-even point is reached where activity does not have on balance enough public benefit to defend exemption.