Five Reasons Not to Tax University Endowments
(Bloomberg View) -- The late Daniel Patrick Moynihan’s prescription for building a world class city? “Build a great university, and wait 200 years.” Moynihan understood that fruit grows when a few square blocks are seeded with producers and consumers of knowledge, intensely focused on those activities.
It's a bad idea.
University endowments are a form of wealth. Republicans typically oppose wealth taxes for a variety of reasons. If you tax something, you get less of it, and wealth is not something we want less of. Wealth doesn’t sit under the mattress. It is invested in the economy, which increases the productivity and wages of workers and the economy’s rate of growth. In a world where wealth is mobile, taxing wealth would cause assets to be relocated to other countries. The saved income that accumulates as wealth has already been taxed, so wealth taxes are a form of double-taxation. The motivation behind wealth taxes is often envy.
Charitable contributions enrich university endowments, and are the source of the investment income Republicans wish to tax. Republicans typically oppose taxing contributions to (traditional) nonprofits, including universities. Any university contributions you make benefit the university, and not you (apart from recognition, like your name on a classroom door). Therefore, discouraging contributions to universities hurts universities, not donors. A taxpayer who donates to a university has less money with which to pay taxes. Allowing a deduction for charitable giving creates a level playing field between those who do and don’t donate to universities. And the tax treatment of university donations recognizes the American commitment to the (partially) private provision of social goods, like higher education.
You might argue that my criticisms are a bit overstated, and you would be right. The GOP proposal isn’t a wealth tax because it taxes income from endowments, and not endowments themselves. And the GOP tax plan doesn’t (directly) change the tax deductibility of university contributions. But the clear target of the plan is university endowments, and taxing their income might reduce charitable contributions. Wealth taxes and the reasons for the charitable deduction are the right things to be thinking about when evaluating this proposal.
Arguing that the GOP plan is a tax on human capital is not an overstatement. Elite universities use endowments in part to relieve students and their families of the burden of paying tuition. Many universities have been increasingly targeting this relief at households who need it most. For example, parents with income below $65,000 do not pay tuition for their children’s Harvard College education. One in five Harvard undergraduates fall into this category. Taxing endowment earnings would make these efforts more difficult, and would probably raise tuition for students from families that would struggle to pay it.
A tax on human capital in a bill intended to raise wages represents policy incoherence that should be more surprising than it is.
Endowment earnings also support the world-class research that make U.S. universities the envy of the world, attracting talent from across the globe. That research advances innovation and, ultimately, social welfare. Moreover, the social returns to university activity exceed the private returns — one reason to subsidize them. Simply living near college graduates raises the wages of less-educated workers. Companies located near research universities generate more patents and spend more on research and development. Cities with more human capital are better able to adapt to economic shocks. Why tax the income that helps makes this possible?
That question has answers, and the idea of targeting endowments isn’t new. You often hear that government should redistribute some endowment funds from elite universities to the rank-and-file, to fund federal subsidies for student aid, to reduce tuition and increase scholarships, or to help reduce the burden of student debt. These are bad ideas. But the GOP’s use of the tax revenue — simply to raise $2.5 billion of the $53 trillion the federal government will spend over the next ten years — is even worse.
It makes you wonder if something else is afoot. Universities are increasingly irritating places to conservatives. Jonathan Haidt, who does not identify as a conservative but whose heroic work in challenging the current state of universities is admired by them, asks: “What is the telos” — the purpose, the goal — “of university?” Is it truth, as it should be? Or social justice? Increasingly, it is the latter, and conservatives — these are my words, not Haidt’s — view universities’ pursuit of their understanding of social justice as a part of the broader progressive political project. Conservatives are correct that universities need to reverse course and reaffirm their commitment to their core mission.
But it is beyond unseemly to tax a few dozen institutions in part because you don’t like their politics. It is also shortsighted. When Democrats are in power, will they target the endowments of conservative institutions? Where does this end?
My answer: It should end with the removal of this provision from the GOP’s tax proposal.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg View columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy” and the co-editor of “Economic Freedom and Human Flourishing: Perspectives from Political Philosophy.”
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