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Don’t Tax University Endowments (Even if It Might Seem Like Rough Justice)

It is hard to suppress schadenfreude as legislators offer proposals to tax the endowments of our elite universities. Their administrators and professors are overwhelmingly Democratic—indeed left-liberal Democrats. They regularly support candidates who want to raise taxes on for-profit corporations and individuals.

Even more piquantly, most of the taxes proposed would target only wealthy universities. Of course, soaking the rich is de rigueur for the left-liberal. And the most serious proposals are coming from blue states, like Connecticut, that are desperately seeking new sources of revenue as business and individuals flee the state’s already onerous taxation and its job killing regulations.

Nevertheless, these are bad ideas. We do not tax educational charities in this county for good reason.  Education is a public good that is under produced by the market. In other words, it creates diffuse benefits, like basic knowledge and civic understanding, that help even those not immediately involved in education. Historically, our universities have done the basic scientific research which improved standards of living and lengthened lives.  And we are rightly skeptical that government will produce these public goods as efficiently, given the interest group politics at the heart of the democratic state.

And the American system of higher education empirically validates the theoretical reasons for not taxing private universities with high endowments. These universities are consistently rated as the greatest in the world. From their labs come a large proportion of the scientific discoveries that win Nobel prizes. Their graduate students get the training to begin startups like Google that transform the world. The statist universities in continental Europe do not compare.

It is true that only the scientific and innovation side of our great universities is thriving as the more humanistic side is mired in political correctness. But these taxation proposals will do nothing to diminish political correctness but they will reduce funding for those aspects of the university that are an engine of the modern economy.

For similar reasons, the ideas of some Republican Congressman to tax large endowments unless they are spent to reduce tuition or pay out a certain percentage are also wrong-headed.  The government lacks the knowledge to determine how best to spend money in an educational setting.  These decisions involve trade-offs that elite universities themselves are best positioned make.  Moreover, the competition that such universities face in attracting both students and faculty likely encourage more accurate decision making than does politics.

So classical liberals should ride to the rescue of left-liberal academics as a matter of principle, even if it would be more fun to look the other way.

Reader Discussion

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on May 05, 2016 at 21:59:12 pm

Eh. It's far from clear that leaving endowments untaxed is the best way to promote the positive externalities that tax-free institutions create.

As a framework for thinking about the issue, I'd start from the premise that all income should be subject to taxation, simply as a means of public finance. We should then consider reasons to grant exception to this rule, and tailor those exceptions narrowly so as to maintain as broad a tax base as possible.

Yes, this targeting process would be subject to politics. But can we say that the initial decision to declare certain institutions beyond the reach of taxation was not also a product of politics? What exactly is the public good that the Church of Scientology promotes for which it receives a tax break?

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nobody.really
on May 06, 2016 at 10:38:13 am

1) "Education is a public good that is under produced by the market." - NO, It is underproduced BY THE PROFESSORIATE (see Greve's GMLunatic piece above).

2) "These universities are consistently rated as the greatest in the world." - Really, I think your time frame is off by 40 years. We used to have great universities - now we have extended "day care" facilities providing much needed "safe spaces" for our overgrown adolescents.

3) " Moreover, the competition that such universities face in attracting both students and faculty likely encourage more accurate decision making than does politics." - Really? and what would these decisions be? Providing a "vacation resort" atmosphere? Overloading budgets, and the consequent increase in tuition, with a battalion of "administrators? *Nurturing* our poor helpless / hapless young students and force feeding them pedagogical pablum?

But you are correct. The government is even less likely to make sensible decisions.
What is needed is a BDS strategy directed AGAINST university endowments for these schools. witness the alumni actions against University of Missouri. Endowments down 72% in one year. Enrollment down 25%.
Now that's what I'm talking about.

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gabe
on May 06, 2016 at 10:40:44 am

"What exactly is the public good that the Church of Scientology promotes for which it receives a tax break?"

Hey, c'mon now!!

It let's Tom Cruise feel good about himself - indeed, one could argue that it made him into a Superhero able to pull off all manner of death defying feats in pursuit of the bad guys. It can't be all that bad!

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gabe
on May 06, 2016 at 18:57:08 pm

Obviously, the schools haven't been donating enough to the candidates. Gotta bump up those contributions or we'll send the tax man after ya!

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Scott Amorian
on May 08, 2016 at 10:24:52 am

Destroying the universities should be a top priority for anyone opposed to the left's domination. Taxing their investment income may help, but ending student loans is more important.

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Dissident

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.

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