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.