The Case Against Taxing University Endowments

Some universities have multi-billion-dollar endowments. Should they be taxed? I am no tax expert, but I have long been concerned that the case for taxing endowments looks a bit like the case for taxing wealth generally. Yet some conservatives support the former while opposing the latter.

In 2017, as part of the Tax Cuts and Jobs Act, Congress imposed a 1.4 percent tax on the net investment income of large, well-endowed universities. The question now is whether it should be expanded.

My colleague Erik Jensen knows far more about tax law than I do, and he had a piece this week in Civitas Outlook suggesting why taxes on university endowments is not such a great idea. Not only does the tax raise minimal revenue, it induces universities to waste more money on accountants and administrators to account for and avoid the tax (and its “cliff effect”), and its costs are not ultimately borne by universities as institutions.

In form, colleges pay the tax, just as corporations pay the corporate income tax. But everyone except Bernie Sanders knows that the economic burden of corporate tax is borne by some combination of investors, employees, and customers—not the targeted corporations, which are legal fictions. Economist Douglas Holtz-Eakin has similarly argued that “in the near-term, the students and university employees will bear the brunt of the [endowment] tax.” Is that desirable?

Jensen also suggests that if the purpose of the tax is to penalize universities for being too progressive or “woke,” that is a misguided justification for the policy.

I defer to no one in my dislike of wokeness, but it’s a bad idea to have the federal government attacking educational institutions for permitting disfavored views. If a college is nothing but a platform for political indoctrination, challenge its tax-exempt status. But despite what you may have read, no elite university is tainted with wokeness from top to bottom. Yes, even departments in the hard sciences and engineering have overdone wokeness in hiring and promotions, but it’s hard to see how a course in physics or a research lab is going to be excessively woke.

In any event, the idea that an institution should be taxed because politicians think it’s too woke should make all who care about academic freedom nervous. (We should be similarly nervous about any proposed federal mandates requiring wokeness.) I’ll leave to First Amendment scholars the question of whether an anti-wokeness motivation for a tax violates the Constitution. But, even if constitutional, it’s not something Congress should do.

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