Public benefit

“I would prefer if Massachusetts imposed a sales tax on tuitions.” This tax would almost certainly come directly out of the pockets of students and would have little to no impact on the overall “wealth” of an institution.

This article ignores the big reason why certain types of non-profit institutions are not taxed: public benefit. If you want to tax “wealthy” colleges and universities, why not “wealthy” churches, or “wealthy” cancer research centers, or the “wealthy” Bill and Melinda Gates foundation as they fight for global health?

We don’t tax entities in these other areas because they provide a valuable public service and benefit. Before you can argue that we should tax “wealthy” higher education institutions, you need to develop the argument that these institutions do not serve the public.

T-bone, at 10:00 am EDT on May 19, 2008

Microsoft avoids Washington State taxes

Interesting that the article opens with such a poor example. In fact Microsoft avoids paying taxes in Washington State

The Redmond company makes products here but records software sales to PC makers and high-volume customers through an operation in Nevada, where there is no corporate tax.source http://www.crosscut.com/microsoft/11167/Microsoft’s+$528+million+Washington+tax+break/

I would expect Harvard to do something similar.

Faculty Person, at 3:00 pm EDT on May 19, 2008

“why not “wealthy” churches”

The First Amendment.

JBM, at 8:20 pm EDT on May 19, 2008

Equality?

Before this essay, you really need to justify why you favor equality of result over equality of opportunity. Then explain why equality of result trumps private property, legally donated to Harvard under previously established rules.

If you go back to Adam Smith, he argues that the equality protected by the great documents like the Magna Carta and the like is the ownership of one’s own labor, for which we turn to law and contracts to protect. Someone chooses to donate that “work” to Harvard under previously established rules. You stretch equality into something quite perverse: You can take anything because you think you’re right, because you lust after it, and because you have the power.

sbw, at 5:15 pm EDT on May 20, 2008

Better Than Taxes

I have an even better idea than taxing the endowments of uber-wealthy institutions such as Harvard: make them and their students ineligible for federal and state funding.

When an institution is sitting on that kind of endowment, then it also has the ability to fund the tuitions of its students out of the yearly earnings without touching the principal. It also has enough money to privately fund the research it conducts. If it needs more funding, it always has the option of tapping its uber-wealthy alumni as well.

By eliminating the government spending that would otherwise have gone to support these institutions and their students, they would eliminate the need for the additional tax revenues would as well.

Jim, at 5:15 pm EDT on May 20, 2008

Stanford

The author has, I would guess, never been to East Palo Alto.

aneu petra, at 5:25 pm EDT on May 20, 2008

At a time when the endowments of many elite schools have ballooned into the gazillions, as have the earnings on such endowments, and the institutions have begun to address questions about how they can justify soliciting further alumni donations, government grants or charging tuition to students, it is valid to at least ask how they meaningfully differ from businesses.

In the case of institutions like Harvard or Yale, that routinely use graduate students. rather than professors, to teach undergraduates, allow professors to teach increasingly arcane and obscure subject matter that coincides with the “research” they are doing, and hire, retain and reward professors for research and writing that is increasingly read, let alone understood, by literally a handful of people, it becomes harder to see the broader benefit conferred. “Research” becomes an arcane game played for grant money. The profs bring that money in, and the students are the cover for the whole operation, even as their “education” becomes very much beside the main point of the institution. Most of the public that subsidizes these universities with tax breaks, government grants, guaranteed student loans, etc., are entirely unaware of how much this scene has changed in the last few decades and are still under the quaint impression that the main task of universities is to educate students.

In fact, many of the elite universities have become bait-and-switch con operations that have little interest in the educational tasks that used to be the reason for their tax exemptions. They lure the students and the public money in with the illusion of tradition and education, and stick the students with grad students for teachers and professors who condescend to grudgingly teach a class or two when they could be doing their “real” work of publishing obscure treatises no one will ever read or benfit from. Profs who get teaching awards are embarrassments to their universities, all of whom know the real academic studs are too loftily brilliant to stoop to mere teaching.

The current reason for being for these elite institutions looks very much like tailoring their product to make the most money, and investing the money they make to get the greatest returns. This doesn’t differ a lot from the Microsofts of the world, their intellectual and educational pretensions to the contrary.

Victor Erimita, at 5:45 pm EDT on May 20, 2008

Massachusetts Should Tax Harvard

Exactly where do you think the money to pay for, “a sales tax on tuition", will come from?

I doubt that Harvard would fund it out of their endowment, and strongly suspect they will raise tuition to pay for this tax.

Consider the unintended consequences of your proposals!

Regards,An Average American

AnAverageAmerican, at 8:15 pm EDT on May 20, 2008

What a waste of a teachable moment this column represents. The reasons for not taxing the Harvard Corporation are identical to the reasons for not taxing any other corporation: The earnings of that entity are taxed when they are paid out to individual employees, bondholders, and shareholders (if there’s a capital gains tax). There’s no compelling argument for taxing them a second time as the earnings of a corporation per se.

Higher Ed’s defenders in this instance seem to have stumbled upon this argument for the first time, providing an excellent opportunity to explain the general principle involved. Instead, we are offered nothing but weak polemics and an absurd counterproposal (apply a sales tax to educational services uniquely among professional services).

George Henry, at 5:15 am EDT on May 21, 2008

About time

This is long overdue but why only colleges with over a billion in endowments?

Total assets in private colleges extend beyond endowments to real estate, art holdings, historical artefacts, etc. A regularized state and federal tax on total assets, especially those held by private colleges and universities, seems more appropriate.

Financial returns, the creation of annual surpluses for internal reinvestment, and calculation of tuition based on surplus revenues underpin the steep rise in college costs at private institutions. These entities exist as financial operations and should be treated as such. As a recent report cited in insidehigher.com showed, these steep increases charged to students have rarely gone to faculty or academic departments.

Structured and comprehensive outside scrutiny remains the only hope that things might change.

Claire, at 8:40 am EDT on May 21, 2008

Tax ‘em still they squeal

The ivory tower elitists at our nation’s universities are constantly telling us about the wonders of socialism, so why not tax these universities? Isn’t it “greedy” for them to be so wealthy and educate only the “lucky few” who can afford the school? Isn’t it “greedy” for overpaid professors to kick back while grad students handle the details in actually running their classes?

I say tax them, and if they survive tax them some more. There are poor people out there in the world, and isn’t it the purpose of government to punish success in the name of engineering a “fair” society? It is if you ask a typical college professor.

Steve, at 11:35 am EDT on May 21, 2008

Microsoft does pay a lot of taxes.

One big tax paid in Washington State is the property tax on all of Microsofts land and equipment. The assessor’s office set the value the value of the property per Washington State Law. All of those employees of Microsoft pay property taxes. Tell me why the Department of Energy is exempt from property taxes in Benton County Washington because of the Hanford Nuclear site. It’s 586 square miles (with riverfront property) seized by Uncle Sam in 1942 and results in a a couple of hundred million is lost revenue. Exempt churches, but no one else. “Public service” is a nonsense argument. Without businesses, there is no “public".

Ken, at 2:25 pm EDT on May 21, 2008

Taxing university endowments

Hear! Hear! Excellent idea.

Does Massachusetts tax personal property? If so, there is no reason for ANY non-profit with assets above a certain level to escape that tax. Even if one stipulates that the purposes of the organization should be tax exempt, surely that only applies to expenditures that advance those purposes. Hoarding wealth should not qualify.

Harvard doesn’t like it? Let ‘em move. Same choices as faced by any other entity.

Marty, at 5:15 pm EDT on May 21, 2008

Taxing success versus taxing consumption

As the article describes, allmost all taxes are punishment for success. We are taxed on savings (that is dumb), we are taxed when we earn more, we are taxed on successful investments, we are taxed at death on our savings and assets. The system needs to change so that we reward success. The FairTax system taxes ONLY sales and services at the retail level and pays EVERYONE a monthly rebate ("prebate") to refund the tax we have to spend on essentials as defined by the poverty level. It essentially untaxes the poorest people completely. The poorest end up paying LESS than they do now. The super rich pay far more and cannot shelter their wealth. The country will actually IMPORT jobs from overseas. There is no tax on education. It is considered an investment. No more loopholes. No more tax lobbyists. No more vote buying.FairTax.

graham killip, at 8:35 am EDT on May 22, 2008

Taxing Harvard

This is one of the least well-reasoned ideas I’ve run across. Your argument for taxing universities (including Harvard) through an excise on either endowments or tuitions is flawed in a number of ways. First, you assert that colleges are less likely to leave the state than private businesses. While it hasn’t happened anywhere (because no other state imposes such an idiotic tax), it certainly would, at least in part. What’s to keep Harvard from moving its very mobile endowment (with its huge investment in Massachusetts businesses) to a neighboring state (e.g., Rhode Island, Vermont, New York, Connecticut), even if it doesn’t move any of its educational functions? What’s to keep it from moving its high-profile business, medical, or government schools to another state? What, in fact, would keep it from moving the whole university outside the state? Real estate is certainly cheaper. Second, no other state taxes such universities for a reason—Because they are a HUGE benefit to the local economy. Do you not realize that the main reason very profitable investment and investment management, medical instrument, genetic engineering, and software development firms have located in Massachusetts is because of the ready supply of top-tier talent coming out of such schools? Its sure not because of the very high state corporate taxes must such businesses pay (9.5% corporate tax rate v. 5.3% individual tax rate in the Commonwealth). Third, you assume that Harvard is free to do whatever it wants to with the funds in its endowment. In reality (as with every other endowment at every other university in the country), endowment funds are generally restricted for a particular use under a combination of federal law, university rules, and donor requirements. In Harvard’s case, 85% of its endowment is so restricted. Fourth, the whole point of a university endowment is to maintain the value of the school and further its mission. An endowment is not “mad money” that ANY university can use for binge purchasing. Harvard spends 4%-5% of its total endowment balance each year—You go higher than that, and you endanger the future of the school Fifth, fully thirty percent of Harvard’s operating budget is funded by expenditures from the endowment. As Harvard’s endowment has grown over the past ten years, Harvard has been able to contribute a higher percentage from its endowment and HOLD DOWN tuition costs. For instance, ten years ago, the Harvard endowment contributed only 18 percent of the total operating budget. This hardly sounds like “hoarding wealth", as you suggest. Sixth, I am surprised that you, as an economist, don’t realize that the capital in Harvard’s endowment is benefitting Massachusetts, even if Harvard isn’t squandering every dime currently. This endowment is invested in Massachusetts bonds and notes, the stock of Massachusetts corporations, and facilities that enrich the local economy (see, for instance the economic miracle that Harvard is creating in enlarging its campus into the rough-and-tumble Alston area of Boston).

One point for a few commenters on this site. Yes, taxing churches is very similar to taxing universities. Taxation of churches would not be prevented by the First Amendment to the United States Constitution. The federal government (and, so far, every state government) have generally declined to tax such institutions, except on incomes that are not essential to the operation of the religious organization (i.e., gift shops are subject to income and sales taxes). Nothing currently restricts the federal government or the states from imposing taxes on all funds held or activities conducted by the church. The politics of this action, however, are such that we’ll never see churches subject to broad-based taxes.

Voice of Reason, at 1:05 pm EDT on July 2, 2008