The New Endowment Tax

Last year, a revolution took place in higher education and virtually no one noticed.  Since the Tariff Act of 1894, colleges and universities have been tax-exempt institutions. Now, with the passage of a new tax on the endowments of private institutions, higher education has moved from the tax-exempt to the taxable column.  This historic transformation in the status of colleges and universities occurred with virtually no public debate. Though the new tax only effects a small number of elite institutions, it is a worrisome harbinger of the future.  If, as the legislation assumes, non-profit colleges and universities can be taxed like profit-making ventures, additional federal taxes may be added in the future.  State governments, desperate for revenue, may follow suit and slap their own new state taxes on institutions within their borders.  Once unthinkable, major new taxes on colleges and universities are now a very real possibility.

There are two aspects of the endowment tax I find notable.  First, the legislation betrays compete ignorance about the critical economic function of research universities in the American economy.  The ostensible purpose of the tax bill was to boost the American economy by cutting taxes for economically productive corporations.  These tax cuts were partially offset by new taxes on supposedly unproductive entities.  But private research universities, the primary target of the new endowment tax, are hardly unproductive.  On the contrary, they are one of the most critical components of our economy and a major driver of long term economic growth.  The United States is the tech and biotech leader of the world because of the work of our research universities, and some of our most vital economic hotspots, like California’s Silicon Valley and Boston’s Route 128 tech hub, exist only because of the research strength of universities like Stanford, Harvard, MIT and Duke, all targets of the new tax.  If we want to promote economic growth, we should be providing more research funding to these schools, not taxing them. 

Even more chilling, the new tax represents a major assault on academic freedom.  The tax on endowments raises very little revenue: a paltry $180 million per year over the next ten years.  It was included not because it raises significant revenue, but because Republicans in congress wanted to punish America’s elite colleges and universities, which they perceive to be too liberal.  The idea that universities should be taxed for failing to comply with the ideological desires of a majority of Congress conflicts with long-held tenets of American democracy.  Over sixty years ago, in the landmark Supreme Court academic freedom case Sweezy v. New Hampshire, Chief Justice Earl Warren wrote: “To impose any straight jacket upon the intellectual leaders in our colleges and universities would imperil the future of our Nation.”  That lesson seems to have been lost on the Republican majority in Congress. 

The passage of the new endowment tax reveals one more important fact about American life today:  our leading universities have virtually no political influence.  When placed in historical context, this is shocking.  Historically, American’s universities have played a leading role in public life.  Woodrow Wilson moved from Princeton to the White House, as did Eisenhower from Columbia. Franklin Roosevelt recruited a widely publicized Brains Trust of leading academics to assure the American people that our best minds were tackling the challenges of the Depression, and John Kennedy used endorsements from great historians, political scientists and economists to strengthen his claim to office.  In the Second World ar, the government recruited James Conant of Harvard and Vannevar Bush of MIT to mobilize scientists for war, resulting in the development of advanced radar and the atomic bomb.  These examples capture a basic fact about government during the “American Century”: it represented a partnership between the political and academic establishment.  That partnership was reflected in the G.I. Bill and Eisenhower’s National Defense Education Act, which provided financial assistance not just to students, but directly to the universities that serve them.   Great universities, it was understood, are an essential component of a great democracy.  Fast forward to today, and one quickly sees that this partnership has disappeared. 

The tax on endowments marks a major departure from the policy of support for higher education that made American great in the 20th century.  Let us hope that departure is temporary, not permanent.  Our nation cannot maintain its economic, military, and cultural power if its government is permanently at war with its leading universities.