Should we tax the endowments of wealthy universities?

This NYT story has some background detail:

The House Republican tax plan released on Thursday includes a 1.4 percent tax on the investment income of private colleges and universities with at least 500 students and assets of $100,000 or more per full-time student. It would not apply to public colleges.

The endowments are currently untaxed, as they are considered part of the nonprofit mission of the colleges. The new tax, if it passed, would bring in an estimated $3 billion from 2018 to 2027, one of many new revenue sources Congress is considering to pay for broad tax cuts.

Note that this would apply to about 140 schools, and also that private foundations already pay tax on their investment income.  Greg Mankiw writes:

If my rough calculations are correct, the tax would cost schools like Harvard between $1,000 and $2,000 per student every year.

I am opposed to this change, mostly because I don’t like to see the government deciding to go after a new source of wealth for its tax base.  The focal point of non-interference ceases to be focal, and excesses and politicization too often follow.  Slippery slope!

But if you are otherwise not so keen on this Brennan-Buchanan argument, what exactly are the grounds for opposing this?  It taxes the relatively wealthy, and it taxes income from wealth.  It taxes finance.  I haven’t heard anyone oppose the tax on the investment income of private foundations, other than diehard anti-tax types.  That tax has hardly vanquished the private foundation form.  On top of all that, university endowments seem to have long time horizons, and to play the g > r game pretty well.  As early as 1958, Paul Samuelson taught us we can transfer resources out of g > r games at no real cost.

So, you’ll hear a lot of caterwauling on this one, but the only good arguments against it are the libertarian ones.  Broadening the base isn’t always good.  Don’t be suckered by the “give up education for tax cuts for millionaires” non-rigorous rhetoric you will hear.  With or without those tax cuts, you still have to ask yourself whether this tax hike is a sensible way of paying off our huge and growing debt.

I wonder if there are people who think a corporate income tax falls mainly on capital, but that this levy would fall mainly on students.  Actually…I don’t wonder.


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