Progressive higher-ed behemoths will survive just fine without preferential tax rates.
C onservatives and libertarians rightly endorse robust private charitable activity so that private citizens, acting freely and without government direction, can ameliorate social problems through voluntary action. Many therefore oppose the provisions in the recently passed One Big Beautiful Bill Act (OBBBA) that substantially raise taxes on the endowments of large private college and university endowments.
This sentiment is worthy and commendable. Those who oppose the tax are nonetheless wrong because they fail to recognize how today’s private educational sector is inextricably intertwined with the modern state, and therefore no less deserving of being taxed than every other kind of citizen or business.
Colleges and universities were largely free from federal, state, and local taxation throughout most of American history. This was for good reason: In a world where most people were poor, public well-being was improved by relieving institutions from taxation that provided services unlikely to be met through private investment and the market.
This was a sort of industrial policy, one that provided indirect subsidies to institutions that society thought worthy of developing. This subsidy allowed these nascent entities to grow and then to flourish. It’s difficult to imagine our extensive modern network of private universities without this original subsidy.
We, however, do not live in the early 19th-century world of minimal governmental activity. The transformation in federal government activity began more than 150 years ago in the first Republican-controlled Congress. This was true with regard to the creation of a protective tariff, the establishment of the Department of Agriculture, and the subsidization of westward expansion through the Homestead and Pacific Railroad Acts. This new direction was also applied to higher education.
The Morrill Land Grant College Act of 1862 granted each state 30,000 acres of federal land that it could sell only if the proceeds financed the creation of colleges that “benefit[ed] agriculture and the mechanical arts.” Many of the nation’s flagship public schools, such as the University of California, are land-grant colleges. So, too, are notable private entities such as Cornell University and the Massachusetts Institute of Technology (MIT). The federal government put its thumb on the market scale and decided that it was more important to ensure expansion of institutions of higher education that were devoted to a specific purpose, agricultural research, than to endeavors that purely private forces might deem worthy.
This educational industrial policy was extended in 1890 to require states with land-grant colleges to either admit African Americans on an equal basis with other students or provide separate institutions to serve them. This spurred the creation of many of what are now known as Historically Black Colleges and Universities (HBCUs) in the Jim Crow South.
Governmental funding of private university education has obviously exploded since the New Deal. Private universities can now receive direct grants and research contracts from federal entities, as well as funds from Pell Grants, federally subsidized student loan program, the work-study program, and a plethora of others. They receive tens of billions of dollars each year, directly or indirectly, from federal sources.
These entities receive other valuable tax benefits. Unlike for-profit corporations, they do not pay net income tax on their operations. They can receive charitable gifts from wealthy benefactors who thereby avoid paying income or estate taxes on those assets. Students who receive university-funded scholarships or fellowships are not taxed on that money, and the children of employees of higher-ed entities are granted tuition discounts.
Most important as it pertains to the OBBBA, universities and colleges do not pay much income tax on their investment earnings. The 2017 tax-cut bill established a miniscule 1.4 percent tax on endowment profits for the wealthiest private colleges and universities, far below the 21 percent corporate income tax.
Nineteenth-century private institutions needed their tax exemptions to sustain their operations. Today’s educational behemoths do not. They are now in the same position as any recipient of a federal entitlement or payment.
This means they should not be treated any differently than an individual receiving food stamps or than a nonprofit hospital that gets Medicare or Medicaid payments. Yes, those recipients have become dependent on those payments, and their reduction or elimination will cause discomfort or distress. But arguing that they should never be cut effectively endorses the logic of creeping socialism. In that view, the public ought to underwrite and direct every important feature of modern economic life.
One might wish that the government expansion of the past century had never happened, but it did. And it did for a very good reason: Most Americans wanted it to. They knew that they were trading some of their liberty for “the soup kitchen of the welfare state,” and they did so willingly and enthusiastically.
Public opinion on this basic question has not changed in recent decades, as is evident in the ongoing difficulty in cutting spending at any level of government. Even conservative states such as Alaska and Kansas have preferred generous funding for education, safety net programs, law enforcement, and other social programs to significant tax cuts.
Our role as conservatives today ought not to be to pine for the past idyll of a Tocquevillian world that’s mostly privately directed. Our task is to defeat the socialist morality that still underpins much of the left. That means we must become the definers of the limit and generosity of modern government.
That can be done only on a moral level that distinguishes between those who deserve public aid or assistance and those who do not. Conservatives have embraced this model when it comes to welfare cash grants and school choice. They must extend this moral vision to the vast web of tax preferences and public payments that form the bulk of government spending.
It’s clear that taxing wealthy university endowments at rates up to the same rate paid by private corporations meets this test. Harvard will survive if it pays higher rates of tax on its private equity investments and its other market investments, just as any other investor will survive if its marginal tax rate is raised. It will have to cut staff, reduce programs, or otherwise be discomfited, but it will still be generously funded by a plethora of sources.
If raising the tax rate on university investments is wrong as a matter of principle, then so, too is cutting the direct subsidies these institutions receive. Most conservatives are delighted with the Trump administration’s proposed changes to the obscene overhead rates that research universities charge the government on grants and contracts. They should be equally delighted with the tax hikes that treat this one form of market activity differently from others.
That principle — eliminating special provisions in the tax code that favor one industry over another — has long been a goal of supply-siders and free-marketeers. The lower tax rate paid by universities and colleges is a tax preference just like special credits and deductions, and it should be opposed on principle for that very reason.
It would be unfair to extend this principle to institutions such as Hillsdale College, which have refused to take any government funds — including Pell Grants and student loans. Those institutions still follow the early 19th-century model of sturdy independence and need the one traditional subsidy that was extended back then. They should have been exempted from the OBBBA’s provisions, thereby providing an example to others who fear what could happen to them when someone like President Trump occupies the White House.
In that way, increasing the tax on endowment earnings could nudge some institutions toward the Tocquevillian world many conservatives desire.
We cannot choose the times we live in; we can only try to improve the world we inherit. Large, rich universities receive huge government subsidies directly and indirectly through their tax preferences, and they use that money to expand staff and push progressive programs and ideas rather than fulfill the charitable purposes for which they received the tax preferences in the first place. Taxing their earnings on the same basis that similar, private employers are taxed would force them to become more efficient and push them to return to their original charitable missions. Those are conservative outcomes that should be backed by prudent conservatives everywhere.