Look But Don’t Touch

The IRS should leave universities tax-exempt status alone

Uncle Sam may be knocking at Mass. Hall soon. Last week, the Internal Revenue Service (IRS) announced it would seek financial records from 400 tax-exempt American colleges and universities in a continuing review of their fiscal practices. Clearly, the government remains skeptical about the lack of operational transparency in educational institutions. The 33-page questionnaire—which Harvard may or may not be selected to complete—seeks to uncover universities policies regarding everything from endowment spending to executive compensation. The decision by the IRS to gather this information is not objectionable, as they undoubtedly have the right to such information, although any new regulations developed as a result of the questionnaire might be.

In recent months, Iowa senator Charles E. Grassey has led the charge against tax-exempt American universities, accusing them of using that exemption to stockpile massive amounts of capital instead of putting those resources to good use. This accusation is unwarranted, as universities serve the public good through their research and the community services they provide. Moreover, for schools with endowments smaller than that of Harvard, every donation is crucial to the growth of the institution and any move by the IRS to tax donations to universities would have a devastating effect on the educational landscape of this country. While schools with larger endowments might be able to weather such a change in policy, the inevitable disappearance of smaller schools would result in more limited access to higher education in the United States. The harm that would be caused by the removal of the tax-exemption status of American universities is much greater than the benefit would be.

That said, American universities need to do the good work that justifies their exemption from taxation. All schools should be required by the U.S. government to spend at least five percent of their endowment every year. The complaint from schools in recent years that they don’t have a consistent need to spend that much is unfounded; universities can use leftover money to subsidize textbooks or other outside costs that add to the financial burden on the student.

While the IRS has the right to study the fiscal practices of universities, it would be an injustice to remove the tax-exempt status of these institutions. Instead, they should require that universities earn their tax-exempt statuses by mandating that they spend at least five percent of their endowment every year, resulting in a favorable outcome for all parties.


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