Taxes and Duties of the Private University

This piece ran as part of our focus on Harvard's endowment.

Last June, University President Drew G. Faust rose in front of Memorial Hall to give her first address at commencement, the University’s most symbolically significant ceremony of the year. The historian chose in this historical moment not to make an abstract address about the location of Harvard and its students in the world, but instead to present a political case for the tax-exempt status of the endowment. It was, all told, an eloquent and well-argued speech, drawing a clever equivalence between the strength of our ledger books and the munificence of our deeds. But in choosing to dedicate her speech to warding off the specter of taxation, President Faust betrayed the tacit terror with which Harvard meets the prospect of the government meddling in our treasury. Unfortunately, that is a terror we must overcome.

I certainly have a vested interest in Harvard’s continued financial might. The things made possible by the endowment not only fund students directly, but also reinforce a collective belief in the social utility of the academy—a belief which President Faust echoed in her remarks.

Our interests, however, are not the sole material with which we should judge public policy. Ultimately we must extend our horizons beyond their immediate provinces. Strong allegiances to Harvard compel us to believe that the endowment ought to be protected; but stronger allegiances to all Americans, and, more importantly, to the equitability of laws, force us to recognize that it must be taxed.

At the crux of Faust’s speech was the argument that Harvard has already paid—and continues to pay—its social debts in kind, so to speak; that the work the University does in educating young people and contributing to the world’s research constitutes an unquantifiable sum far beyond what we might provide with a tax from the endowment. “If the endowment were smaller, we would have to do less,” she noted, and then connected this “less” to a string of unassailable endeavors: stem cell research, public service schools, the arts, global engagement, and sustainability. The endowment, in other words, serves noble causes, and thus deserves protection from the government’s greedy redistributive hands.

Of course, very much the same argument can be made about most corporations. Private firms do the incontrovertibly important work of mining resources, manufacturing goods, inventing new technologies, and procuring services—social products that are just as crucial to human progress as academic research. A great deal of biochemical research is done today in private firms; Google has done more than perhaps any other organization in the past decade to promote the kingdom of knowledge. What’s more, corporations nowadays often have charitable outreach arms that provide services directly to the community.

And yet nobody ever suggests that these corporations should not be taxed. The reason, of course, is that they are private institutions whose day-to-day operations are accountable only to their shareholders, even when the consequences of those operations are socially beneficial. Our basic political assumptions about the interface between the private and public spheres of interest require these corporations to formally support the work of the common good through the mechanism of taxes. This is a mechanism that has its share of functional problems. But it is the best mechanism we have, and Americans—including most academics—have come to accept corporate taxation as a generally positive policy. One can hardly imagine President Faust petitioning the government to slash Microsoft’s tax rates.

The economist Brad DeLong pointed out last May how, on a public budget, the University of California system expanded from teaching 5,000 undergraduates a year in 1960 to 40,000 a year today. During the same time, Harvard grew from 1,200 to 1,600 a year, despite accumulating billions in private donations. It is hard to argue that those additional funds for Harvard were effective on the margin. Harvard has a vested interest in keeping its student body small, since what it produces is essentially a luxury good in the form of Harvard diplomas. As one commenter on DeLong’s article pointed out, “the rationale for Harvard is not the education of young people. It is to produce a certain class of educated person who will go on to fill a certain role in society.” The University shouldn’t be ashamed of this, but it also ought to admit that, in the end, it is a privately-interested organization which happens to have quite a few socially beneficial consequences.

That’s not to say Harvard should be taxed at standard corporate tax rates and its funds be deposited into the government’s general accounts. One good compromise would tax the endowment at a lenient rate and use the funding exclusively for public higher education. Such a program would redirect a sliver Harvard’s income in a way that would still, in Faust’s words, “enable students and faculty of both today and tomorrow to search for new knowledge.”

You don’t have to be bitter at Harvard or taken in by an elliptical populist desire for eating the rich in order to suggest that the endowment should be taxable. You only need to make an honest assessment of the purpose that taxes play in our society, and realize that sometimes we must submerge our immediate advantages under the title of the common good.

Garrett G.D. Nelson ’09, a Crimson editorial writer, is a social studies and visual and environmental studies concentrator in Cabot House.