Milton Friedman, Briefly, on Why Universities Should Be Taxed
A WSJ reader, having read an early commentary supporting the taxation of universities, wrote this:
Which Nonprofits are We Mad at Now?
Richard Vedder’s proposal to tax tax-exempt organizations is wrong-headed (“Harvard Should Pay Its Fair Share,” op-ed, Dec. 23). According to him, Harvard should be taxed on its investment income, receipts for tuition and fees and capital gains. With all due respect to Milton Friedman, this would upend a century of nonprofit taxation policy. And would this apply to all nonprofits or just the ones we’re mad at this week? While I agree that former Harvard President Claudine Gay’s words and actions have been deplorable and have written Harvard College out of my will, I don’t think his solution is appropriate. There are enough complexities in the tax code as it is.
Gordon Lunn
I must have missed the commentary to which the reader responded so I clicked on the link to see exactly what the fuss was about. The commentary’s author is no cultural warrior, he’s Richard Vedder an economist and historian of more than modest repute. I don’t know anything about Mr. Lunn but he sounds like one of us. An egghead who thinks about tax policy and administrability. Here, though, is how Dr. Vedder quotes Milton Friedman on taxing universities:
When I was researching a book in 2003, I emailed [Milton Friedman] (then 91) and asked if he still believed that [universities are appropriate tax exempt because of their positive externalities].
He replied: “I have not changed my view that higher education has some positive externality, but I have become much more aware that it also has negative externalities. I am much more dubious than I was . . . that there is any justification at all for government subsidy of higher education. The spread of PC” —political correctness— “would seem to be a very strong negative externality, and certainly the 1960s student demonstrations were negative externalities. . . . A full analysis along those lines might lead you to conclude that higher education should be taxed to offset its negative externalities.”
The past 20 years have seen negative externalities multiply: discriminatory hiring, promotion and contracting; the exclusion of conservative scholars; the suppression of speech. The case for taxing universities is stronger than ever.
A small move in that direction occurred in 2017, when Congress enacted an endowment tax. But it is small and applies only to some 35 wealthy private schools. House Ways and Means Chairman Jason Smith wants to increase that levy, but the effect would still be limited, since it would exclude public schools with small endowments.
A far better approach would be for state governments to reduce subsidies and introduce some taxation—local levies on property or state sales taxes for tuition and fees. The feds could help by getting out of the student-loan business and taxing schools’ investment income. Why should ordinary citizens pay a 23.8% tax on capital gains while Harvard, with its $50 billion endowment, pays nothing?
Economists always pretends to be objective when they really aren’t. It helps to throw some charts and numbers in just to maintain the air of certainty. But its just an illusion. Because the externalities the author labels as “negative,” might very well be considered “positive” if described objectively and without prejudice. “discriminatory hiring” et cetera might be described as “efforts to increase diversity and understanding.” Of course, we should not subsidize that which generates negative externalities. But who is to say what are positive and negative externalities and how they are described? We should revoke all the exemptions of all the universities — setting aside the complexity for a minute — who cost us more than they produce. But first we gotta define “costs” and “benefits” don’t we?
darryll k. jones