Tax bill a disconcerting raid on university endowments

Such is the federal government’s sprawl, and its power to establish new governing precedents, mere Washington twitches can jeopardize venerable principles and institutions. This is illustrated by a seemingly small but actually momentous provision of the Republicans’ tax bill — a 1.4 percent excise tax on the endowment earnings of about 70 colleges and universities with the largest per student endowments. To raise less than $3 billion in a decade — less than 0.005 percent of projected federal spending of $53 trillion — Republicans would blur important distinctions and abandon their defining mission.

Private foundations, which are generally run by small coteries, pay a “supervisory tax” on investment income to defray the cost of IRS oversight to guarantee that their resources are used for charitable purposes. In 1984, however, Congress created a new entity, an “operating foundation.” Such organizations — e.g., often museums or libraries — are exempt from the tax on investment earnings because they apply their assets directly to their charitable activities rather than making grants to other organizations, as do foundations that therefore must pay the supervisory tax.

Most university endowments are compounds of thousands of individual funds that often are restricted to particular uses, all of which further the institutions’ educational purposes. Hence these endowments are akin to the untaxed “operating foundations.” Yet the Republicans would arbitrarily make university endowments uniquely subject to a tax not applied to similar entities.

Are Republicans aware, for example, that Princeton’s endowment earnings fund more than half its annual budget, and will support expansion of the student body? It also enables “need-blind” admissions: More than 60 percent of undergraduates receive financial assistance; those from families with incomes below $65,000 pay no tuition, room or board; those from families with incomes below $160,000 pay no tuition. No loans are required. Ph.D. candidates receive tuition and a stipend for living costs.

The world’s great research universities foster upward mobility that fulfills democratic aspirations and combats stagnation of elites. It is shortsighted to jeopardize this.

Great universities are great because philanthropic generations have borne the cost of sustaining private institutions that seed the nation with excellence.

Its appetite whetted by 1.4 percent, the political class will not stop there. Once the understanding that until now has protected endowments is shredded, there will be no limiting principle to constrain governments — those of the states, too — in their unsleeping search for revenues to expand their power.

The public sector’s sprawl threatens to enfeeble the private institutions of civil society that mediate between the individual and the state and that leaven society with energy and creativity that government cannot supply.

This raid against little platoons of independent excellence would be unsurprising were it proposed by progressives, who are ever eager to extend government’s reach and to break private institutions to the state’s saddle. Coming from Republicans, it is acutely discouraging.

Disclosure: Will is a former Princeton trustee.