Manhattan Institute

Tax Reform’s Warning Shot for Universities

The GOP puts liberal academia on notice.

Support for, and reaction to, the tax-reform bill has divided almost entirely along partisan lines, with one notable exception: many on the right and the liberal left alike have denounced a new 1.4 percent tax on net investment income for the largest university endowments—those whose value exceeds $500,000 per student. Prominent conservatives such as George Will, Gregory Mankiw, and Michael Strain have characterized the tax—which will affect about 30 universities, including such major research institutions as Harvard, Stanford, and Princeton—as motivated by anti-intellectualism and partisanship, aimed at liberal academia. Will, who has served as a Princeton trustee, described the tax as an “astonishingly shortsighted” threat to the tradition of “great research universities (that) have enabled the liberal arts to flourish, the sciences to advance and innovation to propel economic betterment.”

Yet it’s worth keeping in mind that the federal government will continue to be the nation’s primary source of university research money. The government not only funds research through direct grants but also supports the facilities and staff of universities through “overhead” payments, which amount to many billions of dollars. The National Institutes of Health, for instance, distributed some $5.7 billion in overhead payments in 2013 alone, in addition to tens of billions of dollars in direct research grants. That same year, Stanford got 31 cents in overhead on top of every research grant dollar it received. Each university negotiates its own overhead rates, and complex formulas dictate what portion of the negotiated rate is actually disbursed along with direct research funding. According to federal data obtained by Nature, Johns Hopkins has negotiated a 62 percent overhead rate. By comparison, the European Union sets a flat overhead rate of 25 percent for all institutions receiving research grants.

The question that universities should ask themselves is how they have lost, at least in part, the longstanding bipartisan support that made the federal government the major financial backer of research, as well as a generous funder of university overhead costs. The original champion of federal research, development, and overhead grants for research institutions was the farsighted Vannevar Bush, the first presidential science advisor, who served Franklin D. Roosevelt and Harry Truman. It was under Bush that the Office of Scientific Research and Development first negotiated a research overhead rate, with MIT. Today, the U.S. leads the world in government research and development spending; some $40 billion is distributed to nearly 900 colleges and universities, accounting for 60 percent of these institutions’ research funding. (Twenty percent of the total went to just ten universities, including Stanford, Columbia, and Johns Hopkins). The results—from the mapping of the human genome to the creation of the Internet—have transformed the world.

Elite research universities also number among those schools widely perceived to be hothouses of political correctness. The last few years, in particular, have seen a surge in demands for safe spaces on campuses, with corollary efforts to silence alternative voices. Following a year of shutdowns and shout-downs, campus intolerance has done political damage to elite academia’s image. With identity politics now at the core of liberal arts curricula, many observers on the right have questioned why the taxpayer should support an institution that appears dedicated to destroying traditional society. Politicians have taken note: as Harvard economist Gregory Mankiw noted in the New York Times, Republican Senator John Kennedy from Louisiana was quick to characterize Harvard academics as “liberal weenies.” In September, Education secretary Betsy DeVos’s speech at Harvard was interrupted by protestors calling her a white supremacist, though the dean of the Kennedy School did caution the audience that hecklers would be ejected. But universities should not be surprised, when they demonstrate hostility to free inquiry, that elected officials may be hostile to them—and  think twice about granting them the public subsidies that have been part of their lifeblood.

Big universities have taken a financial hit that will do them and the country no good. It’s unlikely that the federal government will do better things with the money it realizes from the endowment excise tax than the universities would have done. But universities have even more to lose in the future if they continue to alienate a large part of the electorate—and the politicians who represent it.

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