Institutions of civil society should not become the newest source of revenue for a Congress unwilling to confront its spending problem.
Institutions of civil society should not become the newest source of revenue for a Congress unwilling to confront its spending problem.
O ften, the arcane miscellanea of tax policy hold little interest for anyone besides accountants, policy wonks, or lobbyists — and even then, only between 9 a.m. and 5 p.m. Other times, however, tweaks to obscure tax rates implicate the most fundamental things about the American polity. Into the latter category falls a recent proposal from the House of Representatives, passed in the One Big Beautiful Bill Act, to extract more tax revenue from foundations and university endowments.
Tax increases rarely appear in Republican Party platforms. However, when political exigencies bear down on politicians, betrayals of principle often prove far more convenient than philosophically consistent — and politically hazardous — alternatives, such as spending cuts. Such is the GOP’s conundrum: To maneuver through the procedural maze of the reconciliation process, lawmakers must balance the cost of extending the bulk of the 2017 Trump tax cuts. Either some taxes must be raised or spending slashed. Chopping away at federal disbursements in earnest would hazard a revolt from the big-spending factions that account for much of the GOP’s vanishingly slim majority.
Hence the proposed rate increases for foundations and universities. Besides having quite a lot of money (which always invites taxation), many of the largest foundations and universities have pursued decidedly progressive programming. To culturally aggrieved Republicans, the chance to consolidate the greatest legislative victory of President Trump’s first term at the expense primarily of the opposition seems irresistible.
To say that the House tax proposal would rob from Democratic cultural strongholds to give to Republican legislative priorities is not quite right. To claim as much obscures the nature of the House’s tax increases. More accurately, the GOP has proposed to rob from civil society to give to a bloated federal government. All lawmakers — indeed, anyone with an eighth-grade grasp of mathematics — know that a government of 13-figure annual deficits has a spending problem, not a revenue problem. Congress has countless programs to end or reform to offset tax-cut perpetuation. However, bilking institutions disfavored by the ruling majority requires but a fraction of the courage or political capital needed for genuine fiscal reform.
Some, such as John Fund and David M. Simon recently in National Review, have advocated ending nonprofits’ tax exemptions altogether, arguing for equal treatment between individuals and institutions. This proposal has merit, but effecting it would require not just subtle edits to the tax code but a wholesale reworking of the privileges and duties of not-for-profit institutions. Such an effort should be accompanied by large reductions in individual and corporate rates, leaving citizens with more income with which to fund the institutions of their choice (rate reductions which themselves may be feasible only alongside large spending cuts).
Before hazarding so dramatic a reform as exiling an entire class of institution from the tax code, however, Congress should begin by cutting every grant and loan program made available to universities and other nonprofit institutions. More than 100,000 American nonprofits — a third or so of those that submit a Form 990 — take grants from Washington, D.C., with their annual tab coming to $303 billion. Universities every year reap tens of billions in federal research assistance and hundreds of billions in federal student financial aid; Hillsdale College’s shunning of federal funds is the proverbial exception that proves the virtual universality of the rule.
Eliminating tax exemptions before outright federal grants would herd civil society further toward the trough of public subsidization; and doing that should remain as anathema to the GOP as tax increases. Of the proposal to tax university endowments, Hillsdale president Larry Arnn wrote, “This tax turns the incentives backward; it rewards dependence and punishes self-reliance. It encourages institutions to seek the shelter of government aid, where subsidies can offset tax burdens. Those who work to remain free — who choose to rely upon private support rather than public funds — are left to bear the weight.”
Besides providing fiscal offsets, eliminating federal grant programs would cut the marionette strings by which Washington now controls private decision-making. When Connecticut in 1818 withdrew public support from its churches, Lyman Beecher saw only darkness and odium. Soon, however, he understood better. It was, he wrote after the fact, “the best thing that ever happened to the State of Connecticut. It cut the churches loose from dependence on state support. It threw them wholly on their own resources and on God.”
American civil society has been atrophying for more than a half century. Such revolutions in culture resist monocausal explanations. Yet, one primary cause is the dogged incursions of the federal government into the territory of civil society. As the state does more, the citizen does less.
Robust civil society once defined the shape and content of the American dream. As Alexis de Tocqueville observed journeying across the U.S. in the 1830s, “The most democratic country on the face of the earth is that in which men have in our time carried to the highest perfection the art of pursuing in common the object of their common desires, and have applied this new science to the greatest number of purposes.”
Besides civil society’s importance to a healthy politics and society, the habits of voluntary association became etched in the American character — differentiating the people of the New World from the people of the Old. Taking the example of alcohol prohibition, Tocqueville wrote: “In the United States that 100,000 men had bound themselves publicly to abstain from spirituous liquors”; but, “If these 100,000 men had lived in France, each of them would singly have memorialized the government to watch the public-houses all over the kingdom.” When civil society is overrun, the citizenry no longer attempts to do things for itself — there is no need. A people cannot be free and self-sufficient and individualistic and also dependent upon the alms of an overbearing state.
Disallowing institutions to keep more of their own privately raised money — particularly when doing so disadvantages one party’s political foes — seems far less advisable than putting a stop to direct grants and loans. In modern America, taxes are too unequal, too complex, and generally too high; the federal government annually gives out market- and civil-society-distorting subsidies at a rate that would shame Oprah’s most spendthrift producer. Institutions of civil society should not become the newest source of revenue for a Congress unwilling to confront its spending problem.