Universities: Should They Be Taxed or Subsidized?

As I have mentioned in a couple of books and numerous media epistles, late in life the great economist Milton Friedman told me he wasn’t sure whether universities should be subsidized or taxed by governments. This was a change in position: In his Capitalism and Freedom (1962), in which he generally argued for a very small and unintrusive government that gave markets free rein to work their marvelous magic in advancing human welfare, Friedman conceded that there was a strong case for publicly subsidizing universities.

There are, I think, two potentially legitimate arguments favoring public higher education subsidies. First, the traditional argument advanced is that higher education has “positive externalities”—favorable spillover effects. If Susie with only a high school education is working alongside Johnny with a college degree, some of the wisdom, integrity, and skills Johnny learned in college might rub off on Susie—virtuous on-the-job training that colleges made possible.

A second argument is that by providing more affordable access to higher learning, government subsidies for colleges promote the American Dream that Americans should have real opportunities to improve their station in life, gaining human capital vital to advancement in an increasingly educated and skilled society. By making universities for everyone, we weaken the notion that our nation is or should be run by an aristocracy of educated persons raised in a Yale Skull and Bones– or Harvard Porcellian Club–style environment, one in which higher education among a small proportion of elites differentiated them from what Leona Helmsley, pre-prison, memorably called “the little people.”

[Related: “Student Loans Cost Taxpayers $645 Billion More Than We Were Told”]

The problem is, there is little solid evidence that these arguments are valid. To be sure, college graduates on average are more productive than non-graduates, but there are real doubts as to how much of that has much to do with learning during the college years (see, for example, Bryan Caplan’s The Case Against Education), and to what extent college teaches honor, virtue, honesty, or even critical reasoning (see, for example, Richard Arum’s and Josipa Roksa’s Academically Adrift).

As for college being an instrument for intergenerational income mobility, get real. The inconvenient truth is that over the past half century of rapid growth in college enrollments and graduates, income equality as conventionally measured has significantly lessened. As I have said ad nauseum, many governmental efforts to help poor individuals attend universities have backfired, with the big beneficiaries being the universities themselves. They collected sky-high tuition fees that financed hordes of non-academic (often anti-academic) administrators, armies of woke Star Chamber aficionados masquerading as virtuous “diversity, equity, and inclusion” apparatchiks, professors with lower teaching loads so they can write papers that no one reads, and seven-digit football coaches.

A strong case can be made that universities are working to sever the bonds that make us truly American, such as when they tell lies about the role of slavery in the nation’s founding. They are weakening patriotism, venerating and promoting riots and discord not only on campus but in the broader community. Campuses have moved away from being bastions of free expression and open inquiry, sometimes becoming places paralyzed by fear of saying the wrong thing or expressing thoughts outside the woke mainstream.

Colleges have become wards of the state. A modest, but telling, sign of this came recently when eight university presidents along with American Council on Education President Ted Mitchell (arguably primus inter pares in the collegiate Washington rent-seeking community) met with Vice President Kamala Harris to lament the Supreme Court’s ruling on abortion (Dobbs v. Jackson) and, no doubt, plan a strategy to try to reverse the policy implications. Ted Mitchell babbled about how “the clock is ticking,” implying inaction will lead to some to sort of academic Armageddon.

[Related: “Moving Forward: Is Legacy Higher Ed a Lost Cause?”]

The president of Oberlin College (a school that, in my judgment, has seen better days), Carmen Twillie Ambar, is quoted by Inside Higher Education as saying, “Young men and women are facing mounting challenges to secure a quality academic experience…The Dobbs decision dramatically worsens this reality.” My view: this is hogwash. It implies that a substantial number of college students consider the nearby presence of abortion facilities to be of preeminent importance in making postsecondary educational decisions. On what empirical basis can President Ambar make such a dramatic claim? Or is she just sucking up to the Biden administration, hoping it will resume dropping dollars out of airplanes (or the equivalent) on college campuses?

Colleges respond instantly to one thing: money, both increases and decreases. Do you want to stop the negative externalities that I think colleges are emitting by sowing disunity, disparaging our national identity and exceptionalism, and even diminishing their traditional success in producing good learning outcomes? Cut off (or at least reduce) inflows of aid to both colleges and students, and perhaps do as Friedman suggests: begin taxing colleges. At the state and local level, that might mean forcing colleges to pay property taxes or sales taxes on admission to sporting events (or even tuition fees); at the federal level it might mean subjecting colleges to taxes on their income, defined by accounting standards used by private free enterprise. It might mean limiting deductibility of charitable deductions to colleges for income tax purposes. It might mean colleges must have “skin in the game” regarding excessive student default rates on federal student loans.

Colleges, beware: you are utterly dependent on public support. Or, to quote a writer no doubt unknown to many recent college graduates, John Donne, writing before Harvard College even existed: “No man is an Island, entire of itself; every man is a piece of the Continent … for whom the bell tolls; it tolls for thee.”

Image: mnirat, Adobe Stock


  • Richard Vedder

    Richard Vedder is Distinguished Professor of Economics Emeritus at Ohio University, a Senior Fellow at the Independent Institute, and a board member of the National Association of Scholars.

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5 thoughts on “Universities: Should They Be Taxed or Subsidized?

  1. First step: Student loans should be subject to the same laws and limitations as auto loans or mortgages. This may result in fewer campus capital projects such as shiny new buildings to house grievance studies departments. There should be no government involvement. Colleges and universities need to stand behind their product.

  2. Its not IF they should be taxed as much as if a coming MAGA majority WILL tax higher ed.

    MAGA holds higher ed in open contempt. Higher ed faces the 2026 demographic cliff as well.

    A MAGA POTUS & Congress likely will say “sucks to be you.”

  3. The likes of Richard Vedder and the National Association of Scholars have utterly failed in their quest to change American higher education. This latest idea to tax the universities is a pathetic attempt to come up with an idea. Sure, in effect, put a tax on tuition, on donations. Tax that new clinic. Tax that Air Force grant. The students, the parents, the legislatures will all love this.

    1. In theory, the taxes paid by students & parents would be offset by a reduction in other taxes they currently pay.

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