In the latest chapter of the President Donald Trump versus Harvard, Trump has doubled down on his threats to revoke Harvard’s tax-exempt status. As I previously reported on Forbes.com, the tax-exempt status for a university at the scale of Harvard is worth billions of dollars over the span of Trump’s four-year term. However, a natural question arises over whether Trump can even take these actions against Harvard.
How Does Harvard Save Money As a Tax-Exempt Organization?
There are three direct ways a university with a tax-exempt status can save significant money:
- The university does not have to pay taxes on the growth of its endowment.
- University donors receive a tax deduction when donating to their school.
- The university does not have to pay state and local taxes.
These three tax advantages have important implications for Harvard. For instance, the New York Times reports that this endowment is around $53.2 billion. If it grows approximately 5% per year, it generates $2.66 billion in income that is not subject to tax since Harvard is tax-exempt. Harvard uses its endowment to generate those earnings each year. Every dollar that Harvard would now have to pay in taxes on those earnings is a dollar that it is not allocating to scholarships, salaries for employees, and funds for maintaining buildings. Furthermore, Harvard relies on increasing its endowment size each year. If donors no longer receive tax deductions for giving to Harvard, they may scale back these donations. Lastly, if Harvard were to lose its tax-exempt status, it would be subject to millions of dollars in taxes owed to the town of Cambridge and the state of Massachusetts. Combined, Slate estimates that Harvard saves hundreds of millions per year and that it could lose even more in future funds if donors become reluctant to contribute to the university in future years.
Potentially more problematic are the indirect ways losing tax-exempt status can harm the university. Schools often thrive off of their reputation formally through accreditation and informally through people’s beliefs that the university is a high-quality educational institution. As an Ivy League school, Harvard is regarded worldwide as a premier university. Losing its tax-exempt status will likely not change people’s minds that it is a good school. However, it could be a factor that removes it from the very top echelon in people’s minds, which would have an unmeasurable impact.
Can Trump Legally Revoke A Tax-Exempt Status?
Trump’s threats to revoke the tax-exempt status come from his revoking $2.2 billion in federal grants. However, as reported by The Guardian, Trump does not have the authority to revoke a tax-exempt status from any organization. Instead, this power lies with the IRS. Furthermore, it is against the law for the president to direct the IRS to conduct an investigation or audit, including whether to revoke a charitable organization’s tax-exempt status.
The Daily Wire reports that any investigation into Harvard will be conducted independently. This could mean it would be legal since Trump would not directly instruct or conduct the investigation. However, it is important to remember how the IRS is put together. The current IRS commissioner is Michael Faulkender, whom Trump appointed. His appointment is part of a revolving door of commissioners and interim commissioners that have been appointed since his inauguration just a little over 100 days ago. If Faulkender is looking to avoid the fate of his predecessors — three of whom departed in a three-month span, as Politico reported — it could be necessary for him to internalize Trump’s calls to action against Harvard.
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