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Willie Sutton and Greg Mankiw

Posted By Russ Roberts On May 20, 2008 @ 10:24 am In Education,Politics | Comments Disabled

The Boston Globe reports [1] (HT: Greg Mankiw [2]) that politicians in Massachusetts have proposed a 2.5% tax on university endowments that exceed $1 billion. The argument:

"When is a nonprofit not a nonprofit because of the wealth they are
acquiring?" said Representative Paul Kujawski, a Democrat from Webster
and chief backer of the legislation.

"It’s mind boggling that one
entity not paying taxes has $34 billion. How do you justify that?" said
Kujawski, who serves on the influential House Ways and Means Committee.
"When people can’t afford to live. How do you justify not taxing them?"

There are two theories of economics to explain what government does. The first is the market failure argument–government exists to correct the failings of the market where "market" means the things that people choose for themselves. Examples include providing public goods, correcting for externalities, solving problems of imperfect information, and lately, making the distribution of income more just or equal.

Representative Kurajawski is claiming that inequality justifies taxing Harvard and using the funds to help poor people.

Then there is another theory of government. The fancy name is "public choice theory." But let’s call it by a simpler name–the Willie Sutton theory. When asked why he robbed banks, Sutton replied because that’s where the money is. In the Willie Sutton theory, the market imperfection arguments provide cover for the essential task of government in the eyes of politicians–taking money from A to spend on B.

The Globe story actually opens with the Willie Sutton explanation:

Massachusetts lawmakers desperate for additional revenue are eyeing the
endowments of deep-pocketed private colleges to bolster the state’s
coffers by more than $1 billion a year, asserting that the schools’
rising fortunes undercut their nonprofit status.

If you think most of what government does is to correct imperfection of private choice, then you tend to favor larger government. Those of us who favor smaller government tend to think of Milton Friedman’s observation that you spend your own money on yourself pretty carefully. But you’re pretty careless when you spend other people’s money on other people. So even if politicians are motivated to correct market imperfections, they will tend to do it poorly. But in the Willie Sutton theory, politicians are really spending other people’s money to benefit themselves–using that money to buy love, attention, campaign contributions and votes.

Of course, there is overlap. Sometimes, politicians buy love and votes by correcting market failures. Or by at least trying to correct market failures. But too often, they’re just using the language of market failure [3] to act like Willie Sutton. If you worry, as I do, about this latter tendency, the road to a better life is to limit the power of government by changing the constraints that politicians face, rather than trying to elect wiser, kinder people. The biggest determinant of the quality of public policy [4] is the quality of the constraints on politicians not the quality of the politicians.

And even if you accept the market failure argument, you have to worry about how legislation will act in practice rather than in theory. People respond to legislation. They don’t just sit still. In particular, people work pretty hard to avoid taxes. Here is Greg Mankiw’s suggestion for what Harvard might do to avoid the endowment tax:

1. Instead of expanding the university into Alston, Harvard could
create a second campus in another state. Call it Harvard South. (Put it
in a better climate than Boston, and I would be one of the first
faculty to volunteer for the move.)

2. Transfer much of the endowment to Harvard South. Support Harvard North by slowly selling off land in Massachusetts.

3.
Eventually, make Harvard South the main campus, and Harvard North the
satellite. If Massachusetts state lawmakers remain hostile, close
Harvard North down entirely.

Greg, I want to nominate Fairfax, Virginia for the location of Harvard South. But feel free not to wait for the legislature to provoke you. Come South on your own—we have a much better climate than Boston. I’ll talk to my colleagues and see what we can do.

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URLs in this post:

[1] Boston Globe reports: http://www.boston.com/news/local/articles/2008/05/08/lawmakers_target_1b_endowments/

[2] Greg Mankiw: http://gregmankiw.blogspot.com/2008/05/time-for-harvard-to-move.html

[3] just using the language of market failure: http://www.econtalk.org/archives/2007/01/bruce_yandle_on.html

[4] The biggest determinant of the quality of public policy: http://www.econtalk.org/archives/2007/02/bruce_bueno_de.html

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