Today, Harvard. Tomorrow ... ?

The Senate Finance Committee's interest in how Harvard spends its billions has troubling implications that extend to everyone in the nonprofit sector, warns Bernard Fryshman.


June 19, 2008

It may seem strange for me, an ordinary mortal, to be defending Harvard’s $34 billion endowment. But we all know the way government works: today it’s Harvard, tomorrow it’s my $34 billion or maybe my 1993 Lexus. Because our government, acting through the Senate Finance Committee, has started to reach into private pockets, where it does not belong.

A college endowment belongs to the college and the fact that it may be extremely large is no one’s business. Unfortunately, there are people who feel otherwise. There is a mindset that believes that the granting of a tax exemption entitles the government to control how the resources of the nonprofit sector are to be spent. This raises questions about the compact made with the American people when the income tax was first imposed. There were understandings at the time, one of which was that nonprofit institutions carrying out charitable functions would be exempted from the income tax.

It was never envisioned that the tax exemption would be used as a club to beat such organizations into submission to new policy directives. And if we are going to change any part of the relationship, then we must reexamine all aspects of the compact, comprehensively.

Americans do not believe that everything belongs to the government. Quite the contrary, we believe the government is an instrument of our will and not the reverse. That being the case, it is perfectly in order to ask why the fruits of one’s labor should belong, even in part, to the government. In fact, one can propose that there is an element of seizure associated with the IRS taking a portion of a person’s salary check, before the remainder ever reaches the worker.

We can take this unrestrained examination of assumptions a step further: if indeed Americans are to be taxed to pay for expenditures for the common good, why not tax wealth instead of work? In point of fact, the Senate Finance Committee eyeing Harvard’s $34 billion is conceptually no different from its looking at everybody else’s bank account.

Everyone has benefited to one degree or another from a tax exemption. The tax code has been structured in a way that uses tax exemptions to implement social policy. If some billionaire survived in his early years on welfare, or was able to save up for his initial investment because he received a tax exemption for his children, could we not envision a grasping political jurisdiction trying to make the case that it should be a partner in the good years as well? Government seeking to work its will, supported by a society almost overwhelmed by all those needing help, can make a powerful case for itself, and with sufficient public support reach into the private fortunes of individual Americans. It is certainly not inconceivable that we will in our lifetime hear people piously mouthing the question “‘if we tax work, why not tax wealth?”’

At this moment, the members of the Senate Finance Committee are not directly threatening to tax Harvard’s endowment but simply to pressure it into spending some of it. This is therefore the time we, and Harvard, should tell the honorable members of the committee that as long as Harvard is fulfilling its responsibilities as a nonprofit entity, the question of how -- and whether -- it spends its money is none of their business.

If we do allow it to become the business of Senate Finance, we can expect people in Washington to ask, “why just tuition?”, “Why not ask Harvard to spend its money for a whole variety of worthy purposes?” “Why is reducing tuition for the children of extremely well-to-do families a public good?” Are we prepared for widespread discussion as to which public purposes Harvard’s endowment money should go?

The “all money belongs to government” thesis has a powerful corollary: a tax exemption is a tax expenditure. And this has an outcome that currently affects all nonprofit organizations -- the use of the IRS form 990 to promote transparency. Only we aren’t talking about transparency: the correct word is exposure, including all the embarrassing synonyms for this word in the desk thesaurus.

The 990 form at one time was intended to help the IRS carry out its enforcement responsibilities. No one ever objected to revealing all to the IRS. Later, the 990 became public, but this was at a time before the Internet. Getting access to someone’s 990 form was not particularly easy and people with excess time on their hands looked for other areas of amusement.

No longer. Detailed and sometimes embarrassing information about individuals whose only transgression is to support an unpopular cause can be front and center on computer screens all across the world.

(Is it anyone’s business that I am an officer of the Greater National Arachnid Welfare Society (GNAWS)? My employer should not be able to pressure me, no matter how subtly, to leave, nor should anyone know how much GNAWS has to pay to hire an effective executive director.)

The very publication of the form 990 is troubling. America is not a nation where compliance with the law depends on people monitoring each other. The IRS should not be seeking to improve accountability by encouraging the public to inspect 990s and to report problems to the IRS.

Why should every nonprofit be expected to describe its mission to the public? We at GNAWS are perfectly happy to describe our mission to people prepared to support our noble work. But why do we owe a mission statement to anyone else, other than the IRS?

And why should non profits have to describe “their three most significant activities,” even to the IRS? Is the IRS in a position to judge what is and what is not significant? Certainly the IRS can expect that an organization fulfill its original mission. But why the additional intrusion? And again why the publication of what could be quite controversial and embarrassing to everyone associated with a not-for-profit organization? Why the questions regarding governance? Is there a new orthodoxy to which all nonprofits will have to subscribe?

It is important for America as a nation that non profits that advocate unpopular views, also survive. People who volunteer their time as directors, governors, officers and trustees to such groups, should not be hurt as a result of their service. So why all the questions regarding these categories?

Why must tax-exempt groups report certain employees’ compensation on their 990 forms even though the IRS has this information from previous years’ 1040 forms?

What kind of judgment can the public make about the compensation of key employees without appropriate context? Should we expect nonprofits to justify occupying expensive quarters? Or hiring a first rate public relations staff?

From the point of view of those who view tax exemption as a tax expenditure, there is really no limit to how far government can intrude. The rest of us must speak up, and must resist, respectfully but firmly. And we must carefully define the boundaries of the interaction between government and the thoroughly private, and independent, nonprofit sector. Or we may ultimately all receive mail from Senate Finance….


Bernard Fryshman is an accreditor and a professor of physics.


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