Section 4968, recently added to the Internal Revenue Code,imposes a tax on the investment incomes of some college and university endowments. Critics of Section 4968 disparage this new tax as selectively targeting what are widely perceived as wealthy, politically liberal institutions such as Harvard, Yale, Princeton, M.I.T. and Stanford.

There is a strong tax policy argument for taxing the net investment incomes of all charitable endowments including donor-advised funds, community foundations, all educational endowments, and foundations supporting hospitals, museums and other eleemosynary institutions. Like corporations and private foundations that currently pay revenue-generating income taxes,charitable endowments use public services and have capacity to pay tax. Such traditional tax policy criteria as equity and economic neutrality counsel that similar entities and persons should be taxed similarly. Just as corporations and private foundations pay income taxes to support federally-provided social overhead, by analogy, all charitable endowments, as similar entities, should pay similar taxes as well.

Section 4968 falls far short of the goal of a comprehensive, revenue-generating tax on the universe of charitable endowments. Section 4968 is poorly designed to boot. Most anomalously, Section 4968 taxes some relatively small educational endowments while leaving other, much larger endowments untaxed.

Important voices (most prominently, Senate majority leader Mitch McConnell) defend Section 4968 as a regulation of university tuition policies. However, this defense of Section 4968 as a regulatory tax fails since Section 4968 does not regulate tuition or anything else. When it crafted Section 4968, Congress had before it the examples of the Code’s many taxes governing private foundations and other eleemosynary institutions. Had Congress sought to impose on college and university endowments a regulatory tax along these lines, it could have emulated these examples in the design of Section 4968. Congress did not.

Section 4968 is best defended in political terms as an incremental step towards the kind of comprehensive tax on all charitable endowments suggested by conventional tax policy criteria. But, standing on its own, Section 4968 falls well short of this goal and is deeply flawed in its design.

Section 4968 does not create a broad-based tax on eleemosynary endowments. It should be the harbinger of one.