The Liberty, November Issue of 2025
(This interview was conducted on August 25, 2025)

Interviewer: Hanako Cho

 
President Trump threatened to revoke Harvard University from its tax-exempt status. Dr. Laffer explained President Trump’s intention and the current state of university tax affairs.

Cho: What are your thoughts on the turn of events between Harvard University and the Trump administration?

Dr. Laffer: Let me talk my background first. I have worked in academics all my life. I went to Yale for my undergraduate degree. I went to the University of Munich where I got the Maximilian Hans Miller Award as the alumni of the year. Then I went to Stanford, where I got my MBA and Ph.D. Then I went and taught at the University of Chicago, served at the White House, came back to Chicago, and later held the Charles B. Thornton professorship at USC.

I’ve had visiting professorships, lectures at universities. I know universities well. I have been very nicely treated by universities. I got very good grades. And I know all of the players in the universities. The difference between me and the vast bulk of other academics is that I have also worked in both government and private business, not just academia. I didn’t have to spend a summer at McDonald’s. I have a very serious business here that I started. I’ve ran it for years. It has funded me, my operations and all of that. It’s a fairly sizable, impactful business. I have worked in journalism a lot, not specifically as a writer, but for 15 years, writing for the editorial pages of The Wall Street Journal. I was the primary influence in their economics for that period of time.

So, I’ve been heavily involved in academics, business, journalism, and politics. This is the standpoint I’m coming from as I share my thoughts on this topic with you.

An Abused Tax-Exempt Privilege

Dr. Laffer: There are many institutions in the United States that are categorized as 501(c)(3) organizations. This includes universities like Harvard and Yale, but it also includes foundations like the Heritage Foundation, religious organizations, philanthropies, endowments and hospitals among others.

Cho: The institutions categorized as 501(c)(3) organizations get a tax benefit right?

Dr. Laffer: Yes, they have special tax treatments. If you give money to a 501(c)(3), you can deduct that gift fully against your income, but no more than one-third of your income each year.

Let’s say your income is a million dollars a year, then you can deduct $333,333 per year. If you’re in a very high-tax state and you’re in a high-tax bracket, that [tax saving] could be very substantial. Not only do you get to deduct it against your income tax, you get to deduct the full amount of capital gains and you don’t have to pay taxes on those capital gains. It’s called a “step-up basis,” which makes it really attractive.

There are also certain financial circumstances where you can actually make money by giving money away to 501(c)(3)s.

For example, I have the Laffer Foundation. The Laffer Foundation is a 501(c)(3) institute, and I use it for a lot of my projects. Let’s say I gave it $1.5 million personally. I pay some of these people, but I don’t take any money from it all, personally. But I was actually able to make money by giving it away. This is one aspect.

There’s a second aspect of 501(c)(3)s that you should be aware of. The institutions themselves do not pay taxes.

If they have capital gains, if they earn income on their balance sheet, on their assets, they get to keep those returns without having to pay taxes on those returns so all their income is tax-free. They don’t have to pay property taxes or sales tax.

So it’s two ways [of tax savings]. One is that gifts to charitable organizations are tax-exempt, and one is the earnings of those organizations are tax-exempt. Now, as you might imagine, these institutions have grown dramatically in a high-tax world.

The Biggest Loophole in Our Tax System

Dr. Laffer: When I look at the 501(c)(3)s, I see nothing but mistakes being made.

As you know from all of our previous discussions, when we look at taxes, the ideal tax system is the lowest possible tax rate on the broadest possible tax base. One, you provide people with the least incentives to evade, avoid or otherwise not report taxable income. Two, you have the broadest base so you provide people with the least places where they can put their income in order to avoid paying taxes.

That’s the North Star. And that’s what everything should be.

But, because of some items in our Constitution which separates church and state, there is a provision there that religious organizations should not be impeded by the state. And the “state,” in this case, was construed as being taxes. I’m not a lawyer but I believe, by the Constitution, that religious organizations are exempt from taxation.

But all the other organizations that are exempt are not religious. I believe that if you eliminated all religious organizations, all other items should be taxed normally. Right now, a very large amount of money is tax-exempt because they’re universities, because they’re charitable, etc.

A Balance Large Enough to Eliminate the Corporate Tax

Dr. Laffer: Let’s take a look at total contributions which is one of the aspects we discussed earlier. This is 501(c)(3)s who have endowments of $50 million or more. I’ve talked about this with the President. The total contributions including gifts and grants in 2021 were $482 billion. You can see the contributions from federated campaigns, membership dues and fundraising events are all small. But you can see that government grants and all other gift contributions is $450 billion.

Now, you want to take the tax expenditures in 2021. Tax expenditures are the amount you don’t tax that is normally taxed. It’s the tax revenue lost.

The total tax revenue lost in 2021 was calculated at 37%, which is the highest marginal income tax rate. The total loss was $114.6 billion.

Now, you want to look at the other side of these organizations.

The total assets of 501(c)(3) organizations in 2021 were $5.111 trillion. It’s a lot. Now, the total tax revenues lost at 37%, the highest marginal income tax rate, was $189 billion in 2021. In 2024, it was roughly $218 billion. You take all of this together and it comes out to be $348 billion of tax revenues lost.

Now, these are just the big ones among 501(c)(3)s. If you look at all 501 (c)(3)s, the total loss is $453 billion.
When you give away money, you shouldn’t give away taxpayers’ dollars. You should give away from your own money. If you owe the government a dollar, you shouldn’t be able to give away that dollar. You should give it away after-tax.

If we did that, we could put an item in the budget that would be about $4 trillion over a 10-year period. That would be enough to almost eliminate, or eliminate the corporate tax completely. This is the biggest loophole in the system. This is the one thing I want to see the government get rid of and tax 501(c)(3)s and use the proceeds to reduce taxes on everything else.

Perverse Incentives Infiltrate Universities: Why Dr. Laffer Declined Tenure

Cho: Can we go back to the topic of Harvard?

Dr. Laffer: Yeah, let’s talk about Harvard and their tax-exempt status. Now, I don’t mean to pick on Harvard any more than anyone else. I think the professors at Harvard have not earned their tax status.

The professors have no idea who the people are who contribute the money. They have no obligations to them whatsoever, personally. They’re not like customers. When you are selling soap at a store, you treat your customers very nicely because they are the ones that give you the money, and you give them the soap. You say, “Hi. How are you?” and act very polite. That’s not true at universities. There’s no link between them. There’s no private incentive.

When a professor tells you that he’s a conservative professor, that professor’s nose should be growing because he’s not telling you the truth.

People who live in socialist organizations voluntarily do not believe in free markets. These people are not paid according to their productivity that is tested in the marketplace. They give lectures. If five students show up or 500 students show up, they get paid the same amount of money.

That’s what I mean by “no private incentive.” If they do bad lectures or good lectures, they get paid the same amount of money. The people who pay them do not listen to their lectures. In fact, there’s a perverse incentive at universities that people who make noise and scream, “I’m a socialist. I’m a communist. I’m a racist,” attract attention.

By attracting attention, they are famous for being wrong all the time. No one in the business world could ever be wrong all the time and still get pay increases. The whole incentive structure of a university, in my way of thinking, is it does not give you the right incentives to produce good products. Now, I was asked long ago in 1984 and far away at USC to become the university professor. I was 43 years old at the time, and I was asked to be a university professor, which is an appointment for life.

At the time, I was the Charles B. Thornton professor and I believe I was the highest-paid professor at the university then.

But this would’ve given me a position for life as the university professor. I asked myself the question, “What would happen to me if I lost all the fear of losing my job or losing my reputation?”

I can have this sinecure for life. I can become complacent. To me, the fear of loss is an extraordinarily important motivator.

When you’re married, the fear of you becoming ugly, smelly and old and disgusting means she’ll leave you. There’s a fear of loss. I jokingly say this, of course. But what professors need is the fear of loss to do a good job. They should be judged by how many students they have, not the volume of publications in some obscure journal somewhere. Universities are, by nature, socialist institutions that are anti-productivity, anti-quality, anti-work, because they’re never tested in the marketplace. They never have to sell their wares. That’s why I made a decision back in ’84 to leave the university, to jump off the edge of the cliff. Because I figured that if I’m not frightened by losing, I will not become as good an economist as I could be. It’s the competition, in large part, the fear of loss, that makes you want to make sure you’re right.

All of that is lost in the academic world. All of it. All you have to do is be buddies with the president of the university. It’s totally a perverse incentive system there, and it has creeped up. Universities used to just be teaching organizations. Now they’ve got research, then they get government grants. They’ve been expanding and expanding, you can see by these numbers. Not only do I think they deprive the federal government of a good tax system, but I also think they lead to perverse incentives for the faculty, for the students, for the people there. They’re like government employees and they have tenure for life. It’s a very perverse incentive structure.

So, making that institution big is just hurting the economy enormously. That’s why I am 100% backing the policy of getting rid of all 501(c)(3)s except those that are constitutionally guaranteed as religious organizations.

In 1992 Governor Jerry Brown of California ran for the presidency. Jerry Brown would’ve won against Bill Clinton in the Democratic primary had he not made Jesse Jackson his running mate. He ran on a good economics of low-rate, broad-based flat tax, and his policies would’ve transformed university professors to becoming productive people rather than socialist people and lead to a great expansion of the economy there. Professors should not be allowed to destroy themselves. They should be forced to compete just like everyone else in this world.

One of the consequences of not being incentive-based is that you can do all sorts of silly things in life.

If you’ve got tenure, fixed pay, a guarantee for life, who’s to stop you? You can dedicate your life to saving butterflies on the moon or whatever you want. These people have no discipline whatsoever in what they do. When they don’t have discipline, they can carry out projects that are very unpopular, very bad. No one can stop them.

You need to instill an incentive system in the universities to make sure that these people behave correctly according to the society at large.

That’s my view of universities. When I was there at Stanford, they had riots all the time, turned over cars and the police stayed away. When I was at the University of Chicago, we had the “Students for a Democratic Society,” a very left-wing militant organization, which took over the administration building and occupied it.

All of these things are not frowned upon because of the tax system and the incentive system. They go out and do all sorts of damage because no one can touch them.

In addition to that, the government then gives them money. My primary campaign on taxes today is that we should get rid of all 501(c)(3)s and use the proceeds to lower tax rates, get rid of the income tax, get rid of the corporate tax, reduce the payroll tax, to create a political economy of growth. It happens that Donald Trump agrees with me, I think, on a lot of this stuff.

No one should be granted tax-exempt status. Every American should pay a tax rate the same across the board.

No one should get a deduction, an exemption, an exclusion. Whatever you do, you should only be required to pay taxes when you earn income. I’d also like to see taxes on earning income as well as on spending. Because let’s say you decide that you’re not going to earn income. You’re going to live off someone else or something else, so you should at least have a value-added tax on what you spend. So there should be a tax when you earn money and when you spend money. That’s what I did with Jerry Brown.