Taxation without Explanation

Imagine the public’s confusion, and outrage, if the government suddenly decided to dock 15 percent of its disbursals for an unknown purpose. Unthinkable? Not if the ‘government’ is Harvard University and the recipients are student groups.

On Sep. 7, Assistant Dean of the College Paul J. McLoughlin announced that student groups’ donor gift accounts, which allow alumni to earmark their Harvard donations for specific student groups, will face a 15 percent tax on all withdrawals. The tax will start at 5 percent this fiscal year and rise an additional 5 percent per year to 15 percent in the 2009 fiscal year, and this year’s tax is retroactive to July 1. Although this tax assessment had been previously applied to other University gift funds, there was no reason given for the sudden inclusion of all Faculty of Arts and Sciences (FAS) accounts, which includes undergraduate student groups’ accounts.

At the moment, the University’s new tax is simply bewildering, but it becomes ever more egregious as days pass without explanation. Perhaps the College has a worthy justification for the sudden levy, but without a timely clarification as to where the money is going, it is impossible for students to know. McLoughlin, who is only the messenger of bad news, gave no explanation for the tax, and at the time that this editorial went to press we are unaware of any student group that has received any explanation from any branch of the University.

For students groups, the uncertainty associated with the new diktat can be paralyzing. Many student groups depend heavily on gift account contributions for their source of funding. The Harvard College in Asia Project (HCAP), for example, derives 35 percent of its budget from donations to its gift account. Without transparency and clarity, they cannot adjust their spending plans and fundraising goals.

The advantage of using gift accounts in the first place is that they offer both donors and student groups a substantial advantage over direct contributions. Gift accounts enable donors to deduct their donations from their taxes because the recipient of the donations is technically the University, not the groups themselves. Without these accounts, student groups would have to establish themselves as 501(c)(3) non-profit organizations, which is a difficult, time-consuming process that requires expensive annual audits. Moreover, gift accounts are useful because they confer an extra degree of legitimacy on student groups’ finances. Because withdrawals have to go through the university, donors have the added reassurance of knowing that there is another check on wasteful spending.

A University tax on these gift accounts undermines these advantages and risks defeating the purpose of creating the accounts. Not only do student groups receive less money from their withdrawals, but a tax also makes it more difficult for groups to solicit donations in the first place. Alumni want to know where their money is going, and they will be dissuaded from contributing to student groups if 15 percent of their donation will be involuntarily diverted to an unspecified location in the University. Additionally, the imposition of this tax without any warning has the potential to trip up ongoing fundraising efforts, as donors’ questions about the destination of 15% of their money remain unanswered.

Furthermore, the University did not even provide student organizations with clear details about the new policy, leaving many of the minutiae up to the students’ imaginations. For example, groups are uncertain as to whether withdrawals of money that was donated before July are also subject to the new tax, because McLoughlin’s announcement did not distinguish between old and new donations. If pre-July donations are taxed at the new rate, it would be a patently unjust and illegitimate retroactive tax. Pre-July donors contributed with the expectation that all of their money would be going into their intended recipient’s treasury, not the University’s coffers.

We are not suggesting that the University is necessarily wrong to impose this new tax. It is conceivable, for example, that the University has a sizable amount of overhead costs in providing the gift account service, and that these costs warrant incurring the aforementioned harms. But we doubt that the University’s overhead costs are so high as to justify a 15 percent deduction from student group gift accounts, and student groups certainly deserve more than a curt letter that fails to provide important details.

We hope that the University will respect the intentions of those donors who contributed prior to the new policy’s implementation by exempting those funds from the duty. And we urge the University to offer student groups a prompt explanation for the new tax. Only then can students determine whether the tax is justified; without an explanation, it’s just not fair.