Does Tax Exemption for Charitable Endowments Subsidize Excessive Accumulation?

82 Pages Posted: 12 Jun 2008

Date Written: June 10, 2008


This paper examines the concern over large endowments from the perspective of tax policy as it applies to the income tax exemption for charitable organizations. It suggests that because unlike other subsidies, income tax exemption only affects those charities that accumulate funds for the future, such exemption does not follow automatically from the charitable deduction but requires a showing that accumulation is appropriately treated. The paper concludes that unlike the treatment of gifts and income from related goods and services, exemption of investment income from an endowment, represents a departure from normal tax principles. Whether a subsidy is nevertheless appropriate depends upon whether one believes that current accumulation is likely to be excessive. I believe that the bias of donors, trustees and key employees indicates that endowments may well exceed the level that public policy would suggest and recommend a tax based on assets and a reduced limit on the charitable deductions for the largest endowments. While a mandatory distribution level is considered, I conclude that such a requirement is both intrusive and unlikely to have a significant impact on the level of accumulation.

Keywords: University Endowments, Income Taxation of Charitable Organizations

JEL Classification: L31, H24, D63

Suggested Citation

Halperin, Daniel I., Does Tax Exemption for Charitable Endowments Subsidize Excessive Accumulation? (June 10, 2008). Available at SSRN: or

Daniel I. Halperin (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
(617) 495-3100 (Phone)
(617) 495-1110 (Fax)

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