The move by the state of Massachusetts to impose a 2.5 per cent tax on its biggest university endowments is causing an outcry. It is not surprising, given what is at stake for Harvard’s $36bn foundation.

The debate was reported in the Wall Street Journal on Friday after rumbling along in the state’s media and in higher education circles this month. State politicians are feeling the budgetary pinch and have put forward a bill to levy universities in the state that have endowments of more than $1bn.

At the moment, although universities such as Harvard and Yale can be regarded as some of the world’s biggest hedge funds, they have tax-exempt status. They do not even have to meet the requirement on other non-profit foundations in the US to distribute 5 per cent of their capital each year.

I think it is a bad idea, for reasons I will come to. And, surprise, surprise, there are plenty of Harvard economists who think so, including Greg Mankiw. But before I say why, it is worth acknowledging the arguments in favour.

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