Last week, Republicans in Congress proposed a tax on wealthy private-college endowments as part of their make-or-break tax bill. The new tax, if passed, would bring in an estimated $3 billion from 2018 to 2027.
University leaders were shocked. Had Republicans in Washington forgotten their own Ivy League roots? Or was the proposal just for show — red meat for a conservative base that resents cultural liberalism in academia? It seems improbable, after all, that the narrowly divided Senate would actually pass a tax on endowments.
But it would be a mistake to dismiss this move as just partisan pandering. Democrats have also proposed state-level endowment taxes in Connecticutand Massachusetts, homes to some of the nation’s wealthiest schools.
It’s an increasingly bipartisan view that elite private colleges are islands of wealth. And there’s good reason for that: It’s true.
An investigative report this week by The New York Times, based on a leak of offshore financial records known as the Paradise Papers, revealed that dozens of wealthy college endowments use Caribbean islands as offshore tax havens for their investments.
Endowments are already tax exempt, but they have increasingly worked with private equity and hedge funds that borrow additional money to invest. Endowments pay taxes on the money they earn that way because it is not related to their educational mission — unless they hide that money with the help of offshore investment corporations.
Private colleges and universities have increased their endowments spectacularly through aggressive fund-raising and these kinds of investment and tax-avoidance techniques. Stanford University, one of the schools found to use offshoring, increased its endowment to $18 billion in 2012 from $2 billion in 1977. Harvard’s endowment grew to $32 billion (in inflation-adjusted dollars) from $6 billion during the same period.
The problem with enormous endowment growth is that private institutions have not used the resource boom to provide greater benefits to the public. Stanford is a case in point. Despite having increased its endowment tenfold, Stanford still only enrolls about 1,600 new freshmen every year — approximately the same number of new freshmen it enrolled annually in the 1970s. As a result, Stanford now spends about $55,000 each year on every full-time student, just from its endowment. That’s a ninefold increase since the 1970s after adjusting for inflation.
Harvard, Princeton and Yale all spend even greater sums per student from their endowments.
It’s true that a number of these wealthy universities have begun to increase the generosity of undergraduate financial aid, essentially offering free college, room and board to the lowest-income students. That’s a good thing, but most qualified low-income students receive zero financial aid from the wealthiest colleges because they are never admitted. According to the Stanford economist Raj Chetty, the top 38 private colleges today enroll more students from the top 1 percent of the nation’s income spectrum than from the bottom 60 percent. Basically, what wealthy colleges end up spending on low-income students is a drop in the bucket compared with what they could be doing.
America’s top public universities, on the other hand, have substantially increased their enrollments since the 1970s despite shrinking state funding. They also tend to enroll low-income students at much higher rates. The University of California, Berkeley, enrolls more low-income students than the entire Ivy League.
It would be easier to turn a blind eye to the increasingly lavish exclusiveness of the Ivies if it didn’t come at such great public expense. Just three tax breaks related to endowments now come at a cost of nearly $20 billion in reduced federal tax revenue annually. If that $20 billion was captured as federal revenue instead, it would provide nearly enough funds to double the federal Pell Grant program for low-income students.
The answer is not necessarily to tax endowments, though they have only been fully tax exempt since 1984. But if wealthy private colleges want their endowments to remain tax exempt, they need to start providing much greater public benefits. The most obvious place to begin is a substantial increase in undergraduate enrollment, especially of underrepresented students.
There has been a marked increase in anxiety about the cost and value of a college degree. Wealthy colleges could help assuage that by enrolling many more students from other walks of life. They can certainly afford to do so.
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