Education

Private Universities Protest the ‘Endowment Tax’

(Pixabay)
. . . but it will have a minimal impact on their finances in the near term.

On March 7, leaders from some of the nation’s richest academic institutions sent a letter to Congress in protest of Section 4968 of the Tax Cuts and Jobs Act of 2017. The section imposes a yearly excise tax of 1.4 percent on investment gains by private colleges and universities that have at least 500 students and an endowment valued higher than $500,000 per student.

Needless to say, the schools that make the cut are wildly wealthy. The National Association of Independent Colleges and Universities estimates that only about 32 of the upwards of 5,000 institutions of higher education in the United States fit the criteria. And because the law takes student-body size into account, the list is actually surprisingly diverse — beyond the usual suspects like Harvard, Yale, and Stanford are smaller schools such as Bryn Mawr College, top performing-arts institutions such as New York’s Juilliard, and two medical colleges. Those finding themselves right on the $500,000-per-student bubble include the University of Chicago, which has an $8 billion endowment and 16,000 students. On the other end of the spectrum, Princeton University, by this metric the richest school in America, has nearly $3 million per student — a $23 billion endowment and a student body of only about 8,000.

The signatories of the March 7 protest letter include representatives from each school that is likely to pay the new tax, as well as a number of other schools not yet wealthy enough to qualify. Their argument appeals to the sanctity of higher education’s traditional role as a generator of both social mobility and society-benefiting knowledge. This “unprecedented and damaging tax,” they say, will inhibit their respective institutions’ ability to provide financial aid and support indispensable research.

Though rhetorically powerful, this alarmist tone is misleading. Given their extreme wealth, a 1.4 percent tax on investment gains promises to have minimal short-term impact on the affected institutions’ ability to support core projects such as financial aid or teacher salaries. Schools typically take only a small, fixed percentage (about 4 to 5 percent) from their endowments every year, providing a reliable source of revenue but still allowing the principal to grow. A tax on investment gains might slow that growth over the long term, but it will not affect these schools’ ability to pay professors or award financial aid, nor will it create immediate volatility in these schools’ finances.

More duplicitous is the suggestion that this tax would compel administrators to cut financial aid, professor salaries, and research funding from their budgets, rather than the obstructing fat of useless administrators and non-academic staffers who do nothing to advance the central missions of these academic institutions. This particular brand of scare tactic exemplifies what Charles Peters in 1976 dubbed the “Firemen First Principle,” wherein budget directors facing general cuts defund the most publicly visible and necessary programs in order to drum up popular distaste for austerity.

Further, the message is unduly self-congratulatory and comes off as tone-deaf to the concerns many Americans have regarding troubling trends in higher education today. The letter’s signatories tout themselves as heads of institutions that “lead the nation in reducing, if not eliminating, the costs for low- and middle-income students.” But these men and women have presided over an era in which tuition continues to rise at super-inflationary rates, and in which faculty positions and salaries continue to stagnate or shrink while administrative and non-academic budgets bloat.

It is true that some of the wealthiest schools in the country have strong financial-aid programs — Harvard, for instance, gives full need-based scholarships to students from families making less than $65,000. But these measures don’t address the underlying problems surrounding published price tags that now routinely exceed $70,000 a year. The letter suggests that the only way to improve university accessibility nationwide would be for other schools to grow their endowments to these prodigious levels, and offers no innovative solutions to ballooning budgets and student debt. But academics such as Johns Hopkins’s Benjamin Ginsberg have argued convincingly that not only have rising administrative costs been foisted on student families, but it is private institutions — insulated from public scrutiny and protected by these endowments — that are the worst offenders.

Interested parties have found themselves defending a law that is, on the surface, inconsistent with their own beliefs.

The irony surrounding the debate on this provision is that interested parties have found themselves defending a law that is, on the surface, inconsistent with their own beliefs. Dissenting Republicans in Congress and independent critics alike have made strong conservative arguments against the tax, centering on the inherent problem with taxes qua taxes and on the potential long-term damage to our private philanthropic system. At the same time, complaints from very liberal academics about the injustice of what we might call a “1%er” tax on their schools are laughably hypocritical but perhaps not altogether off-base. Further, not even three months after Donald Trump signed the GOP’s tax reform into law, the endowment provision is already receiving bipartisan pushback in Congress. In a move that seems to have been coordinated with the March 7 presidents’ letter, Representatives John Delaney (D., Md.) and Bradley Byrne (R., Ala.) introduced legislation the next day to repeal the tax, arguing that its language should have accounted for inflation in order to avoid affecting progressively more and more institutions in the future.

But despite the valid critiques raised in this ongoing debate, the impact of the bill itself feels more like a shot across the bow than a direct hit. The Joint Committee on Taxes has predicted that the provision will raise only about $1.8 billion over the next decade, a comparatively minor sum (in the context of a tax bill that appears set to increase the federal deficit by nearly $1.5 trillion over the same time frame) that suggests symbolic rather than substantive censure. If taking these administrators to task for leveraging their enormous wealth to protect self-serving bureaucratic interests produces any substantive change in university practices, then the gesture will have been a considerable success.

Andrew L. Shea — Andrew L. Shea (andrewlshea.com) is the Hilton Kramer Fellow in Criticism at The New Criterion and a practicing artist.

Most Popular

World

Trump’s Disgraceful Press Conference in Helsinki

On Monday, President Trump gave a deeply disgraceful press conference with Russian dictator Vladimir Putin. The presser began with Trump announcing that although the Russia–U.S. relationship has “never been worse than it is now,” all of that “changed as of about four hours ago.” It was downhill from ... Read More
White House

The President’s Do-Over

I agree with Jonah on all counts: On net, President Trump’s do-over of his Helsinki remarks is a good thing; regrettably, it is not sincere; and while I hope the revised version is the one he sticks to, I don’t have confidence that will be the case -- as posited in my column Tuesday on the folly of having the ... Read More
National Security & Defense

Trump’s Helsinki Discord

Donald Trump is not, and never will be, the Moscow correspondent for The Nation magazine, and he shouldn’t sound like it. The left-wing publication is prone to extend sympathetic understanding to adversaries of the United States and find some reason, any reason, to blame ourselves for their external ... Read More