Friday, November 10, 2017
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?
But it would be a mistake to dismiss this move as just partisan pandering. Democrats have also proposed state-level endowment taxes in Connecticut and 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 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.
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.
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