Harvard is a 'hedge
fund with a university attached to it'
Slate
Jordan Weissmann, Slate
“The joke about Harvard is that it’s a hedge fund with a
university attached to it,” Mark Schneider tells me. It’s a quip that, for
obvious reasons, has become pretty popular in recent years.
In 2014, the university’s legendary endowment, overseen by a
team of in-house experts and spread across a mind-bending array of investments
that range from stocks and bonds to California wine vineyards, hit $36.4 billion.
“They’re just collecting tons, and tons, and tons of money,”
says Schneider, a former Department of Education official who is currently a
fellow at the American Institutes for Research.
Of course, normal hedge funds have to pay taxes on their
earnings. Because it’s a nonprofit, Harvard doesn’t. And since bestowing tax
exemptions is the same as spending cash from the government’s perspective
(budgeteers call them “tax expenditures” for a reason), that means the American
public effectively subsidizes Harvard’s moneymaking engine.
The same goes for Stanford (endowment: $21.4 billion),
Princeton (endowment: $21 billion), Yale (endowment$23.9 billion), and the
country’s other elite institutions of higher education.
Aiding wealthy research universities that cater to largely
affluent undergraduates might have been acceptable in a more flush era. But at
a time when state colleges are still suffering from deep budget cuts that have
driven up tuition and politicians are stretching for ways to make school more
affordable for middle-class students, clawing back some of that cash to spend
on needier schools is starting to sound awfully appealing. Which is why it
might just be time to start taxing Harvard and its cohort.
Students graduating
from the School of Law cheer as they receive their degrees during the 364th
Commencement Exercises at Harvard University in Cambridge, Massachusetts May
28, 2015.
This isn’t a new idea by any stretch—in 2008, lawmakers in
Massachusetts considered slapping a 2.5 percent tax on large university
endowments—but Schneider has made an especially intriguing case for it.
Earlier this year, he and Jorge Klor de Alva, a former
president of the for-profit University of Phoenix, released a report that
compared the approximate amount of money private colleges saved from not having
to pay tax on their endowments with the funding state schools received from
government appropriations. Though the authors were comparing different kinds of
subsidies, the contrasts were nonetheless jarring. Princeton received $105,000
in tax benefits per student.
Rutgers, New Jersey’s flagship public university, got just
$12,300 per student in public funding. Whereas Harvard netted $48,000 per
student in tax benefits, the University of Massachusetts–Amherst got a measly
$9,900 in government backing. Among the 60 schools Schneider and Klor de Alva
analyzed, private universities with large endowments averaged $41,000 in tax
subsidies, compared with $15,300 in direct funding for public flagships, $6,700
for regional state colleges, and $5,100 for community colleges.
In short they showed the extent to which some very rich
colleges are getting richer thanks to tax benefits most Americans scarcely
think about when we consider the resources devoted to higher education in this
country.
“It wasn’t until we started calculating these numbers that
we realized how big the discrepancies were between these private universities
and the schools that were going to be educating most of the workers of the
future,” Schneider says. “It’s a web of hidden subsidies that need to be talked
about and investigated so we can figure out whether this is a socially
desirable system.”
I want to be upfront: There are some aspects of Schneider
and Klor de Alva’s report that should make watchers of this debate
uncomfortable, issues that Politico and the Washington Post
glossed over in their own coverage of the study. Take its source.
The paper was published by the Nexus Research and Policy
Center, which Klor de Alva runs and which was founded with money from the
University of Phoenix’s parent company. In the past Nexus has produced dubious
research boosting for-profit schools (which are notorious for predatory
business practices) that made similar points about the subsidies received by
wealthy, traditional colleges.
There are obvious reasons to be skeptical about a report by
a think tank associated with for-profit colleges claiming that nonprofit
schools are leaching on the system. That said, Schneider, a former commissioner
of the National Center for Education Statistics, is a generally respected
figure in higher education policy associated with the center right.
(Disclosure: Slate is owned by
Graham
Holdings Company, which also owns Kaplan, itself a big player in
for-profit higher education.)
More substantively, Schneider and Klor de Alva’s report
probably exaggerates the overall subsidy gap between elite private and state
colleges to a degree. For instance, it doesn’t count the tax savings that some
large state institutions enjoy on their own endowments—the University of Texas
at Austin, for instance, is part of a nine-school system with a $25.4 billion
endowment, while Rutgers has more than $900 million to its name.
The study also doesn’t consider subsidies from the federal
Pell grant program, which mostly benefit lower- and middle-income students at
public institutions.
And, perhaps most importantly, it probably overstates how
much money colleges are saving thanks to their nonprofit status each year,
because it treats all increases in the value of their endowments as taxable income,
whether or not they were actually realized. In the real world, the government
only taxes capital gains when investors sell their assets.
In other ways, though, the study may actually undercount
subsidies to wealthy colleges. For one, it doesn’t take into account the more
than $6 billion that Washington is expected to lose each year by making
donations to educational institutions tax-deductible. Sadly, charitable giving
is skewed toward a small percentage of already well-to-do schools and often
leads to taxpayers footing part of the bill for extravagant gestures of
ambiguous social utility, such as hedge undefined Schwarzman’s $150 million
gift to Yale, which will pay for a new student center with Schwarzman’s name on
it.
In the end, it’s hard to say precisely what a perfect
accounting of all the various subsidies schools receive would look like.
Ideally, I’d love to see a researcher without Nexus’ baggage take on the
subject. But even if the comparisons in Schneider and Klor de Alva’s report
aren’t airtight, they’re in keeping with what we know about the massive
inequalities in higher education. Private colleges and universities are sitting
on hundreds of billions of dollars in their endowments.
But that wealth, along with the sizable tax subsidies that
help it stack up, is concentrated in the hands of a tiny few. In a world where
the government only provides limited resources for higher education, we’re
almost certainly shoveling an outsized share of them to schools that don’t need
the financial help.
Of course wealthy universities see things quite differently.
They tend to point out that although $36 billion or $21 billion might sound like
a princely sum, much of that money is restricted to specific uses by donors.
(If a railroad magnate in 1878 endowed a classics professorship, then the
school needs to keep spending the returns on his money on Latin instructors,
not a new biology lab.)
Andover Hall, home to the Harvard Divinity School at Harvard
University in Cambridge, Massachusetts.
Moreover, they note, the money needs to grow at a regular
rate to make sure they can keep up with the fast-rising cost of running the
equivalent of whole towns while offering generous financial aid and ensuring
that professors can keep conducting cutting-edge research, from now until
forevermore.
And some of these are fair points. Their extraordinary
resources really have made America’s elite colleges the world’s envy, allowing
them to bring together some of the most brilliant minds from here and abroad to
crank out all sorts of wonderful innovations.
Still, that doesn’t change the fact that we seem to have
stumbled into a system that disproportionately subsidizes the educations of a
tiny few. So what, exactly, should we do about it?
Some critics of large endowments have argued that schools
should simply be forced to spend more of their money hoard. In 2008, another
time when elite schools were prospering and tuition was rising, Republican Sen.
Chuck Grassley caused a minor uproar in higher education circles by proposing
that colleges should be forced to spend 5 percent of their endowments every
year, the same way private charitable foundations are.
Recently, Victor Fleischer, a law professor at the
University of San Diego, caused a similar stir with a New York Times
op-ed demanding that schools spend 8 percent per year.
But it’s not clear what exactly that approach would achieve.
Maybe schools would bolster financial aid and start paying adjunct faculty a
living wage. Maybe they’d devote more money to renovating dorms or building
lazy rivers in their student rec centers. At the end of the day, we’d still be
heavily subsidizing wealthy schools, which would have to spend a bit more
lavishly, but not necessarily more productively.
That’s what makes taxation more appealing. Schneider and
Klor de Alva, for their part, propose a progressive tax on private college
endowments worth more than $500 million equal to 0.5 to 2 percent of their
total value. By their calculations, that would raise about $5 billion per year,
which could be spent supporting cash-strapped community colleges.
About 95 schools would be affected—with institutions like
Harvard and Yale at the high end, and ones like Marquette and Villanova at the
low end—and they would be allowed to cut their tax bills by deducting dollars
spent toward financial aid.
Some might object to the idea of taxing a few colleges to
fund others. And, to be sure, it’d be nice if we could simply pay for higher
education in this country with a tax on Wall Street trading, as Bernie Sanders
would have it. But progressives have lots of spending they would like to do,
and there are only so many new taxes Washington will ever pass. Redistributing
resources within higher education might not just be fair, but also necessary if
we want to find ways to fund our public institutions.
A tax like Schneider’s would still raise other philosophical
and logistical questions. For starters, why tax giant endowments at colleges
but not other nonprofits? The Metropolitan Museum of Art in New York commands a
roughly $3 billion endowment—it’s hard to think of a coherent reason why it
should escape the Internal Revenue Service if, say, Fordham University in the
Bronx (endowment: $675 million) can’t.
Another quandary: Today, the government generally doesn’t
tax savings. It taxes income. So why take a cut of wealth from colleges when we
don’t do it to individuals? As Kim Rueben, a senior fellow at the Tax Policy
Center, put it to me, “We’re going to tax Harvard, but we’re not going to tax Warren Buffet?”
And, of course, there might be unintended consequences. Even
with write-offs for financial aid, taxing endowments could encourage schools to
spend less on things society generally likes, such as new research labs. The
government could tax schools and require them to spend a minimum amount,
which is how it treats private foundations. But then you have to consider to
what creative lengths Harvard might go to avoid the IRS.
Cutting down the tax advantages of rich schools, obviously,
would not be simple. But it still worth seriously considering the idea. Maybe
we should consider taxing the Met as well. Maybe the government could stick to
what it knows and tax Harvard’s capital gains instead of its whole endowment.
Maybe we could learn to live with a little tax avoidance. However we choose to
do it, I think we’d all like to spend a little less money sending other
people’s kids to Harvard.
Warren Buffet
Warren E. Buffett
was a director at the Washington Post Co.,
is the chairman & CEO for Berkshire
Hathaway Inc., and an adviser for the Nuclear
Threat Initiative (think tank).
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Holdings Co. is the successor company for the Washington Post Co., and the owner of Slate.
Berkshire
Hathaway Inc. was a stockholder for the Washington Post Co., and is a stockholder for the Graham Holdings Co.
Ronald
L. Olson is a director at the Berkshire
Hathaway Inc., a director at the Graham
Holdings Co., a director at the Nuclear
Threat Initiative (think tank), and a director at ProPublica.
Carnegie
Endowment for International Peace (think
tank) was a funder for the Nuclear
Threat Initiative (think tank).
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was the president of the Carnegie Endowment for International Peace (think
tank), a director at the American Friends of Bilderberg (think
tank), an honorary trustee at the Brookings Institution (think tank),
and a 2008 Bilderberg conference participant (think tank).
Ed Griffin’s interview with
Norman Dodd in 1982
(The investigation into the
Carnegie Endowment for International Peace uncovered the plans for population
control by involving the United
States in war)
Open
Society Foundations was a funder for the Carnegie Endowment for
International Peace (think tank),
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Soros’s father, and was the chairman for the Foundation to Promote Open
Society.
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guest at Barack Obama’s February
2015 private White House dinner.
Barack
Obama’s guest at his February 2015 private White House dinner was Malcolm Gladwell, was the president of
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Bill
& Melinda Gates Foundation was a funder for the Brookings
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America Foundation.
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William H. Gates
III is a co-chair for the Bill &
Melinda Gates Foundation, a director at Berkshire Hathaway Inc, and a co-founder & technology adviser
& director for the Microsoft
Corporation.
Microsoft
Corporation was the owner of Slate,
and a funder for the Brookings
Institution (think tank).
Warren E. Buffett
is a trustee & major donor for the Bill
& Melinda Gates Foundation, the chairman & CEO for Berkshire Hathaway Inc., an adviser for
the Nuclear Threat Initiative (think
tank), and was a director at the Washington
Post Co.
Ronald
L. Olson is a director at the Berkshire
Hathaway Inc., a director at the Nuclear
Threat Initiative (think tank), a director at the Graham Holdings Co., and a director at ProPublica.
David A. Hamburg
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Carnegie
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tank) was a funder for the Nuclear
Threat Initiative (think tank).
Roger W. Ferguson
Jr. was a trustee at the Carnegie
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at Harvard University.
Bill
& Melinda Gates Foundation was a funder for the New America Foundation, and the Brookings Institution (think
tank).
Jonathan
Soros is a director at the New
America Foundation, and George Soros’s
son.
Atul A. Gawande
is a director at the New America
Foundation, an associate professor at Harvard
Medical School, an associate professor at the Harvard School of Public Health, and was a medical columnist for Slate.
Slate
was acquired by the Washington Post Co.
Slate
Group was a division of the Washington
Post Co.
Graham
Holdings Co. is the successor company for the Washington Post Co., and the owner of Slate.
Berkshire
Hathaway Inc. was a stockholder for the Washington Post Co., and is a stockholder for the Graham Holdings Co.
Larry
D. Thompson is a director at the Graham
Holdings Co., and a trustee at the Brookings Institution (think tank).
Lawrence H. Summers
was a trustee at the Brookings Institution (think tank), the National
Economic Council chairman for the Barack
Obama administration, is a professor; former president for Harvard University, and a 2008 Bilderberg
conference participant (think tank).
Paul
E. Peterson was a director of governmental studies for the Brookings
Institution (think tank), and is a professor at Harvard University.
C. Douglas Dillon
is the chairman for the Brookings Institution (think tank), and an
overseer at Harvard University.
Harold
H. Koh was a trustee at the Brookings Institution (think tank), the State
Department legal adviser for the Barack
Obama administration, a developments editor for the Harvard Law Review, and an overseer at Harvard University.
Ann
M. Fudge is a trustee at the Brookings Institution (think tank), the
U.S. program advisory panel chair for the Bill
& Melinda Gates Foundation, and was a professor at Harvard University.
Bill
& Melinda Gates Foundation was a funder for the Brookings
Institution (think tank), and the New
America Foundation.
Jonathan
Soros is a director at the New
America Foundation, and George Soros’s
son.
Eric E. Schmidt is the chairman of the New
America Foundation, the
chairman for Google Inc, was a funder for the New America Foundation,
and a 2008 Bilderberg conference participant (think tank).
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Books Library Project is a Google Inc. project.
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Shirley M.
Tilghman is a director at Google Inc., and a trustee at the Carnegie Endowment for International Peace
(think tank).
Carnegie
Endowment for International Peace (think
tank) was a funder for the Nuclear
Threat Initiative (think tank).
David A. Hamburg
is an adviser for the Nuclear Threat
Initiative (think tank), and was a professor at Harvard University.
Jessica Tuchman Mathews is a director at the Nuclear Threat Initiative (think tank),
was the president of the Carnegie Endowment for International Peace (think
tank), a director at the American Friends of Bilderberg (think
tank), an honorary trustee at the Brookings Institution (think tank),
and a 2008 Bilderberg conference participant (think tank).
Ed Griffin’s interview with
Norman Dodd in 1982
(The investigation into the
Carnegie Endowment for International Peace uncovered the plans for population
control by involving the United
States in war)
Lawrence H. Summers
was a trustee at the Brookings Institution (think tank), the National
Economic Council chairman for the Barack
Obama administration, is a professor; former president for Harvard University, and a 2008 Bilderberg
conference participant (think tank).
Paul
E. Peterson was a director of governmental studies for the Brookings
Institution (think tank), and is a professor at Harvard University.
Richard
C. Blum is an honorary trustee at the Brookings Institution (think tank),
married to California Senator Dianne
Feinstein, and a regent at the University
of California.
University
of California is a partner at the Google
Books Library Project.
Google
Books Library Project is a Google Inc. project.
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