I’ve been contemplating the possibility of taxing private college endowments since I read an article in the WSJ last year about how elite college endowments are now being managed like hedge funds. Simply, this is not behavior fitting for a non-profit tax entity.
So I’m pleasantly surprised to read today what the House is up to :
Massachusetts lawmakers desperate for additional revenue are eyeing the endowments of deep-pocketed private colleges to bolster the state’s coffers by more than $1 billion a year, asserting that the schools’ rising fortunes undercut their nonprofit status.
Legislators have asked state finance officials to study a plan that would impose a 2.5 percent annual assessment on colleges with endowments over $1 billion, an amount now exceeded by nine Massachusetts institutions. The proposal, which higher education specialists believe is the first of its kind across the country, drew surprising support at a debate on the State House budget last week and is attracting attention in higher education circles nationally.
I think this beats cigarette taxes and casinos. I also think a significant portion of the revenue should go to the UMass system and community colleges. What are your thoughts?
by either supporting this measure ot at least not loudly opposing it. Grumble a little, but don’t hire 58 lobbyists and some phony op-ed types to scare off the Legislature. The first university to shriek: “We’ll move to Providence!” is a rotten egg.
Here’s the thing:
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p>Cigarettes are bad for society. They’re bad for the people who consume them, and they’re bad for the people nearby. Taxing them makes sense because it serves to reduce unhealthy behavior and helps to fund the medical care required because of the smokes.
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p>Private universities are good for society. They’re good for the people who attend, and they’re good for the rest of us because we benefit from a more skilled, more trained work force and we benefit from the research universities perform. Taxing them doesn’t make sense because it serves to reduce healthy behavior.
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p>Casinos are bad for society. They bleed dry the people who consume more than very small quantities of them, and they’re bad for the loved ones of those addicts as well as the local businesses nearby. Allowing them [and taxing them] is essentially lowering the tax on casinos, now currently infinite. This doesn’t make sense because it makes it easier to partake in risky behavior, and will be problematic for the location in which the casino is located.
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p>Look, I know that folks resent that Harvard et al have big endowments. But, people quickly forget that (a) Harvard is a major employer, (b) Harvard is a major educator, (c) Harvard is a major researcher, and (d) Harvard does pay payments in lieu of taxes (PILOTs). The same goes for MIT, BU, BC, etc. Taxing the endowments only serves to push more of the cost of an education on the students and their families, which only serves to increase the stratification between rich and poor.
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p>It just doesn’t seem like the best place to go looking for new revenue. Tax things with detrimental externalities [smokes, booze, gasoline, electricity, natural gas, heating oil, bottles, trash, GHG emissions, etc] before taxing an organization whose sole mission is to expand knowledge.
As of 2005, the largest taxpayer in Cambridge was… MIT, which pays taxes on it’s non-academic business, investments and community relations. I’ve heard, but can’t verify that the largest employer in Cambridge is… Harvard. Other than the fire department, MIT places very little strain on the cities resources as they have their own police, communications infrastructure and can co-generate power. In fact, when you look closely, it’s hard to see where MIT is under-taxed. In fact, the opposite may be true if you factor in the pilot it gives out. Cambridge makes out like a bandit if you further factor in the companies spun off from MIT and Harvard that stick around and hire people.
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p>Worse, still, is the effect it will have on the endowment itself. The point, it seems to me, of endowments will be bludgeoned completely senseless if endowments are taxed: rich people give money, often as a tax shelter, to schools and, in so doing, get to restrict the uses to which that money is put. In fact, it’s often these very restrictions that prevent the endowment from getting spent… (You think MIT wants that 10 billion just sitting around doing nothing? ) The money is tied up in professorships, and faculty chairs and graduate student research, and any of a myriad ways that can’t and shouldn’t be taxed. You’ll cripple the schools because they’ll have to fund the tax money from elsewhere or will have to risk pissing of the rich who’ve endowed with a specific purpose in mind. Why do you think the schools bit on the pilot non-tax…? To avoid this very scenario.
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p>I can’t think of a better way to sever the hamstring of the states long-term economic health without actually banning universities altogether. This is a horrible horrible idea.
to the tune of $2,000,000 a year, a smidge more than 1% of Brookline’s total budget.
tell that to people who live in Allston-Brighton and who have had their shrubs urinated on and their lawns strewn with beer bottles by our unfailingly upright and austere undergraduates
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p>I myself was strewing beer bottles and urinating on shrubs in high school (which was public) and later with some various cohorts who attended “Zoo-Mass” (which is also public). And, unless you’re quite diligent, you’re going, from time to time, to get some urine from (shock! horror! gasp!) undereducated high-school dropouts!
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p> I fail to see how a tax on endowments is going to affect that behaviour in the least.
but that is more an opinion that an indisputable fact. No doubt thay are good for the students- the students have nice facilities, pretty good food, fun school-sponsored parties and activities, nice cars, nice parents, and bright futures (generally). But by buying up taxable land and converting it to dorms or a scary virus biolab, or by requiring the services of the Boston Police Department or the Fire Department or the Cambridge Public Works or Parks Department, they are draining money out of city coffers. You can argue that the vast numbers of students also put money into the state treasury by buying stuff, eating out, and so forth, and contribute to the economy that way, but then again, who doesn’t buy stuff and eat out? And “to avoid pissing off the rich”? “A horrible, horrible idea”? Apparently the hysterical shrieking has already begun.
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p>PILOTs keep the land taxed, and P.S.: Allston and Brighton have been screaming for BU/BC/Harvard to build more dorms so that the student overflow wouldn’t change the character of the residential neighborhood as severely. Don’t know about Cambridge.
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p>Non sequitur red herring on a building that’s far from close to getting the go-ahead in the first place.
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p>And replacing it with PILOTs. Most major Us have their own PDs, and in the case of BU [the U I’m most familiar with], they plow and shovel sidewalks for both their Brookline buildings… and the areas near them, effectively doing the job of the DPW in that regard.
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p>An educated workforce pays far more in taxes than an uneducated workforce — taxes that benefit everyone in the state. Academic research benefits us all, in the fields of medicine, transportation, agriculture, computing, and on and on and on. Many also believe that the art and culture coming from universities benefits the public too [you may disagree].
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p>We all benefit from Boston’s world class universities.
For instance, Boston University pays a lot more than B.C., for arbitraty reasons. Taxation of the Universities at a predictable and universal rate won’t hurt them. They’ll be just fine, and we’ll all continue to get along just famously.
but I suspect that they’re becoming more equal, not less equal, over time.
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p>But why just Us? Why not go after all non-profits? Lets tax the churches, the non-profit hospitals, the homeless shelters, the food banks, the cancer research facilities? Why go after universities in particular?
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p>Why do crooks rob banks?
Why not just tax the people giving to the endowment? Honestly, isn’t this just a passive-aggressive wealth tax?
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p>I though you were against that….
I’m just explaining why someone wants to tax the big endowments, ’cause that’s where the money is!
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p>It sounds like a money grab with no rational explanation or as a tax hungry politician might call it, a loophole.
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p>Why not tax the otherwise exempt pension plans, 401(k). Hey, why not tax the state run PRIT. There’s billions there! And it’s run like one of those evil hedge funds.
The best I can offer is that homeless shelters, food banks, and non-profit hospitals are thought to provide services that government would otherwise have to take on. If universities made it their mission to educate every high school graduate in the state, providing the indigent with work-study jobs and housing, then they would surely be thought to be relieving social ills and contributing vastly more to the common wealth than they could ever do through paying taxes. Right now, though, the argument can be made that a lot of private universities are merely exacerbating class divisions and providing services to those who are already poised for wealth and success due to their family’s income. They are conferring a private benefit upon private individuals, for a fee, and those fees are then divvyed up among the private individuals who comprise the staff of the institution. I would bet that the average salary of a mid-level homeless shelter employee is significantly less than that of a tenured professor (though this would not be true of the hospitals or cancer research facilities) and that the homeless shelter or food bank is barely squeaking by, while the large endowments of universities suggest that they have substantial surplus resources. In terms of churches, I think there may be a constitutional prohibition against taxing churches- in any event, i’m almost positive that “houses of worship” (that is, the physical structures wherein religious services are actually conducted) are exempt by state law. Hmmm…does that mean if you start a new church in your house you’d be exempt from property taxes? It’s probably been tried before (peyote, anyone?).
Which homeless shelter, food bank, or non-profit hospital seeks to provide service to every homeless, hungry, or sick person?
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p>Non profit universities are educating tens of thousands of Massachusetts students every year, students which would otherwise turn to public-subsidized UMass.
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p>If colleges didn’t have financial aid packages, I’d tend to agree with your private wealthy line. But, the reality is that most universities — and especially those with large endowments — are letting poor but high potential kids come at a discount or even free. So, not only are they training the nation’s high tax bracket taxpayers, but they’re also providing an opportunity for young overachievers who come from poorer backgrounds the chance to be in that top bracket too.
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p>I’m not proposing that we start taxing churches, shelters, or other non-profits. I’m also not proposing that we tax universities. My question is simply: why tax one and not the other? It doesn’t make any sense to me.
…
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p>I am a big fan of taking incentives into account when designing policy… tax policy, housing policy, medical policy, what have you. And your comment about passing costs to students is well taken.
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p>It is, however, interesting to me that in much of the conversation about taxes we have in the public, revenue generation many times takes a back seat to designing incentives. Sometimes we forget the point.
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p>This was recently pointed out by Ezra when he pointed out something Howard Gleckman said about the income tax recently:
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by only taxing religious colleges. 😉
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p>This tax would be a small dent in a college’s endowment fund, which they use to make MORE money– not to lower tuition costs . This is pretty obvious, as you see endowments skyrocketing along with tuition costs.
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p>I think NOT taxing endowments only serves to increase the stratification between rich and poor.
Without the endowment revenue, tuition would increase faster, thereby making it harder and harder for low and middle class families to send their children to universities.
I’m not so sure the rising endowment has slowed tuition inreases. But numbers would bear it out. Let’s see if there’s a correlation between endowment and tuition at these schools.
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p>And would ANY tax discourge these schools from doing good in our world, or just a really, really massive one?
Look, you can’t just look at endowment payout and tuition. You’ve got to factor all costs and all revenues for the university. To do otherwise just intentionally ignores the complete picture.
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p>The endowment pays out every year. Yale’s endowment will pay out roughly $1.15 billion in 2008-09 (source). Their total budget: $1.75 billion (source).
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p>So… without the endowment covering 65% of the university’ expenses for 2008-09, where would the money come from? They’ve either got to cut costs [salaries? library?], or raise revenue [tuition].
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p>Furthermore, you can’t just use tuition sticker price. Universities have been playing Robin Hood for decades, cranking up the sticker price to extract more from rich families, and using that to subsidize the tuition of poorer families. So, instead of using nominal tuition, you’ve got to use effective tuition by considering how much money in scholarships the U is giving too.
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p>Burying my head? I don’t doubt that the endowment money is being used. I just wonder if it is being underused. I wonder if, as the piles of money grow larger, the services offered are growing at any comparable rate.
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p>Don’t get all prickly just because you think the goodwill of these schools was questioned.
Thanks for the sources, but your numbers are a bit sloppy.
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p>First of all, Yale’s budget was $1.75 billion back in 2003, not for the 2008-09 school year. Look at the date of the article you pulled the info from.
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p>Secondly, Yale was budgeting $1.15 billion as it’s endowment payout for 2008-09, but that is not what the endowment’s actual return was. The endowment’s actual return was roughly $4.75 billion (source: http://www.npr.org/templates/s… It started at ~$17 billion and grew by 28% to around $22 billion. So they’re spending $1.15 billion on education and reinvesting $3.6 billion. I don’t think that the state taking $550 million (2.5% of $22 billion) would really put them in the poor house. They’d still be reinvesting over $3 billion–considerably more than needed to keep up with inflation.
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p>But wait, what if Yale is an outlier?
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p>Here’s how Harvard did during the same period (source: http://www.news.harvard.edu/ga…
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p>Harvard realized a 23% return, growing their endowment by over $6.5 billion from ~$28.4 billion to ~$34.9 billion. They payed out a little over $1.1 billion toward a total operating budget of around $3.5 billion. They could have covered their entire operating costs (free tuition for everyone) and still banked $3 billion. They simply chose not to.
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p>Now, granted, they probably don’t have returns like this every year, but don’t you think that something is a bit amiss if a fund whose sole purpose is to fund education and educational research pays out less than 20% of it’s return toward that purpose?
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p>When they have roughly 10 times their annual operating budget invested in the endowment, I think they’re at the point where they are pretty immune from temporary market downturns and they can probably start paying out a significantly larger percentage of the annual return to the purpose which generates their tax exept status. If not, they should lose that status.
due to lack of good googling luck. You’re also cherrypicking good years. My question is: when the endowment returns less than budgeted — or even turns in a loss — what do the beancounters take out to fund the school?
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p>In other words [and I’m making up the numbers to make an example] if they only take out $1 billion endowment payout when it returns $3 billion, but also take out $1 billion endowment payout when it returned -$3 billion, does that change the question?
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p>Furthermore, what happens if they project that their costs [research, energy, health care, etc] are going to grow quickly over the next 10 years? Should they not prepare for that?
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p>Ultimately, the money has to go to non-profit uses. It might be this year, it might be in 20 years, but it’s going toward education or research. What’s wrong with a university striving to get its endowment so large that, even in bad years, it can fund 100% of its expenses from the endowment? Isn’t that just great financial planning? Why tax that? The money is still going toward good uses, uses that benefit the public at large. They should lose their tax exempt status if they’re no longer acting in a non-profit manner… but encouraging private citizens to donate their money so that the U can fund education and research in the future as well as in the current year… why is that not a non-profit move?
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p>As for taking 2.5% of wealth instead of income, that’s just plain crazy talk. What’s average market returns over the past 20 years? Now, take out for inflation, and your down to a few percentage points. Tax 2.5% of the endowment wealth, and it’s suddenly close to merely treading water.
For Harvard: 14.4% (souce: http://seekingalpha.com/articl… )
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p>For Yale: 15.5%
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p>Still think we need to worry about all those off years?
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p>During that time frame, Harvard’s endowment lost money twice and the biggest loss was 2.7%. Yale lost money once: 0.2%.
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p>While I agree that it makes more sense to tax earnings rather than wealth, I think the facts clearly show that both Harvard and Yale could have EASILY absorbed the 2.5% tax we’re talking about here.
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p>When your average return over 20 years is 15% give or take a half percent, you really have no business arguing that you can’t afford it.
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p>And to address your question of what is wrong with allowing them to grow to the point that they can cover their entire budget with endowment earnings (while not risking dipping into principal over the long run, I presume), the answer is … absolutely nothing. The thing is … Harvard and Yale are already there!
Is like talking aboutappropriate income tax rates for everyone by comparing Bill gates to Warren Buffet.
But the proposal was only talking about universities with endowments over $1 billion anyway. That’s a select group and, while they aren’t all Harvards and Yales, if you do the research, you’ll find that most are doing comparitively well.
Nevertheless, Harvard and Yale are on a whole other plane than the BCs and BUs, and even the MITs.
This is from 2002, but I can’t imagine it’s change that much…
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(source)
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p>So, they’ve gained endowment in the past six years, likely faster than their costs have gone up… but I doubt they’ve gone from 30% to 101% in six years, which leads me to believe that even Harvard and Yale are not “there” .
Stomv,
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p>Endowment budgetted does not equal endowment earned.
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p>The document you source explains:
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p>Remember, I have already shown that over the past 20 years, Harvard has averaged over 14% return per year. So let’s not kid around and pretend that 4.5%-5% spending per year is the maximum allowed by fiscal prudence.
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p>And besides, since that time, Harvard’s endowment–even after subtracting the amount they budget toward their opperating costs–has grown by over 230%.
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p>They could afford to support about a third of their opperating costs back then and since then the endowment has more than tripled. You don’t have to work very hard to do the math on this one. They CAN afford it. They CHOOSE not to.
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p>About six or seven years ago, I actually interviewed a Harvard press officer about their endowment and the fact that Brown had recently moved toward straight grants (no more student loans). The Harvard response to why they hadn’t (yet) followed suit: Paying for your education builds character.
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p>Need I say more?
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p>The choice, such as it is, is not in the hands of the university, but written into the DNA of the gifts themselves. Harvard is LEGALLY OBLIGATED by the terms of the gifts that make up the endowments.
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p>THATS HOW ENDOWMENTS WORK.
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p>People in this discussion seem to think that the endowment is just a pot o’ money that the university can dip into at any time. It’s not like that at all. Believe me, Harvard would very much like to tap that money for general use. They cannot. Same for MIT. Same for BU, BC, Tufts and all the others.
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p>Wealthy alumni and other generous people give money. They attach strings specifically for the purpose of seeing that the university spends their gifts without a change in focus. The bulk of the money in the endowment has these strings attached. The university cannot spend the money on anything other than how they are directed to do so by the donors.
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p>What universities and institutions do is to invest the money (because it’s almost always a multi-year commitment on the part of the donor) and use the interest gained to defray university costs.
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p>The endowment grows because universities are constantly asking their alumni for more money and adding what they get. In 2004, MIT had a capital campaign that garnered the institute 2 billion dollars in new funds.
That would hit the rich, not the people on scholarships. If they can afford 40,000, they can afford 42,000, or even 44,000. And if they can’t, then work harder to earn scholarships, or go to cheaper schools, but that’s good, it would help integrate society and help out the lower tier schools.
The governor’s wife would not be keen to open the door to sales taxes on services.
Or a credit? And yeah, shouldn’t we tax legal services, and health care? The theory being, if someone can afford it, they can afford 5% more to pay for the people that can’t afford it.
low-income and lower-middle class families send their children to state universities (and community colleges)- not Harvard, MIT, Amherst, etc., which are playgrounds for the rich–where fees have risen tremendously in the past few years. Higher education is no longer an option for a lot of students because of the dearth of state funding.
If you’re an attractive student for MIT or Harvard, they’ll find a way to get you there.
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p>The trouble is in the next tier — the schools with endowment between $100M and $1B. Those are the schools which can’t afford to bring in every smart kid they find; those are the ones which run the risk of becoming playgrounds for the rich.
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p>Those massive endowments are exactly what allows the top schools to accept — and fund — every great student they can find, not just the rich ones.
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p>…it has been said, by wiser people than I, that the difference between Harvard and MIT is that at Harvard you start out rich and they make you poorer whereas at MIT it’s the opposite.
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p>That’s something you should bring up with Bill Weld, et al…
2.5% a year? That means they have to be getting a return of 2.5 + inflation (4% or so right now) to have the same amount of money next year.
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p>You know any fund managers who can guarantee 6.5% returns every year?
I assumed that the proposal was 2.5% of growth, or income, or capital gains, or similar measure.
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p>Upon re-reading, you’re right that it sure sounds like they’re talking about 2.5% of the entire fund. That makes nice money now, but depletes the endowment over time.
This proposal sounds like burning your food to stay warm. Depleting university’s endowments is possibly the dumbest thing I’ve ever heard. Not to mention, we’ll simply discover that universities no longer keep liquid endowments but massive portfolios of real estate and offshore funds, whatever else they can think of, you can’t take 2.5% of an office building, whatcha gonna do now commonwealth?
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p>And it’ll all function much less well because universities won’t have access to liquid funds when they need it.
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p>This is literally the dumbest idea I’ve heard in months.
MIT & Dartmouth, among others, recently declared zero tuition for families < $75k.
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p>How do you suppose they cover those costs?
If cigarettes are bad, how about making them free? That is, make it a crime to charge any money for them. You could still smoke them if you got em, but you couldn’t profit off of selling them. Kinda like other drugs.
Riddle me this. Is there a size at which an endowment exceeds the traditional function of such funds?
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p>If so, perhaps they also exceed the nonprofit purpose for which the state has exempted this activity from taxes.
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p>All of stomv’s points (a) through (d) are worthy ones, but also are unaffected by the size of the endowment past a certain point. Harvard would continue to play those roles, in the same way, with half its current endowment. Which would still be a lot.
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p>It is true that when Congress began to make rumbling noises on this issue some of the universities responded by cutting tuition to middle-income students, to forestall any further action. That is a function of the political scene, not the sizes of the endowments.
based on giving scholarships to “qualified” students.
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p>Just an idea.
And that’s saying something. I really don’t like casinos.
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p>I’ve already been exposed as an Obama-backing, wine-sipping elitist (at least I don’t drink lattes), so I won’t hide my sympathies. I went to Dartmouth and got this email a couple weeks ago:
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p>I haven’t been watching closely, but my sense is that elite colleges have been moving toward making themselves more affordable to the middle class recently (after years of going the other way). I think MIT has made similar moves recently, too. This is a good thing, but it requires money.
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p>I don’t know if the current treatment of college endowments is the best of all possible policy options, but I do know that the idea of applying a tax because there’s a lot of money sitting there strikes me as a bad idea, for reasons stomv enumerated.
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p>At the very least, I’d structure it so that colleges could avoid the tax by committing some portion of endowment funds/income to various forms of financial aid. If private elite colleges are making a killing on their investments and using enough of it to help capable people attend their schools who otherwise couldn’t afford it, fine by me.
Taxing endowments seems problematic since while the Universities have seen a boom period recently and have are sitting on huge endowments that money won’t stay there foreover. Taxing it will discourage people from giving since that money might go to the Feds and not to their beloved schools. And basically all the other reasons mentioned by stomv and others prove why this could be a poor idea.
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p>I would argue instead that we should tax these institutions in areas where they do make a profit. Certainly they make a profit off the portion of the endowment they invest and perhaps taxing the interest on the investment (like a capital gains tax) would be feasible. Additionally many of these schools own private property that does not serve an educational, research, or other non profit idea. The Hotel @ MIT is a great example of a location that ought to be taxed. This is more of a local issue for Cambridge and Boston but it saves the state money by decreasing the amount of local aid those two localities will need if we tax the for profit property of non profit institutions-dorms I would even argue are fair game and we can work from there.
Universities already pay property taxes on those properties not directly related to the school’s educational mission. The hotel is a perfect example. Dorms, however, are exempt. You could probably make a fair argument that they shouldn’t be, however, because-strictly speaking-you don’t need dorms to eductate and the rents charged in dorms are outrageously high considering the square footage and amenities each individual student actually gets.
and why not just seize the endowments, or the whole schools, for that matter. The Harvard Police force is large, but not very motivated.
I’m undecided on this.
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p>I don’t want us to simply engage in a cash grab from institutions that do good things. But there is an obscene amount of money being stockpiled.
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p>I’m glad to hear these elite schools are making it more affordable for lower income students to attend. But would it be horrendous for them to do more to expand access to students to go to schools that are below that elite level?
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p>I know I’m probably asking too much of them. But I’m for increasing taxes on anyone (including myself) to improve schools.
What does college endowments “being managed like hedge funds” mean and why is that bad? Is there anything different with the way endowments are managed than any other large investment? Maybe we should start taxing everyone’s pension funds as well. Maybe we should tax the endowment of the Boston Symphony or the MFA. Why stop there? Let’s tax the endowments of private schools and parochial schools. Just go around looking for the largest accumulation of money in the state you can find and tax it regardless of its purpose.
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p>I also don’t see why we should be punishing a school like Amherst College, which has 100% aid-blind admissions and which is using its endowment to fund all students who otherwise would have to get loans. Taxing endowments will make it difficult for them to maintain such a program and will only help to drive up tuitions.
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p>If I were on the investment boards of those schools I would band together with schools from across the country and threaten to drop MA state and municipal bonds from all of their investments if they go through with this proposal.
When you’re a billion + dollars in an endowment fund to aggressively make more money through leveraging, short-selling, futures, etc. (i.e. the reference to hedge funds) your fund should be taxed just like every other investment vehicle. The idea that taxing a sliver of these endowments will have any harmful effect whatsoever is ludicrous.
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p>simple! not stupid!
Why does it matter if they’re leveraging, short selling, or buying US savings bonds? The purpose of an endowment is to use the return on investment in funding the university’s missions — education and research.
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p>A bigger endowment just means more education and research. Why wouldn’t a reality-based community support those things?
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p>P.S. Consider a $1b endowment, returning $50 million a year (5%). Let’s say we tax it at 2%. That’s $1,000,000 dollars. At $40,000 a year for tuition, that’s the tuition of 25 students. That’s 25 kids who can’t get full scholarships because the state is taking the money. That’s just at one school, and that’s for a $1b endowment, and only a 5% return. In Boston alone, you’d be wiping out the tuition for 100s of students. The rich ones will still go, but the poor kids will have to find a new school. That’s the stratification to which I refer.
because they’re clearly not using the returns on educational and research purposes…
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p>The goal of the endowment fund is simply, use money to make more money through aggressive investment tactics that have ABSOLUTELY NO REDEEMING SOCIAL VALUE!!! (Yes caps are necessary because you don’t seem to understand this point).
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p>look at SethJPs comment above:
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p>and yes, Harvard is a good example because they will be paying the most under this proposal.
is that it is invested?
Did someone say they were looking to eliminate endowments?
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p>Is it automatic that making an enormously large pile of money that grows at enormous rates is going to become undesirable if it is made ever so slightly less enormous?
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p>When does a rich person ever say “fine, take it all! I’d rather be poor and get the lower tax rate?”
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p>I look at the money in these endowments and it’s hard not to get the feeling they’re just hording money. Are we to believe they never reach a level of reserves that is sufficient?
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p>Well.. Yes! Taxing endowments is, in effect, advocating the elimination of them.
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p>See, there is your first problem: you don’t understand what an endowment is. It’s not a ‘rainy day’ fund. It’s not a ‘nest egg’. It’s not a backup plan or a reserve fund.
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p>It’s a restricted gift. Money is given with instructions on how to spend it. Often the institution is directed to spend it on specific people, or on efforts to cure a specific disease or on a specific building. You can, if you so desire, give it without restrictions, but this is exceedingly rare. And, here’s the thing, it’s not “going to waste”. Most of the money is, in effect already spent in that it is there for the purpose of future expenditures. Harvards 25 billion is mostly already spent in funding for a specific faculty chair in perpetuity, for example. Or research in higher mathematics, again in perpetuity. They CANNOT legally be spent in any way other than directed by the donor. MIT’s 10 billion is mostly already spent in the same way. Taxing that would have an awful damping effect on this.
“Well.. Yes! Taxing endowments is, in effect, advocating the elimination of them.”
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p>We tax all kinds of private income. I don’t think that taxing private income is sufficient evidence of a policy for the elimination of private income. Besides which, it would be a self defeating policy since, as I pointed out elswhere in this post, the primary purpose of taxation is the generation of revenue.
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p>I’d argue the inverse, not taxing something (or taxing it less) is a tacit admission by the state that it has and interest in promoting it.
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p>The default for ‘fair’ is everyone pays their fair share. After that you balance things out with specifics so that the incentives are where you want them.
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p>Where do the private endowments of private educational institutions fit in here in terms of balancing incentives we wish to promote vs. the need to generate revenue in a ‘fair’ way? I’m agnostic on the issue. But I know taxes in general are not policy positions for destruction.
It sure sounds like they are proposing to tax the entire endowment, and not just income/capital gains/etc.
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p>I agree that it is too soon to totally poohpooh the proposal, but it sounds like the universities are raising legitimate points.
The original poster indicated that he’d wishes to tax university endowments because the manner in which they are managed is “like a hedge fund” and which he finds to be “unfit for a nonprofit.”
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p>That suggests that the entire point of this tax is punitive.
Right now, they are getting special tax breaks.
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p>Once the hedge funds are paying their fair share of taxes might be a better time to discuss taxing schools.
First, very little of any of these institutions portfolios is invested in risky schemes. Second, they really aren’t invested differently than many large pensions funds and private trusts.
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p>Furthermore, how would you like to have 2.5% of your own investments worth taxed? If you think that is just a “sliver” then you should have no problem having it applied to everyone.
Nah, let’s just burn that down.
It’s interesting how the rep from Harvard plugged into conservative language to defend his turf:
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p>Wow. Who would be in favor of taxing success? Maybe we should tax failure instead. And how many students look at Harvard and say “only $20bn in the endowment fund? Screw them, I’m going to Yale!”
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p>There are some issues to be worked out here, but I don’t think the concept is that bad. These are nonprofits. If they’re raising and spending money to further their goals, good for them. But if they’re just amassing it, it doesn’t seem like they’re paying as much attention to their public purpose, does it? At some point, enough becomes enough.
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p>With as much respect as is due, this is just dumbly wrong. Banks amass wealth not schools.
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p>This is just a completely bone-headed view of what an endowment is and what schools do with them.
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p>If I go to MIT and subsequently make a billion dollars (like this guy or this guy or this guy or if you just manage billions of dollars like this guy) and I decide that my favorite professor deserves a promotion I can give them so many millions of dollars and say “this is for Professor Fuu Bar McSmarty Pants. I want him to be the McSmarty-Pants chair of Electronic Wizardry and I want him to study the effects of Post-Prandial Distension on EBCaK chaos.“
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p>MIT then takes my money, puts in a bank account and uses it to pay for Professor McSmarty-Pants salaries and research expenditures until he dies or quits and then, depending on the directives from the giver (me) MIT either names somebody new to the ‘McSmarty-Pants Chair of Electronic Wizardry’ or dissolve the endowment, returning what’s left over or otherwise dispensing of the money per the agreement between the institute and I.
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p>That’s what we’re talking about here. We’re not talking about money in a vault being ‘amassed’ somewhere… it’s not like that at all.
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p>All the money in the endowment is controlled by these agreements. That’s how endowments work. That’s why they’re called ‘endowments’ and not ‘slush funds’. Taxing them would have a terrible chilling effect on the donors, most of whom give to schools and not governments for a reason…
If the chair costs $x but the endowment grows to the point where it secures $x + y, what is the ethical space for the extra y? How big does y have to get before we start wondering if “y’s mission” is substantially deviating from “x’s mission” before we decide that y deserves it’s own classification and tax rules?
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p>Just asking.
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p>Also your point on the effect of donors is well taken.
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p>I doubt we’ll ever know. When I make my billions and start donating to schools, I’ll know the nuts and bolts of it better. But I suspect that if the endowment grows, as you say, to X + Y and where Y starts to get appreciably large such that they start taxing on Y, then donors will give directives on rules for investing. If you want to take my money, they’ll say, invest it at no more than Z percent in order to keep Y below the taxable Y. Only the accountants win in that scenario.
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p>Seriously, the government ought to just start their own endowment and ask for donors. They’ll get better results and no one gets hurt.
that the “bleedover” of y often goes to the general endowment. That unrestricted endowment is usually spent on expenses which need to get paid but don’t capture the imagination of donors [like the electric bill, minor repairs, or any other of the hundreds of line items in the budget].
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p>No major American university has an endowment so large that all costs are covered by the endowment, so far as I know.
… any extra revenue just sorta evaporates…
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p>So, if we’re really only talking about taxing the invested portion of the revenues, and since Y << X, the anticipated gains will be much much less.. 2.5 percent of Y is a far far cry from 2.5 percent of X.
The miracle of compound interest might eventually make that an incorrect assumption. SethJP notes upthread of an example where the majority of the gains were reinvested (although others dispute his numbers). Certainly in the case of one specific chair, it’s not hard to imagine monies invested in the early 90s might have achieved a surplus greater than the expense by now.
(1) “Taxing a nonprofit” organization with a net worth greater than $1 billion is not only an oxymoron, it sets a precedent for creating exceptions to every tax regulation. A non-profit is a non-profit unless it has more than an $1 billion endowment.
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p>What’s next? Exempt non-profits with more than $1 billion in endowment except for those west of the Connecticut River?
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p>Where’s the exception-making stop?
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p>Are we going to re-define what is or isn’t a non-profit now? Why only education institutions, as others have posted?
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p>(2) A tax on wealth? Wow. That’s confiscatory. And once that camel’s nose is under the tent, why not a tax on corporate value? Raytheon? Let’s see, how about 1% of your market value? Every year.
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p>Any why not individual net worth? Dear John Kerry and Teresa Heinz … please remit 2.5% of your combined net worth. Every year. (If only they lived in 02114 and not 02108 … billionaires on the back side of the Hill are exempt.)
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p>Where’s the philosophical firewall?
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p>Not even could 1960’s Politburo central planners could dream this one up. It’s too silly.
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p>Perhaps the state addiction to revenue — “it’s for the children,” of course — causes insanity.
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p>It’s not necessarily a tax on wealth. It’s a tax based on wealth. And a tax on wealth is not such a horrible animal either.
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p>If I amass $1bn and give it to my kids, so that they don’t have to earn any income for the rest of their lives, and taxes are basically only on income, well then, they’d live tax-free, wouldn’t they? They’d be free-riding on the system even though they have plenty of capacity to pay. They’d have the benefit of the court system, the defense budget, agencies which keep poison out of their food and scam-artists out of their nest egg.
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p>Should we be encouraging people to live off wealth rather than earning it? In the USA, supposedly a meritocracy? I don’t think so. So taxing wealth is not necessarily inherently evil, in fact, I think it’s a good thing to prevent aristocracy.
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p>Another way to look at this, using an economic frame, is that large endowments provide significant barriers of entry to the college market. It’s hard to form a new college when older colleges have a $30bn head start (plus their reputations to boot). As time goes on, the market gets less free due to the amassed wealth.
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p>However, I don’t think the college tax concept as presented is quite right, it could be tweaked. I think the correct goal to pursue is to limit the amount of wealth that gets accumulated simply because the college has money in the bank. I think that the $1bn number is a little arbitrary, it penalizes larger institutions over smaller ones (although if this is the purpose, so be it).
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p>I can agree, when you think that the endowment as “restricted investments set aside to fund specific activities”, then it takes on different meaning. But I think the tax policy could be written to encourage spending money on the targets that the nonprofit serves, rather than simply churning them back into the system to accumulate even more endowment. Per-restriction accounting might be too daunting, though I’d bet the colleges already have the breakdowns at their fingertips.
We disagree on capital gains tax policy, but are in 100% alignment here…
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p>The corporate excise tax is imposed in MA regardless of a corporation’s income. Its on Form 355, line 1 (if a tangible property corporation) or line 2 (if an intangible property corporation). Its a little less than 1%, its actually .26%. So I guess the camel’s nose is under the tent?
We gave exemptions to any of those 9 schools that go the same direction as Dartmouth, which is to say they basically pay the tuitions for families that are even into the middle class. So, if we could set this up as a way to promote the ability for anyone to be able to afford to go to those schools, not just those with the money, then I’d think it a great idea. Any schools with that kind of spare money that aren’t making their schools exceptionally affordable for those who need help don’t deserve government protection from taxation.
as me giving a 6 to everything stomv has said. Shocks me too.
I’m a Massachusetts native and currently a freshman at Yale, and this issue was widely discussed when Sen. Chuck Grassley (R-IA) proposed a few months ago making schools with large endowments spend at least 5% of their revenue.
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p>One good point I read in the comments is that size really should be measured based on money per student – Yale has a lot of money both because it’s rich and because about 20,000 people make up the Yale community (versus, say 4,000 for a small college).
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p>But that minor point aside, I think this proposal reflects a misunderstanding of what endowments are used for. Yale’s, for example, is used to: reduce the percentage of the operating budget that comes from tuition and offer more financial aid; renovate buildings which helps the local economy; expand the campus, which helps the local economy and educates more students (which helps the US economy); and overall improve Yale as an institution. It’s not as if anyone is getting particularly rich off this, or our President Rick Levin is getting around on his (non-existent) Yale jet. The highest-paid employee of Yale, in fact, is David Swensen, our Chief Investment Officer. He makes 1m+ only because Wall Street would pay him, say, 20 times that if he were to leave.
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p>In conclusion, endowments further education and help the local economy. Education is a worthwhile endeavor, and I think that that while one might be able to argue that, say, student accommodation can a times be luxurious, that doesn’t mean the government should tax Yale or any other school.
… way to measure the cap. Rather than a general $1B figure, it should be measured in terms of a surplus beyond a threshold dollar figure per student. There should be some kind of inflation adjustment on the base figure, but it seems to me that this would be a sensible measure of the institutions use of the endowment money for (and beyond) the educational mission we’d like to incentivise.
as others would pay on gains, rather than creating a new breed of tax. That is to say, rather than imposing a new tax, just strip the exemption, for large endowments.
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p>I don’t have an opinion yet about whether or not any such tax is a good move. I have a slighly favorable opinion of reducing the property tax exemptions of very large nonprofit institutions, though even that I haven’t fully thought through.
.. CG tax with deductions based on how they’ve spent the gains. I do think that any tax policy has to keep their mission in mind.
Are these schools also exempt from Mass State Sales Tax on purchases they make?
I’m really not an expert, I’m just trying to conceive of what a good balance of revenue generation through ‘fair’ taxes, against incentive structures toward the missions we would like to encourage these institutions to continue.
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p>No. There are some limited sales tax exemptions for printed material, but the not-for-profits generally pay the same sale/use tax that everyone pays.
When I was moonlighting as a cashier at Home Depot, non-profits of all kinds bought stuff and qualified to be sales-tax free by showing a specific state issued paper and filling out a form.
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p>A google search didn’t turn up anything definitive…
I know that the state oftentimes allows companies that contract with the state for materials or services give them an exemption for items purchased toward those services. Makes sense because the tax would just mean the contractor marking the items up and the state would wind up paying their own tax anyway (with the contractor possibly collecting a fee percentage on the transaction – including the tax).
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p>I wouldn’t be surprised if, after handing out state grants, some of the come with a similar tax exemption for the same reason (not wanting to rob Paul to pay Paul). I could see, for example, a grant for renovating a women’s shelter would waive state sales tax on materials for the endeavor.
… what would happen if you offered a 100% dection for the gains spent on student grants?
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p>Viva la éducation!
PILOTs are a joke, and AICUM has managed to direct a lot of the public scholarship funding (i.e. MassGrant) towards the privates.
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p>I totally agree that the privates do a great job for our economy, but they definitely have a sweet deal. A small tax on endowments is not that big a deal.