Billions of “nonprofit” colleges’ wealth comes from speculation on Wall Street. Why not tax them for it?
A current bill making the rounds in Massachusetts’ State House, called the Endowment Tax Act (H.2824/ S.1834), is proposing to tax all Massachusetts universities with endowments of more than $1 billion. Unsurprisingly, the richest colleges of Massachusetts, the proposed tax targets, are not so happy about it.
The bill would require all revenue to go towards massively boosting funding to public higher education. If passed, the 2.5 percent tax it would levy would generate at least $2 billion per year as of 2023 according to its House sponsor, Natalie Higgins (D-Leominster).
In addition to concerns about the financial woes it would create for these universities, which I will debunk in the second part of this op-ed, critics have questioned what right the Commonwealth has to tax these private, non-profit institutions at all. “There is no reason to single out particular institutions based on their endowment,” said MIT Economics Chair Jonathan H. Gruber according to the Harvard Crimson.
So what right does Beacon Hill have to take money from Harvard University and other private universities in the first place? Especially if these universities have earned that money themselves?
For one thing, despite purporting to provide a public good, these institutions have refused to enroll more students, all the while the wealth of their endowments has grown exponentially in recent decades.
But the real catch is that Harvard and company didn’t exactly earn their present fortunes by themselves. No, I’m not talking about donations from billionaire alumni where they endow a new library to get their son admitted. I’m talking about these universities’ ever-growing reliance on the stock market in the form of hedge funds and private equity to balloon their wealth beyond proportion. If you ever hear someone say, “Harvard is just a $51 billion hedge fund with a university attached,” this is why.
Just in 2016, as Astra Taylor of the Nation reported, “experts I consulted estimate that over $100 billion of educational endowment money nationwide is invested in hedge funds, costing them approximately $2.5 billion in fees in 2015 alone.”
Given the growing push to tax Wall Street more for their often exploitative speculation, shouldn’t we do the same for universities that call themselves non-profits yet have spent the last few decades making billions in profits from speculation on Wall Street?
It wasn’t always this way: as UC Merced economist and “Bankers in the Ivory Tower” author Charlie Eaton notes, the obscene wealth of these colleges only began in the 1970s. At the time, the growing power of the finance industry led universities to increasingly bring in hedge fund managers to invest their funds intended for education into the stock market. “[F]inanciers helped Princeton increase its endowment by 847 percent from $2 billion in 1973 to $22 billion in 2016,” Eaton said.
At this point, it is a matter of saving these institutions from their addiction to money and power above all else. According to Taylor of the Nation, in 2011 over half of all college endowments “allowed board members to do business with the university”. This has made them more beholden to the interests of the hedge funds whose employees increasingly dominate their boards, as this scandal at Dartmouth laid bare.
In turn, this calls into question how beneficial these institutions are for students as opposed to the private equity barons running them. As Julien Berman of the Harvard Crimson wrote, “In 2014, five rich institutions including Harvard paid more to private equity fund managers than they dished out in aid to their entire student bodies.” Meanwhile, another study Berman noted found that endowment increases have no effect on tuition. In other words, Harvard getting more money is not making it any more affordable.
So if these universities continue to not only acquire unparalleled sums of wealth through shady Wall Street speculation but also refuse to adequately use it for their students, why not tax them and give the proceeds to public universities who will put it to better use? That is what the Endowment Tax sets out to do.
Of course, the Endowment Tax is by no means a silver bullet to the wide range of other challenges Massachusetts’ state schools face today. These range from the exploitation of workers, to rising debts, to reduced funding for cherished humanities and arts programs.
And nor should this bill be the only solution: these private universities do rely very heavily on their endowments, and excessive taxation would indeed hinder the groundbreaking research and nourishing of promising young minds these schools are famous for. (It just so happens that the amount this bill taxes would not be excessive enough to financially ruin these colleges.)
Nonetheless, achieving anything as monumental as tuition-free college through the Endowment Tax would give us the momentum to face these problems head on. Because passing this bill is not just about more funding, it is about sending a message: that the ultimate service of any university must be to the people. And if they fail in that mission, it is the people’s job to make them do better.
Read part 2 of this essay here.
Liam Rue is a UMass Amherst rising senior studying political science and Spanish. He is also a volunteer communications worker for the Public Higher Education Network of Massachusetts (PHENOM), a Massachusetts nonprofit advocating for the Endowment Tax Act and other legislation aimed at improving the affordability and quality of Massachusetts public higher education.
