Michael Strain of the American Enterprise Institute argues that the House tax bill provision to tax profits earned from investing endowments is a bad idea. He writes:
Their tax proposal seeks to subject private universities with endowments of more than $250,000 per full-time student to a 1.4 percent excise tax on their net investment income. There are about 70 such universities. . . .
Arguing that the GOP plan is a tax on human capital is not an overstatement. Elite universities use endowments in part to relieve students and their families of the burden of paying tuition. Many universities have been increasingly targeting this relief at households who need it most. For example, parents with income below $65,000 do not pay tuition for their children’s Harvard College education. One in five Harvard undergraduates fall into this category. Taxing endowment earnings would make these efforts more difficult, and would probably raise tuition for students from families that would struggle to pay it.
A tax on human capital in a bill intended to raise wages represents policy incoherence that should be more surprising than it is.
I must say this is one of the few provision of the House tax bill that I find compelling and not because (okay — not only because) I’m a college-tuition payer. Strain has a point when he says “Endowment earnings also support the world-class research that make U.S. universities the envy of the world, attracting talent from across the globe. That research advances innovation and, ultimately, social welfare.” That may be the case but how much is enough for a supposed nonprofit institution?
Bloomberg found, “About 800 endowments together hold more than $500 billion, led by Harvard with $37.1 billion. Thanks to a strong market, many schools are richer than ever, and they don’t pay taxes on their investment earnings. Their funds have become major players in the financial markets, with investments in hedge funds, venture capital, and real estate.” So perhaps the better question is why do Harvard and other elite institutions need endowments of tens of billions — and why are college tuition costs outpacing inflation? At some point a corpus of the size of these institutions seems inappropriate for a nonprofit.
This seems like an ideal situation for a hearing — gasp! — where Congress and the American people might learn something and make informed policy choices. As Bloomberg noted:
After a U.S. Senate Committee on Finance hearing in 2007, Chuck Grassley, an Iowa Republican, merely mentioned the idea of requiring a 5 percent annual spending rate for colleges. That whiff of a threat seemed to spur changes. Within months, about three dozen colleges said they would spend more on financial aid. Schools including Harvard, the University of Pennsylvania, and Pomona College adopted measures to replace loans with grants, which don’t need to be repaid. Still, the wealth at some schools remains a tempting target for lawmakers. “If we look at major universities, they haven’t done a very good job of explaining why they’ve accumulated this money,” says Henry Hansmann, a Yale Law School professor and economist.
Maybe universities could use some more scaring, rather than the hammer of the IRS. Moreover, there is a real debate about where the revenue, if we go down this road, should go. To lighten tuition? We know that increasingly colleges and universities are increasing the gap between rich and non-rich by taking more and more wealthy students. Maybe cost is a factor, or perhaps the elite universities need to plow money back into pre-college preparation to widen the field of college-ready applicants.
The bottom line here is that Congress identified a legitimate issue, but not a responsible process for addressing it. One casualty of a Congress that no longer bothers with extensive hearings is that lawmakers know less and less about what they are doing. We’d prefer taking the college tax out of the tax bill, but addressing this in separate legislation informed by hearing and debate. Isn’t that the way Congress is supposed to operate?