Should the Rich Universities Pay Taxes?

There is a proposal in Massachusetts (it’s in the very early stages) to tax universities whose endowment is more than $1 billion. Here are the basic arguments for and against:

“The pileup of wealth doesn’t match their mission of serving the public good,” said Wick Sloane, a specialist on college finances and student access who teaches at Bunker Hill Community College. “These schools have generated huge cash flows but are not doing their civic duty.”

Sloane and others pointed out that private colleges receive significant government funding for research and financial aid and that their tax-free endowments, financed by tax-free donations, represent a major public subsidy.

…

College leaders said the measure would probably reduce the amount they would raise and spend on financial aid, and noted that most gifts to endowments are restricted for specific uses. Private colleges and universities already make substantial public contributions through taxes on payroll and nonexempt property, and educate the bulk of the state’s students.

I don’t know where I stand on this–universities do serve a public good in general, but some of these universities are very rich (Harvard has a $34 billion endowment) and we subsidize them? I do think the proposal here is interesting:

Put aside 1 percent of your capital gains each year to be gifted to the endowments of colleges and universities your institution thinks deserve the funding. (For your reference, Harvard’s endowment grew almost 20 percent from roughly $29 billion in 2006 to roughly $35 billion in 2007, while the 76th place institution, Tulane University, saw its endowment grow nearly 18 percent from $860 million to just over $1billion in the same time period. While the actual rates of return for an institution’s investments are not publicized, for the sake of easy math, let’s say that capital gains were responsible for $1 billion of Harvard’s and $100 million of Tulane’s growth. The two of them together would have $11,000,000 to disburse. Pretty soon we’re talking about real money.)

I would support a tax on the rich universities only if it was for this type of thing. This article gives an idea on the disparity and the reason I might support something like this:

About 50 institutions now possess more than half of the money in college and university endowments nationwide. These institutions enroll fewer than 2 percent of the nation’s students, and their student bodies are disproportionately wealthy.

I also noticed a couple ridiculous statements in the article in the Globe:

Representative Kevin J. Murphy, the House chairman of the Joint Committee on Higher Education, said it was unfair to single out wealthy universities to improve the state’s finances. “You’re picking and choosing someone who has a lot of money,” he said. “Taxing the Red Sox would raise money for the state, too.”

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Richard J. Doherty, president of the Association of Independent Colleges and Universities in Massachusetts, which has lobbied against the assessment, said the plan would weaken one of the state’s strongest sectors. “It’s like Florida taxing oranges,” he said.

Umm guys, since both of these are private institutions, they are both taxed.

I do kind of like the baseball comparison (one of my friends used to say that baseball is isomorphic to life–us silly math people), so let me look at how baseball deals with disparities in club payrolls: there’s a luxury tax (teams whose payroll is more than a certain amount pay money to the league and this is distributed to the poor teams). Now why would the rich teams allow that? To keep the league somewhat competitive, which keeps the league around (how long do you think the league would be around if each year a few teams dominated).

Something similar is true for universities. It’s the system of unversities that is important for the US–everyone (or almost everyone) is able to go to college even if they aren’t rich and even if they’re not top students, so it’s almost universal in availability. If the top universities get too rich and the cost of universities continues to grow as it has, this will break down–universities will again be only for the rich and the top students–and if this happens, the US will become a divided society again (even more than it is now).