Tag: Taxes

Universities are bracing for the second Trump administration, anticipating the most adversarial relationship between the presidency and higher education in American history. Unlike the first go-round when Trump seemingly surprised even himself by winning and had no clear educational policy to implement, Republicans have now had years to develop an agenda for addressing what they see as the many sins of the sector. Not only is the incoming administration better prepared for a clash, but universities are in a weaker position to defend themselves. Trump is more popular now than when he first took office, while universities are at their nadir of public approval. Should Republicans prove determined in their vision of reform, universities will find it more difficult to resist.

One avenue that Republicans may pursue is to tax university endowments. In 2023, Vice President JD Vance, then serving as an Ohio senator, put forward legislation that would have placed a 35 percent tax on the investment income of wealthy universities. Republican lawmakers beyond Vance have expressed  their approbation of the principle. These proposals follow the precedent of Trump’s first term. The 2017 Tax Cuts and Jobs Act introduced a 1.4 percent excise tax on the investment income of a few extremely rich universities. Despite the great alarm with which this tax was met in the worlds of higher education and philanthropy, the public doesn’t seem to have soured on the idea: A 2024 poll found that likely voters supported taxing endowments further.

Rather than simply denouncing these developments, university leaders should work to understand why they came about—and why they might be in a weaker position to fight them off than they imagine.

Some preliminary points are in order. First, it should be recognized that large endowments are not the normal mechanism for funding education. Primary and secondary education, in the US and abroad, is usually provided by institutions that receive the entirety, or nearly the entirety, of their funding from taxes. Even private education need not be funded through endowments—that is, through the accumulation of a capital surplus (based largely on donations, which in this country are themselves tax-exempt) from the investment income of which institutional activities are funded. Private education could be sustained through the conventional practices of the private sector—namely, by a mixture of the revenue from the products they sell and taking on debt. 

“There is nothing inevitable about endowments as a financial basis for education.”

There is nothing inevitable about endowments as a financial basis for education, and the vastness of the present endowments of the major American universities is anomalous both in a comparative and historical perspective. Other countries’ universities have nothing like endowments of this size, when they have endowments at all. And historically US university endowments were smaller and covered a smaller proportion of their overall costs. It is not a law of nature that societies be so permissive toward the accumulation of capital and property beyond the necessary operating expenses of educational institutions. Laws can be made that tightly condition the privileged tax position of endowed nonprofits on certain spending and institutional requirements; or that restrict or disincentivize gifts to universities; or that simply stipulate that universities distribute each year such a portion of their assets that their endowments dwindle. Measures of this sort were contemplated in this country a mere half-century ago in the deliberations that led up to the 1969 Tax Reform Act that placed heavier regulations on private foundations, and other liberal nations have policies in place that are designed to discourage endowment accumulation.

Nor should we think of skepticism toward endowments as an intrinsically right-wing proposition, even if that is the direction from which hostility is coming at present. As I have noted in these pages before, what historians considered liberalism’s heyday saw liberal politicians and authors express wariness toward educational endowments and encourage the state to reform them. Arguably the greatest liberal statesman in history (not to mention one of the most devoted to education), William Gladstone, proposed removing the tax exemption from the endowments of charitable foundations, including schools and universities. In this attitude, such figures were drawing on a venerable legacy. Animosity toward endowments of all sorts was a feature of the French Enlightenment, and Adam Smith’s Wealth of Nations included an extended discussion of how inappropriate endowments were for educational purposes, arguing that they insulated professors too much from the realities of market demand (or lack thereof) and left schools ill-adapted in the long run to the needs of the population. 

An endowment can be conceptualized as a third way between relying entirely on market competition or on public provision. Interestingly, it was precisely as an alternative to market-based education practices that they were seen in prior periods when their fate was being decided. In Victorian England, a leading Liberal politician framed the choice in education policy as being between “endowment or free trade.” In the higher-education context, an endowment is a way of offering to scholars and teachers a degree of insulation from direct market discipline. Instead of merely fetching what they could charge by directly hawking their wares to potential pupils or consumers of their research, professors are subsidized by a mass of accumulated capital—capital whose accumulation has been aided by being exempt from taxes.

Finally, and at the risk of stating the obvious, we should remind ourselves that exemption from taxation is a subsidy. To pay no or lesser tax than other similarly situated institutions or persons effectively increases the resources available to the exempt entity no less than receiving a direct financial grant from the government would. And it likewise increases the burden on others. As one report puts the matter plainly, “the favorable tax treatment of private non-profit and public higher education is a mechanism to transfer resources to higher education.” If universities wish for their endowments to remain in this fiscally privileged position, what is needed is a set of justifications for the specific proposition that the current methods of financing higher education, which facilitate the development of institutions at once less reliant on consumer preferences and on government largesse, are so valuable that we should continue placing extra fiscal requirements on the rest of the public to preserve it, rather than simple denunciations of endowment taxes as attacks on education. After all, higher education is provided the world over, while American universities almost alone enjoy such enormous untaxed or undertaxed resources.

Let us consider three common justifications for tax-privileged endowments in higher education, in ascending order of importance and ask whether universities are in a strong position to put them forward at present. The first is that they permit experimentation and diversity. If all institutions had the state as their sole funder, or if they all faced short-term market pressures, one might expect conformity and convergence. Large endowments give individual institutions financial wherewithal and a margin of independence for trying out new initiatives, setting out on their own path, making a risky venture to differentiate themselves from others, and maintaining their own distinctive traditions. It was this rationale which led John Stuart Mill to abandon his initial hostility to educational endowments: Endowments were a protective shield against the homogenizing forces of government dictation and the fashions of the ignorant mass consumer. 

But how do things stand in fact? Universities with large endowments seem to display less and less differentiation. They give up longstanding traditions as soon as complaints are heard about them being “culturally insensitive” or too demanding or anachronistic, and they regularly engage in iconoclastic assaults on their own particular heritages and founders and benefactors. They show less and less distinctiveness in curriculum; their academic calendars and jargon have synchronized; they use not only a common application platform, but also a pretty common set of admissions standards. There is less and less distinctness in the kind of student they pursue, or in the environment—academic and residential—that they offer that student once admitted. Go to any of, say, the twenty private universities with the largest endowments and just look at the signage posted throughout campus for events, programs, services: You will find that at every one they convey a near-identical blend of culturally progressive presuppositions, identitarian appeals, and therapeutic argot.

Until recently, my own alma mater, the University of Chicago, used to have a very distinctive profile for undergraduates, and to put them through a distinctively exacting core curriculum. It had a peculiar campus atmosphere, grimy and gothic and self-importantly cerebral at once. But in recent years—in tandem, as it happens, with an explosion of its endowment—a concerted effort was made to become more like a generic Ivy: The core curriculum was watered down, a less nerdy and more “well-rounded” applicant profile seems to have been preferred, the campus was altered to feature more of the amenities of a typical wealthy school. One might argue that these changes—or the equivalents that have occurred at other universities as they have similarly shed the particular and historical for the normal and the expected—were worth making, but they nonetheless undermine the “protection of diversity” rationale.

Similarly, diversity in political orientation across elite campuses has vanished. In the heady days after the first Trump election and especially in 2020, these institutions responded to current events in a nearly identical manner, often with statements so similar they could all have been written by the same person. Across them all, the political allegiance of faculty is skewed in the same direction. The Great Awokening met precisely the same amount of resistance at all of them: namely, none. Instead of a thousand flowers blooming, well-endowed universities exhibit startling degrees of what sociologists call normative and mimetic isomorphism. In other words, they all play follow the leader, and they are all shaped by the same type of (careerist, conformist, safetyist, left-liberal) personality. Indeed, it is hard to think of an industry with less real diversity (an ironic outcome, given that diversity has become its guiding value).

That endowments foster pluralism––whatever the intuitive appeal of the thought––is thus a difficult argument to make at the moment. A related justification has similarly fallen on hard times. Insulated from the dictates of the state and market demands, endowments are supposed to furnish universities with the material substrate for integrity. They should enable universities to stick to their principles and resist the temporary gusts of political passion. Whatever moral manias gripped the populace, wealthy universities could sustain their own commitments to free inquiry and scholarly rigor, and could afford to ignore the screeching outside their walls. 

And yet, we have seen precisely the opposite. In FIRE’s free-speech rankings, some of our most exorbitantly endowed schools consistently fare the worst. Universities are often the most eager institutions to join moral crusades, heedless of the damage that this does to the spirit of open inquiry within their walls. Great numbers of their inhabitants regard them as environments distinctly unfavorable to free speech, and self-censorship is rife there, far more so than in non-academic domains of life—a state of affairs which is the antithesis of what we should see, for if universities are to fulfill their mission they should be the intellectually freest parts of civil society. The rapid institutionalization of DEI, with its disastrous effects on free speech, campus comity, and educational quality, is indicative of the well-heeled university’s failure to maintain its intellectual equilibrium when faced with social upheaval and vague calls to “do something” to prove its relevance on this issues of the moment. After Columbia’s recent dismissal of a pro-Palestine tenured professor, several liberal and left-leaning academics, including some who were previously stalwart deniers that any problems of bias or intolerance existed, admitted that DEI was always repressive and that the university, underneath the guise of happy mantras like “equity” and “inclusion”  and “anti-discrimination,” has in fact compromised its ability to preserve a small-l liberal culture in the face of strong societal headwinds.

Even the aforementioned John Stuart Mill, who worried more about the effects of social intolerance and “cancel culture,” as we would now call it, than any philosopher in history, thought that the rich at least would feel sufficiently untouchable to maintain unpopular beliefs. But in our own time, neither rich people, nor rich institutions, seem to demonstrate the capacity to hold to principle if any cost greater than a couple days of negative response on social media are involved. A large endowment is to an institution something like what tenure is to an individual: a guarantee of a certain measure of security. And yet, just as tenure itself appears not to be helping academics to live up their ideals (tenured academics seem not to speak more freely than their untenured colleagues) , a sizable endowment is not in fact cashing out in greater resolve to respect academic freedom and ensure fair treatment for students and employees of all ideological stripes.

The final, and most compelling, justification for endowments is that they are essential to funding the university’s core activities of research and teaching at such a level as to maintain the standards of excellence to which we have become accustomed. To even the most hardened critic of higher education, this is a very strong argument. American universities, for all their faults, are the finest in the world. Lavish endowments are a key reason for that. They allow our schools to fund major scholarly projects in a way that other countries cannot match, and to offer higher salaries than our peer nations and therefore to attract top talent. Whatever reforms Republicans undertake, they should be careful not to weaken one of our country’s great advantages. 

At the same time, even this rationale is not as strong as it could be. For the 21st-century wealthy American university has prioritized things other than academic excellence. Higher education has undergone a remarkable amount of mission creep, and its extraordinary resources are not going to research and teaching in the proportions they ought. By far the greatest growth in university spending on labor has been devoted to administrators, many of whom perform functions that are related to pedagogy and research by only the most threadbare of connections. Student-life bureaucracies, an extremely capacious conception of therapeutic services and wellness provision, meddlesome “bias response teams” and social-justice apparatuses—endeavors of this ilk have brought in new personnel at an astonishing rate, while faculty numbers have increased modestly at best. Academics and scholarship make up a lesser share than formerly of the actual activity of the university, which has become what the political scientist Steven Teles rightly calls a “total institution.” 

Moreover, an increasing amount even of the ostensibly academic spending of the modern university now takes place not in traditional departments like physics, history, or philosophy, which for all their faults have a legacy of striving for objectivity in their methods and standards. Instead, money has shifted into the rapidly expanding category of “centers” and “programs” devoted not to a well-defined discipline but rather to an issue or theme: “climate change,” “social justice,” “inequality.” The line between activism and scholarship at these new entities is often incredibly blurry. What standards the research at such places is being held to, and whether these entities even bother to pay lip service to a politically neutral conception of research excellence, are questions that have not yet received satisfactory answers.

“An endowment tax could be designed to incentivize reallocating university budgets.”

In short, much of what the university does now is no longer exactly what even many educators would expect it to be doing. It is arguable that the ideal type of the American university in the popular imagination—a blend of the historic Oxbridge residential model with the German disciplinary research model—has been at least partially eclipsed by a new kind of “all-administrative university.” It seems natural to wonder whether the considerable perks that were granted on grounds of public confidence in the classical model should persist as that model gives way. If an endowment tax pushed universities to look harder at their administrative spending, that outcome would hardly be bewailed by the American public—and would probably be welcomed by many in academia itself, even if they would be reluctant to say so publicly. Indeed, an endowment tax could be designed to incentivize reallocating university budgets from administration and to teaching and research. 

If American universities are still the best in the world, the grounds for that superiority may be eroding largely due to universities’ own misplaced endeavors. On the teaching side, grade inflation has reached heights that would be hilarious if they didn’t indicate that universities have effectively given up on evaluating student performance and on the very notion of professorial authority. College students are more miserable and less prepared to contribute to society and the economy after graduation than in past generations. Classes have become markedly easier, and even at the most selective and well-endowed institutions faculty are giving up on asking their students to do sophisticated or demanding reading. Cheating is rampant, and our wealthy institutions appear to be making only the most desultory of efforts to combat it. As universities have run up unprecedented resources, the quality of education they are delivering is getting worse.

When it comes to research, the trends look equally bleak. Academic fraud is rampant, and low-quality, unreplicable studies have proliferated. In the endless quest for inclusion universities have wound up playing host to less productive researchers; what universities have newly included, it turns out, have been above all the less competent and accomplished. Many of the most famous ideas to come out of academia have turned out, to put it kindly, wrong. One discipline after another has had to reckon with its research practices being shown to be unreliable. 

Perhaps most perverse of all, it has proven a pathway to clout for many academics to tear down their fields, to declare their disciplines mere instruments of one evil or another, valueless and noxious. I am reminded when listening to such rhetoric of Alexis de Tocqueville’s depiction of aristocrats on the eve of the French Revolution indulging in the most subversive and egalitarian rhetoric because in their solipsism it had not occurred to them that those below them in the social hierarchy might “hear what was said.” If academics themselves proclaim that their areas of study are worthless and the impartial pursuit of knowledge within them is a myth, they shouldn’t be surprised that the public is no longer keen to permit their institutions to amass untold quantities of tax-payer subsidized assets.

Endowment taxes are a risky proposition. It is naïve to think that top-notch scholarship, scientific  research, and postsecondary education can be provided for on the shoestring subventions which governments tend to provide their universities, and ill-designed or exorbitant endowment taxes could do real damage to students and research capacity alike. Having the best universities in the world is something Americans should be proud of, but it is not nor will it ever be cheap. 

At the same time, it is not a natural right of nonprofit institutions to sit on giant publicly-subsidized piles of cash. If US universities are to remain strong, their leaders have to take an honest inventory of their problems and pathologies, and must admit that their recent performance has diminished the appeal of their arguments for continued special treatment in the eyes of many of their countrymen. The greatest theorist of the nonprofit sector, Henry Hansmann, already recognized more than three decades ago that many of the justifications for higher education’s endowment accumulation were weaker than commonly acknowledged. In the ensuing interval, their footing has not gotten any surer.

Universities are some of the most legally and fiscally privileged organizations in the land. With privilege comes responsibility, and a need for public accountability. If they wish to continue to enjoy their privileged position, universities need to do much better at living up to the values that legitimize them in the first place.