The tax bill approved by Congress and signed into law by President Trump last December included a precedent-setting provision that deserves much more attention outside higher education circles, even though it initially has direct impact on only 32 institutions. The bill includes a 1.4% excise tax on investment income at private colleges with an enrollment of at least 500 students and with endowment assets valued at $500,000 per full time student. The impetus for this provision was a growing number of higher education observers and leaders who have been increasingly focusing on the accumulation of wealth among the larger university endowments and calling for this so-called “excessive” wealth to be taxed in the public interest.
Influential opinion leaders who strongly favor this move include people like R. R. Reno, the publisher of First Things magazine, even though this is an idea which seems out of character for this conservative Catholic-oriented publication. Reno believes that these “outsized” university endowments should be taxed in the interest of funding free community college education for the “non-elite” that are not favored by the “elite” institutions in which this excessive wealth is concentrated. He is basically convinced that these monster institutions have corrupted higher education governance and culture and that their dominant influence should be curtailed. And he continues his campaign, having recently written that he feels the tax should be much higher, in the 5% range for the 30 or 40 largest endowments, saying “We must address the problems of our time, one of which is the ascendance of an arrogant, bloated set of elite institutions with far too much power to shape our society against our wishes and without our consent”.
He is correct about the concentration of wealth. Of the more than 800 North American colleges and universities with endowments, the top 10 schools hold more than one-third of the total assets, and this doesn’t include the vast real estate holdings that are tax-exempt as well.
I also agree with the notion of the flawed institutional influence on higher education governance and culture exercised by these dominant institutions and often wonder why their trustees don’t do a better job of resource allocation, including the possibility of assisting the community college system or, even more importantly, asserting more leadership backed by resources and incentives in fixing our mediocre elementary and secondary education system so that more students can be qualified to attend these elite schools without the need for failed policies like affirmative action and/or remedial courses.
But theses endowments have been substantially built by choices made by private sources of wealth through private philanthropy, a phenomenon which is a significant element of the foundation of success of American higher education. This almost uniquely American system of volunteer association, private philanthropy, and independent giving as a major component of American exceptionalism has been recognized and commended as far back as the 1830s by Alexis de Tocqueville. The governance and cultural influence problems he describes are real and should be assertively addressed by the trustees and alumni of these institutions, with the assistance of organizations like the American Council of Trustees and Alumni and the National Association of Scholars. Government intrusion through taxation is bad precedent and not the right answer. We disturb this private system at our peril.