Tax Policy: Fostering Inequities

9/1/20

The Black Lives Matter movement has appropriately heightened America’s awareness of the pernicious and long-lasting consequences of racism, and it has forced a more expansive examination of white privilege than ever before. In the words of Walt Kelly (the artist/author of the comic strip Pogo), and speaking as a white liberal, “We have met the enemy and he is us.” Addressing these issues requires a reallocation of resources, and allocations relating to education are sure to be high on the list of considerations.

Unfortunately, this is an area where personal well-being and societal well-being are often at odds — at least in the short run. My own situation is illustrative. My wife and I made the choice to send our kids to private schools because (a) we put a high priority on quality education, (b) we believed the private schools offered a superior experience, relative to what was available publicly, and (c) we had the financial assistance of my in-laws, which made the choice possible for us. The foundation built in our kids’ secondary schools set the stage for all of them ending up going to ivy league colleges. My kids did benefit from great educations, but what was good for them happens to be bad for America.

America is supposed to be a land of opportunity, but clearly, it’s not equal opportunity. Having the financial wherewithal to afford elite private school education has positioned my kids and others like them at the top of a societal caste system — not just because of the quality of their educations, but also because of the pedigree conveyed by earning degrees from schools that have effectively branded themselves as ones that turn out the best and the brightest. By sending our kids to these schools we’re perpetuating an inequitable social hierarchy. It’s hard to fault parents for trying to provide the best for their kids, but it’s quite another thing for public policy to be used in a way that is at odds with encouraging a more egalitarian society. That’s what’s happening when we allow tax exemptions for educational institutions that disproportionately benefit those who already enjoy the benefits of these elite colleges and universities.

Officially, tax-exempt schools are expected to pay tax on income not substantially related to their educational rationale, but income earned by university and college endowments or foundations is not considered to be “unrelated,” and thus the tax exemption applies. This posture is overly generous to those institutions, and it deserves reconsideration.

TheBestSchools.org website offers a listing of the 100 largest college and university endowments as of September of last year. The list starts with Harvard with an endowment of $38.3 billion and ends with the University of Tulsa with a $1.1 billion endowment. Given the performance of the stock market, It’s reasonable to expect virtually all of these valuations to have appreciated considerably since then. It’s safe to say that all of America’s most selective and elite institutions are high on this list. In fact, it’s telling to report the top 10.

  1. Harvard University — $38.3 Billion
  2. The University of Texas System — $30.8 Billion

3. Yale University — $29.3 Billion

4. Stanford University — $26.4 Billion

5. Princeton University — $25.9 Billion

6. Massachusetts Institute of Technology (MIT) — $16.5 Billion

7. University of Pennsylvania — $13.7 Billion

8. Texas A&M University System — $13.5 Billion

9. University of Michigan — $11.9 Billion

10. Northwestern University — $11.08 Billion

These institutions alone managed a combined portfolio in excess of $92 billion — and, again, that was in 2019.

It shouldn’t be at all controversial to say that the benefit of the tax exemption for educational foundations and endowments accrues to the faculty, students, and alumni (and, of course, the portfolio managers) of these august institutions. It’s not that these people are unworthy. They’re plenty worthy, but the beneficiaries are among the wealthiest and most privileged of our society. Are these really the people who should be the recipients of federal largess? Really?

If we’re ever going to address the systemic inequities of America, we need to take bold steps that alter the status quo. We should commit to examining the myriad subsidies and tax exemptions currently in place. Congress should take steps to reduce allocations that accrue to those who need them least and redirect those benefits to those who need them most. We can start with eliminating tax exemptions on educational endowments and foundations. It’s only right.

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Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University.

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Ira Kawaller

Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University.