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It’s Time to Tax the University Endowments

Good tax policy should help build a country's future, tax-free status for colleges doesn't do that anymore

Imagine you are a senior executive member of a foreign intelligence service dedicated to global domination and overtaking the United States as the sole superpower in the world.

Your boss gives you a long-term assignment: find a way to brainwash the American intellectual and media elite, steal American intellectual property, bankrupt the otherwise-wealth-accruing middle class, foment class warfare and general social unrest in the United States, and train the elite children of our own senior party officials to become insanely rich and good at gaming the system. In time, this would play a key role in supplanting the United States as the key superpower in the world.

At first, you might be pretty overwhelmed at such an assignment. How on earth could you build such a massive conspiracy under the noses of the American people? How could you simultaneously fleece them, train their children to be subjects of your own children, and make your colleagues and children rich in the process?

Then, relief. You discover that one American institution is already undermining the country’s future: the universities.

They have everything you need: a goldmine of intellectual property created by professors with poor op-sec and who are happy to share it for some rubles or yuan deposited directly to their bank accounts; cybersecurity practices that would make a 90s computer hacker blush; sky-high tuitions guaranteeing debt-servitude for all students but those from the wealthiest families; a propensity to take foreign money and set up as many “programs,” “institutes,” and “centers” as they need to to keep getting it; tax-free endowments that you can both fleece through getting to invest in your companies and that you can send your agents to work for; and excellent credentialing abroad so your colleagues can send their children there to train the next generation of mandarins to rule and manage society.

These institutions are a mother load of negative externalities, and a godsend for anybody looking to undermine the American future. And the best part is that the American government props them up with tax-free status and relatively little oversight.

You and your government can profit off these externalities. All you need to do is bribe some professorsinfiltrate some security networks, and send your officers to attend as students.

Dirty Money in the Ivory Tower

Meanwhile, the executives in charge of America’s elite universities will rake in millions to fly around the world and entertain foreign donors. Are you an oil sheikh whose government funds terrorism abroad and you want a top-tier American university campus in your country? Anything is possible with enough donor dollars. Or are you a Chinese Communist Party member who wants to get your money out of China’s stringent capital controls? You could put all of your money into metal stores like aluminium or luxury properties in Vancouver or San Francisco to save it from the CCP’s prying eyes. Or you could park it at major American universities, buying your children and grandchildren their own spots and top-tier credentials. Yale and Harvard may have a deal for you.

American university presidents are paid millions of dollars every year to seek out donations that result in these kinds of decisions. While the American middle class sees diminishing gains from higher education and drowns under debt, American university presidents jet set across the world courting foreign dollars.  Georgetown, Carnegie Mellon, NYU, Northwestern, and countless other American universities have campuses in the Gulf Arab states. The Chinese Communist Party has its infamous Thousand Talents Program to pay American academics to give intellectual property to Chinese institutions. Even if the foreign families aren’t directly “donors,” they are courted as such by the universities because the universities can charge them full-sticker price to send their students to an illustrious American institution.

Hedge Funds with Classrooms Attached

This money then gets invested – not in creating American infrastructure or in promoting a stable, safe, and welcoming future for Americans – but in tax-free family offices and hedge funds known as university endowments.

America’s richest universities are sitting on more than $100 billion in endowments. Those endowments are tax-free but operate essentially the same as a family office or a hedge fund. They have Chief Investment Officers and teams of analysts and associates moving money around between private and public markets. If Harvard’s $40.9 billion endowment were treated as a hedge fund, it would be about the same size as Elliott Management and one of the largest in the world.

David Swensen, the Chief Investment Officer for Yale University (which recently announced it was going on a hiring freeze due to the coronavirus pandemic), admits in his book Pioneering Portfolio Management that he would not be able to get the outsized returns he does for Yale if it were not for the tax-free status the endowment gets. Yale’s endowment is over $30 billion.

With these kinds of numbers, America’s universities are tax-free hedge funds with classrooms attached, as TAC covered in 2012. With $100B+ in their combined endowments, American universities could open a campus in every major American city. But they don’t. They could pay students to work hand-in-hand with Americans in rustbelt cities, advancing sound infrastructure plans for autonomous vehicle proliferation, upgrading American cybersecurity infrastructure, and starting businesses locally. But they don’t. They could pay off the debt of every med school graduate who works in a struggling rural hospital. But they don’t.

Instead, they lay off working class staff and move to glorified Zoom sessions at the first sight of foreign money drying up. All while giving students pass/fail grades for the semester.

Good Tax Policy Should Empower a Country’s Future, not Undermine It

Good tax policy is about encouraging constructive behavior, discouraging destructive behavior, and internalizing externalities. It’s clear by now that the tax-free status given to university endowments does none of the above.

It would be one thing if American universities were using these endowments to promote the common good, but research is an afterthought to university executives, who spend most of their time courting foreign donations and hiring the best possible chief investment officers for the endowment. Academics and students are mere afterthoughts that help protect the tax-free status. If world-class research occurs on campus, that’s in spite of the university’s divided interests, not because of them. If world-class education occurs for most students, that’s in spite of the university’s credentialing, not because of it.

The negative externalities go beyond just foreign entanglements and gaping security threats. The gains from most university education continue to stagnate for middle class Americans. The human capital gains from university education are middling, at best. Bryan Caplan’s The Case Against Educationa comprehensive survey of the human capital literature, goes to great lengths to show that the gains from higher education sit in the issuing of degrees, not in education.

With that in mind, it becomes even clearer that American universities are selling credentials to wealthy foreign families, handing intellectual property to hostile foreign intelligence services, loading up young Americans with debt that can’t be discharged in bankruptcy, and getting rich off of tax-free endowments.

That’s a dangerous formula for an uncertain future. How can any sane government allow such a process to continue? Why would any government incentivize such behavior?

Conservatism is about building and supporting institutions that allow families to plan for the future and build communities that make life worth living. It’s about smart tax policy that encourages the behavior, consumption, and spending habits that build that future.

The revenue brought in from American universities can help build an American future: helping Americans start families, paying off usurious debt, promoting domestic research, and bringing American manufacturing home.

It’s time to give up the romanticized view of American universities as noble institutions of learning that just so happen to have endowments to fund this noble pursuit. It’s time to recognize them as hedge funds that keep students around to maintain a tax-free status. It’s time to tax the endowments.

Zak Slayback is a technology professional who lives in the United States. He tweets at @zslayback and writes at zakslayback.com.