<p>We already have a tax on the excess earnings of nonprofits. Organizations characterized as “private foundations” have to use at least 4% of their assets per year, determined on a three-year rolling-average bases, for their charitable purpose. If they fail that test, their earnings in excess of what they give away are subject to an excise tax. “Public charities”, including pretty much every private university, are not subject to that rule. But it wouldn’t be a huge leap to impose something like it.</p>
<p>The last time I looked at numbers, Harvard had earned $3.5 billion on its endowment in the previous year, and had taken in close to $500 million in new contributions. The total amount it contributed to the operating budget of Harvard University – including all those medical discoveries, as well as education – was about $1 billion (which was a little less than 4% of the endowment as of the beginning of the year).</p>
<p>Now, I’m a big fan of Harvard. But the sheer volume of its unused wealth is a little troubling. When a corporation amasses that much, it has shareholders who will be agitating for the company to do something productive with the money, or to distribute it to them so they can enjoy it (and pay taxes on it, of course, unless they are Harvard et al.). But nonprofits have no shareholders to which it can distribute money it doesn’t plan to use. And their administrators don’t mind sitting astride the largest diversified investment pool on earth.</p>
<p>Furthermore, one of the things that keeps public charities honest is the need to keep raising contributions from the public. If people don’t think the charity is doing a good job, funding dries up quickly, and heads roll at the top of the organization. Harvard still raises money actively, but it has almost certainly passed the point with its endowment where if it never raised another cent from alumni no one would notice the effect for several generations.</p>
<p>Am I casting my vote to make some of Harvard’s investment earnings taxable? Probably not. But it’s not a crazy idea.</p>