<p>NewHope33, I fully support taxing MIT’s football revenue. In fact, I think the state should get at least 200% of the revenue MIT brings in from football. At least. Maybe something like 500% would be more appropriate.</p>
<p>:D</p>
<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>
<p>But there’s a difference between taxing the earnings and taxing the assets themselves, which seemed to be what the OP was suggesting.</p>
<p>I agree with your post though.</p>
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<p>Not really. It is more like taxing any appreciation in your home equity whether you sell your house or not. </p>
<p>Most endowment growth is strictly a paper profit. Universities may have to sell some of their assets in order to pay any additional tax. They are not sitting on a lot of extra cash beyond of what they use for operations.</p>
<p>It would be bad policy to base it on a single case, to wit Harvard.<br>
Taxing earnings in excess of an institution’s needs for its operating budget (or above a certain threshhold) would need to take into account 1. periodic fund-raising campaigns that provide temporary excesses and 2. the savings such institutions make in order to build new buildings and programs.
Harvard has made known its plans for Allston which is something like a 25 year plan during which it not only raises money but also taxes its own faculties (this has been one of the reasons why the Faculty of Arts and Sciences was so unhappy with Larry Summers). Once the university actually begins building, a lot of the “excess” will likely disappear. Other colleges and universities similarly have plans for adding buildings and programs, though perhaps not as ambitious. Any scheme to tax their excess earnings would have to take into account the way they finance their expansion.</p>
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<p>What?! Sounds so un-American…</p>
<p>It’s worth noting that the only other private assemblage of tax-exempt wealth equivalent to Harvard’s – the Gates Foundation – made grants of over $2 billion in 2007, or roughly twice Harvard’s spending rate. The Gates Foundation is about the same size as the Harvard endowment – $37.5 billion vs. $41 billion. </p>
<p>The comparison is a little unfair in both directions, of course. The Gates Foundation intends to liquidate itself over the course of a generation or two. At the same time, it is much less diversified than Harvard – most of its wealth consists of Microsoft or Berkshire Hathaway stock, although it is certainly diversifying a a nice clip – and therefore a good deal riskier. But it is virtually assured of attracting more new contributions than Harvard over the next few years, thanks to Warren Buffet’s 10-year pledge. And in many respects it is not yet up to full speed.</p>
<p>As for the Allston project: A couple of years ago, Stuyvesant Town/Peter Cooper Village – 80 acres of land in mid-town Manhattan, with over a hundred buildings and over 25,000 residents – sold for $5.6 billion, or roughly two years of Harvard endowment growth net of contributions to the University’s operations. I don’t expect to see Harvard’s endowment shrink to the measly levels of, say, Yale’s anytime soon.</p>
<p>garland, at post #27(?) asked whether I thought Wesleyan should pay a tax on its endowment.</p>
<p>It depends. I think Marite brings up a good point in post #45: one factor should be whether the college or university is in a growth cycle with active plans for future use of its endowment.</p>
<p>Wesleyan faced many of these same questions in the early sixties when its endowment was probably worth well in excess of $1 billion in 2008 dollars. It too, was a big employer, paying above-average wages in a blue-collar host city; its presence also had a huge multiplier effect on surrounding communities. Middletown did considerably better than its neighbor, New Haven, to the south in the 1970s thanks, in part, to Wesleyan’s rather astounding growth spurt.</p>
<p>In fact, some critics would argue Wesleyan was spending down its endowment in so doing.</p>
<p>Even now, Wesleyan is spending about 7.5% of the total return on its endowment, which is nearly twice the rate at which Harvard spends its.</p>
<p>Re post 46: Did you know that HU rents Mass Hall from Harvard College? One interesting fact about Harvard is how little money the University (as distinct from its component parts) actually has. So for something like Allston, it has to levy monies from its constituent parts. Another tidbit is that the Faculty of Arts and Sciences (i.e Harvard College plus the Graduate School of Arts and Sciences) has been in a deficit for the last several years. </p>
<p>Re: post 48: I suppose Wesleyan has to spend more. When my S was attending, many buildings were crying out for renovation. </p>
<p>Universities have done very well in the last couple of decades. But I remember when Yale was coping with a deficit by mowing the lawn and washing windows less often and dealying much needed building maintenance.</p>
<p>^^hey, I know of at least one Connecticut doctor whose education was paid for by a Wesleyan building and renovation project. :D</p>