By Richard Vedder
As one who has been accused of being to the right of Genghis Khan with a severe hangover, the headline on today's blog may seem a bit startling. Herbert Allen, who Forbes Magazine tells us is the 410th richest man in the world, in today's New York Times argues that endowment inequality is huge and growing. That, in turn, disadvantages most American universities and contributes to the costly academic arms race. Hence, let us tax rich universities. Harvard made $7 billion or so last year from its endowments --why not tax them 15 percent of that ($1 billion) and give the proceeds to other, but poorer schools? Allen is an investment banker, a director of prestigious corporations (e.g., Coca Cola), and is a respected name on Wall Street. When the Wall Street establishment starts calling for taxing Harvard, that is news.
Actually, what Allen is proposing is similar to what I suggest as one option in a study I have just completed, but not posted yet, on federal tax policy towards universities. If we are going to give huge tax breaks to wealthy schools, they should use those funds in a way to serve the broader public interest --perhaps by expanding supply (e.g., opening up Harvard West in Arizona, Princeton South in Alabama), or by providing assistance to "less developed universities” similar to the way foreign aid is handed out by prosperous countries to less affluent nations. If, however, they fail to spend the funds appropriately, we should tax them.
The libertarian side of me has some problems with all of this --but it has problems also with taxing kids who inherit the family farm in Iowa upon their parents' death, but then make Meg Whitman exempt from taxation for providing luxury hotels for upper class kids going to Princeton.
I have proposed an Under Spending Tax—set some threshold spending level based on the fairly long run past investment return of the institution in question (say the last 10 years). Spending below that threshold will be taxed at 15 percent. If Harvard has a 10 year rate of return on investment (excluding endowment growth from new gifts) of, say, 12 percent, set the threshold at, say, 7.5 percent (12 percent minus 3.5 percent for inflation minus an additional 1 percent because of alleged inherent difficulties in reducing college costs). On Harvard's current endowment, that would mean spending about $2.6 billion annually. Harvard in fact spends a little over $1 billion. Impose the under spending tax of 15 percent on the $1.5 billion differential -- about $225 million a year.
Allen, I think, would give this money to poorer universities. My inclination would be to give the money to students—the consumers, not the producers. GIVE IT TO THEM DIRECTLY, not to the financial aid offices of the schools, who then manipulate their own aid so the total aid package is what they want it to be, independent of the student's best interest.
Suppose my under spending tax raises $2.5 billion a year (not implausible, I think). Give one million new $2,500 vouchers to students annually who are: 1) from low to moderate income families, 2) who show good academic promise and 3) who will agree to repay the amount with interest if and when their post-graduate income exceeds by 50 percent the minimum annual earnings of full-time, year round American workers. This creates a redistribution of wealth away from plutocratic universities towards moderate income kids with ambition and academic success, but does it in a way that does not seriously jeopardize the supremacy of the rich schools. It is a politically doable approach --not ideal, but perhaps better than doing nothing.
To be sure, this is a Second Best type solution. Ideally, the government should be getting out of the financing of higher education—period. I think its infusion of funds has corrupted the academy, led to inefficiencies and promoted an arrogance towards the general population that is both astounding and revolting. But as long as tax-exempt private financing is going to continue, let us start to channel funds to students, not institutions, and let us use those funds to promote equality of educational opportunity as well as institutional equality amongst American universities. Just a thought.