Emily Kowalik ‘18
Opinions Editor
Are the Republicans right – is it time to revisit the taxation of college endowments?
Dozens of wealthy college endowments use Caribbean islands as offshore tax havens for their investments, according to a report released recently by The New York Times, based on a leak of the offshore financial records known as the “Paradise Papers.”
College endowment funds have been fully tax exempt since 1984, but they have in recent years worked with private equity and hedge funds to borrow additional money to invest.
Institutions could be forced to pay taxes on the profits earned in this manner, because such earnings are not related to their educational mission.
However, colleges often avoid the taxes by hiding the money in offshore investment corporations. Private colleges and universities have increased their endowments through these secret offshore investments and tax-avoidance techniques.
Schools have increasingly turned to blocker corporations to shelter earnings and avoid scrutiny of investments involving fossil fuels or other subjects that might instigate campus controversy.
Many colleges, including Smith College, have been under pressure from student activists to move towards “green” investments and away from fossil fuel companies.
However, The Appleby records of offshore investment funds held by Columbia and Duke’s endowments show both held shares in Ferrous Resources, whose primary business is iron mining in Brazil. By using a blocker corporation, colleges shield an unpopular investment strategy in addition to evading taxation.
In addition to Columbia and Duke, Colgate University, Dartmouth College, Johns Hopkins University, Stanford University and the University of Southern California have all used blocker corporations. Officials working in colleges and universities that use blocker corporations generally refused to comment on the issue, citing policies against discussing their investment strategies.
Stanford, one of these schools that has benefitted enormously from offshoring, has begun to increase its undergraduate financial aid program, essentially offering free tuition, room and board to the lowest-income level students.
But, according to Stanford economist Raj Chetty, the top 38 private colleges enroll more students from the top one percent of the nation’s income earners than they do from the entire bottom 60 percent. So, what many wealthy colleges end up spending on their low-income students is essentially a pittance compared with what they could be doing.
For perspective, the University of California at Berkeley enrolls more low-income students than every school in the Ivy League put together.
Last week, Republicans proposed a tax reform plan that called for a tax on wealthy college endowments. The new tax would result in revenues of an estimated $3 billion from 2018 to 2027.
Currently, tax breaks for endowments cost the nation nearly $20 billion in reduced federal tax revenue annually. If that $20 billion was paid as taxes, it would provide almost enough money to double the federal Pell Grant program for low-income students.
I’m not a big fan of the Republicans’ tax reform plans, and I doubt the sincerity of their claim that their effort is motivated by a desire to tax relief to the middle classes. However, I think they may have a point when it comes to the issue of reexamining the taxation of college endowments.
