May 12, 2008
Slapping a tax on Harvard’s $35bn hoard
The move by the state of Massachusetts to impose a 2.5 per cent tax on its biggest university endowments is causing an outcry. It is not surprising, given what is at stake for Harvard’s $36bn foundation.
The debate was reported in the Wall Street Journal on Friday after rumbling along in the state’s media and in higher education circles this month. State politicians are feeling the budgetary pinch and have put forward a bill to levy universities in the state that have endowments of more than $1bn.
At the moment, although universities such as Harvard and Yale can be regarded as some of the world’s biggest hedge funds, they have tax-exempt status. They do not even have to meet the requirement on other non-profit foundations in the US to distribute 5 per cent of their capital each year.
I think it is a bad idea, for reasons I will come to. And, surprise, surprise, there are plenty of Harvard economists who think so, including Greg Mankiw. But before I say why, it is worth acknowledging the arguments in favour.
First, state governments have to get their money from somewhere and Harvard, the Massachusetts Institute of Technology, Boston University and the rest are rich and powerful institutions. The tax-exempt status, for example, means that they do not have to pay taxes on property.
Second, the most successful university foundations have had an extraordinarily good run in recent years. In terms of financial wealth, they have pulled away not only from other US universities but the rest of the world. Which university does not look enviously at Harvard’s hoard?
Last, there is a case for redistribution. Brad DeLong describes how the University of California has grown hugely while Harvard has simply got richer. He does not say that, once upon a time, state universities such as Berkeley were comparable with private ones in terms of research expertise and prestige. No longer.
The reason for that is money. Going to Harvard or an Ivy League private university confers a clear advantage in the job market. I remember being told by one private equity executive that his organisation did not bother to visit anywhere other than Harvard Business School and the Wharton School for recruits.
Since its graduates tend to be richer, Harvard can then collect more money from them in donations. That makes it richer still, which gives it more research clout and more prestige, which increases its attractiveness. So a tax on its foundation might at least level the playing field a little bit.
Having said all that, I still think it is a bad idea. The reality is that Harvard and the other universities contribute an enormous amount to Boston and Massachusetts and it is not as if they are squirreling their money away in Swiss bank accounts. Eventually, it will flow back to benefit the institution.
As Greg Mankiw says, Harvard or any other university could also shift itself to a more tax-friendly location if it comes under pressure. The reality is that many places in the world would kill to host an elite university - just think of all the dismay in continental Europe about the lack of a comparable institution.
Above all, a leading global research institution is an extremely hard institution to create. The fact that Massachusetts has several should be a cause for pride and to treat them with kid gloves. They are indeed golden geese, which could be scared away.
Perhaps Felix Salmon is right that universities should come under similar rules as other non-profits - having to distribute 5 per cent of their capital annually to avoid taxation. But that is as far as it should go.
The image of elite US universities is somewhat tarnished in continental Europe, since some high-profiled graduates of these institutions have been sacked as their performances/strategic decisions have resulted in huge losses for the companies they worked for in Europe. In particular the banking and insurance sectors have been damaged.
A lack of regulation encourages scams, imo, which Americans seem to tolerate to a far greater degree than continental Europeans.
Why is this so? In fact, scams are a part of American economic history when Ellis Island(in the late 1890s) became the place of entry for millions of immigrants,
including of course the most successful group of immigrants ever into the USA, the German Jews fleeing from Nazi Germany.
As the American author & journalist Bill Bryson
(he’s now the Chancellor of Durham University in England!!) wrote in his best-seller
“Made in America” p. 167:
“Once landed on Manhattan the new immigrants would immediately find further manifestations of the wondrousness of America. At the landing point they would often be approached by fellow countrymen who spoke their language, but who were friendlier, easier in their manner and far more nattily dressed than any they had seen at home. With astounding magnanimity, these instant friends would offer to help the newly arrived immigrant to find a job or lodgings and even insist on carrying the grip into which he (the immigrant) had packed his few valuables - one couldn’t be too careful in New York, the immigrant would be solemnly cautioned. And then at some point the immigrant would turn to discover that his new friend had vanished with his belongings, and that he had just learned his first important lesson about life in a new land. Few newly arrived immigrants were not fleeced in some way within their first days.”
With Harvard being associated with Hedge Funds and Private Equity, a degree from that university is not a passport to success in continental Europe any more, imo, since Franz Müntefering (Gerhard Schröders Vice-Chancellor and a very prominent pol in the German Social Democratic Party) gave the name “Heuschrecken” (locusts) to Hedge Funds in spring 2005. That term caught on like wildfire with the public not only in Germany but in other continental European countries. This is probably another reason why many anglo-saxon banks are now downsizing in the UK and other European countries and moving personnel and top managers to the Persian Gulf (UAE in particular) and to the Far East (Singapore in particular).
Fundamentally, the anglo-saxon business mentality is short-term oriented towards maximizing salaries for elite partners, managers and traders which has encouraged massive speculation, immense leverage, a tsunami of
Posted by: J.J. | May 12th, 2008 at 8:48 am | Report this commentilliquid financial products, and created a massive bubble which has now burst. Now the same is happening in oil, and OPEC is considering holding an emergency meeting to deal with this, in advance of its planned meeting late this summer.
This article doesn’t mention what is the likely driver behind Massachusetts tax initiative - the decrease in property values and a faltering economy are leading to huge budgetary shortfalls for many states and localities in the US. Many such governments are also constitutionally bound to have balanced budgets. With the endowments’ huge run-up in value since the turn-of-the-century, these may be seen as relatively quick sources of supplementary government revenue.
Sadly considering the good reasons espoused here for leaving the endowments alone, the financial pressures on US government bodies will likely see the rise of schemes such as this as the tax coffers shrink.
Posted by: Andrew | May 12th, 2008 at 10:26 am | Report this commentWhat is so wrong with taxing university coffers. The way I see it the US has been in a vicious cycle which has stretched the rich-poor divide. Think of this analogy- graduate from harvard, join PE firm, pursue asset-stripping and fire some poor workers, make tons of money, donate to harvard so your kids can head to Boston. I am failing to see how this benefits the broader society? I would love to know how many poor kids harvard sponsors as a percentage of their student body.
Posted by: kb | May 12th, 2008 at 11:06 am | Report this commentI am so glad to hear the PE executive thinks that all the smart people are from harvard and wharton. Needless to say he sincerely believes in diversity of opinion. Thats a clear recipe for success. No wonder investment banks are losing so much money- One word - Group Think!
Witout supporting the proposal to tax Harvard’s endowment it does seem rather unlikely that the University could “shift itself to a more tax friendly location”. I would suspect that a university is one of the least mobile institutions.
Posted by: Ian Stuart | May 12th, 2008 at 11:27 am | Report this commentTo Andrew:
These days around 75% of Harvard undergraduates receive some form of financial aid - and the mean value thereof oscillates around $30,000a year. This year alone, Harvard will distribute in excess of $100,000,000 in scholarships to its undergraduates - not to mention its doctoral grants, which are some of the most generous in the nation. Recently, Harvard Law has announced a scheme whereby its final year students who commit to at least five years of public service will be exempt from tuition fees completely.
For these reasons and many others, I think it is difficult to maintain that institutions like Harvard do not benefit the public.
Posted by: Piotr | May 12th, 2008 at 11:53 am | Report this commentI negotiate for workers at all of the major educational institutions such as Harvard, MIT and BU.
The reality is that these schools function as faceless corporations with 19th century labor relations departments that win them few friends even among their employees. This is true even though they provide stable, if not overly generous paying, jobs.
The schools appear to have unlimited amounts of money to spend on elaborate buildings, extravagant dinners, and the like and you’d have to be blind not to see it. Furthermore, they are big, clumsy, bureaucracies with organizational structures are neither efficient nor smart and the waste is simply astounding. The workers see all this and tend to roll their eyes when the institutions cry poverty.
There is absolutely no way places like Harvard are going to pick up and move to India or any other low wage haven. I’d like to see them try. The fact is, all of these schools could do more for their staff without a great deal of financial pain and greatly improve their image both on and off campus.
I would also argue that this perception rings true for most average Bostonians who watch as schools infringe on their neighborhoods, run up rents, disrupt their communities and unfairly push their weight around. By and large, they are not viewed favorably by either taxpayer or property owner.
This is a toxic political environment which is always on the verge of getting worse and the universities have no one to blame but themselves.
Posted by: Wayne Langley | May 12th, 2008 at 12:00 pm | Report this commentHum. Harvard economists? Surely not the same people that lecture on the benefits of flexible job markets (it keeps workers on their toes, and translates into higher productivity)….whilst profiting from a job-for-life institution: called tenured professorships… just another case of human hypocrisy exposed (in my opinion, their endowment funds should just be taxed like anybody else’s / I recall something I learned in America: your tax cut/exemption is my tax rise!).
Posted by: Anon | May 12th, 2008 at 2:32 pm | Report this commentI have wondered about the ‘non-profit’ designation of private universities because most of the ‘donations’ they receive are from former students, who - in any rational analysis - are nothing but customers. Of course these contributions are not required legally, but a long standing code of behavior has developed which, de facto, assures payment.
And of course the ethical morass of ‘non-profit’ universities does not stop with their getting free ride from society. It also seems illogical that customers (err, students) should, by calling some payments to their alma mater ‘donations’, get to deduct these from their income tax.
Posted by: tweston | May 12th, 2008 at 7:12 pm | Report this commentHarvard was the first University to give automatic scholarships to students whose parents earn less than $40,000. It also gives reductions to households earning less than $60,000. The implication that they are not performing a public service is a tad unreasonable. They are probably the best of America’s private universities when it comes to helping in low-income students. It’s Harvard’s huge endowment that allows them to do all this.
Posted by: Phil | May 12th, 2008 at 11:20 pm | Report this commentBe realistic Mr Gapper, do you know of any prestigious university who’s ever moved out of the location from which it was associated with?
The Cambridge (Mass) campus and its history are an integral part of Harvard. If Harvard were to move it would lose its soul. Beside do you really think these rich American Aluminas would still be donating if Harvard were to move to some tax-heaven?
I personally think the $35bn would be fine if it weren’t for the fact that money is short at every level of government these days. Weren’t you supporting a revitalisation of the US road system in a previous article? The government needs money and unfortunately for Harvard, it is loaded and there isn’t much it can do.
Posted by: Christian G. | May 12th, 2008 at 11:43 pm | Report this commentIt’s alumnae and not Aluminas in my previous post…
Posted by: Christian G. | May 12th, 2008 at 11:49 pm | Report this commentWhile it is true that Harvard’s endowment is famously huge and that it’s status and reputation in most disciplines is among the best, these and other institutions of higher education are in many respects singularities which can but rudely be lumped with others without peculiar effects. The same applies to MIT.
Harvard *predates* much of Massachusetts, and Boston’s eminence as a technology and science center only happens because of these institutions and the critical intellectual and inventive energy they collect. I’ve tried to do good technology work in intellectual backwaters, seeking cheaper cost of doing business, and it is very difficult.
I see this proposal more as desperation, for the reasons J.J. mentions, and because the mood in the United States — as well as in Europe — is frankly tending to the anti-scholar, anti-science, and anti-inquiry. (Consider what’s happened to physics departments in Britain.) Large companies cut technical libraries in downsizing. Small towns almost never have libraries any longer. The short term focus of companies has descended upon the household. Students don’t want to study maths, or engineering, or science, because it is too hard. And Presidential races are sporting events, not serious examinations of hugely important issues.
Among those issues is how research and educational funds, once plentiful when coupled to a Cold War and national security, have been deeply cut, even for the largest institutions in the land. Universities have instead pursued corporate connections and deep endowments.
There is a disparity in taxes paid to the local community among Harvard and MIT, but, for instance, it is known that Harvard does contribute to and pay for significant public works and infrastructure.
I think any move to tax these universities is foolhardy, since it will lessen their interest in supporting local communities and regions. They may not leave, but they may reorient.
Posted by: ekept | May 13th, 2008 at 1:06 am | Report this commentTaxing Harvard’s endowments will seriously question the Governance of Massachusetts, which has recently come under financial shortcomings. An act of desperation, a last-ditch effort, bad politics - these are the images that come to mind.
Harvard, MIT, and other Elite Institutions, make up the Jewels in the crown of Massachusetts.For centuries, Harvard has stood as an epitome of excellence, creating Leaders in every stream of Education.Harvard’s endowments are, in turn, a symbol of its legacy, and should not be looked upon as a squandered mass of wealth.Harvard has undeniable rights over its coffers and owes no obligation to distribute it.
Harvard has done more to Boston than did Boston to Harvard.To seek a share from its endowments would never improve the climate in Boston but rather affect the low-income people.Harvard is doing more to help poor kids get education, funding research that goes back to the public and puts “non-profit” service in top of its agenda.Demanding money from Universities such as Harvard is a shame.
The government of Massachusetts should come up with better practices that should be exemplary to other states of the US.Harvard’s hoard, national treasures, monuments are not solutions to our problem, but rather true Statesmanship is !
Posted by: Arun | May 13th, 2008 at 3:31 am | Report this commentOf course Harvard should be taxed-look at the damage they have caused to the US by their practice of the most pernicious form of affirmative action known to man-the Alumni Preference. Harvard’s practice of this form of “Rich Man’s” affirmative action is a KEY contributor to the decline of the US.
It’s simple; the very rich and unqualified (incompetent) people inherit their place in Harvard, or buy it through “donations” crowding out untold numbers of MUCH more qualified middle class and poor students.
This in turn jams our country with shockingly incompetent people throughout our society and as you can see this is causing America’s shocking decline-we are currently being beaten in all dimensions by 3rd world countries.
And you need to look no further for proof of this than George W. Bush. Here is a man who is so unqualified the UT Austin turned him down cold but Harvard took him on the spot because of who he was related to, not how qualified he was.
So Harvard gave their seal of approval-their guarantee that this man was qualified “Harvard” material competent to run the country. And now America is in terminal National Decline-Thanks Harvard.
Tax Harvard until they stop this discrimination and stop funneling more incompetents into positions of power in the US-we can’t afford any more of this. The LEAST Harvard could do is pay something for the damage they have done.
Posted by: Martin Etter | May 13th, 2008 at 4:20 am | Report this commentHi there-consider for a moment what some are seeking to tax, it is not the university and thereby the intellect but the financial infrastructure that supports it. However without the financial infrastructure there is no fertile ground for new innovations and technologies to prosper. It is innovations and new technologies that enable wealth creation. Universal wealth is not created to any large extent by retail trade (which is what the US media show on their news broadcast when talking about the wealth of America, contrast with Japanese/Chinese/Korean news stories). And this is not an issue of taxing the rich to give to the poor but to tax the successful with no view to the long term impact, in a bid to fix a fundamental mistake in the finances of the State. Those agitating for such as tax would be as well to look at who is motivating them to do this and what their motivations are. And since when did any financial construct, maintaining a sound, long termist, financial policy that is prudent and successful (Harvard has not defaulted on its loans unlike a large number of cities) become a tempory cash box that is to be effectively raided in support of a state that proved less effective at its own fiscal policy.
Posted by: Max Lovell | May 13th, 2008 at 7:48 am | Report this commentBugger, i’m hungry. Bright idea - I’ll kill the goose that laid all my golden eggs.
Posted by: Michael | May 13th, 2008 at 8:13 am | Report this comment“As Greg Mankiw says, Harvard or any other university could also shift itself to a more tax-friendly location if it comes under pressure. The reality is that many places in the world would kill to host an elite university - just think of all the dismay in continental Europe about the lack of a comparable institution.”
Bullsh*t. Harvard has many billions of dollars of physical plant, let alone the other difficulties.
“And you need to look no further for proof of this than George W. Bush. Here is a man who is so unqualified the UT Austin turned him down cold but Harvard took him on the spot because of who he was related to, not how qualified he was.
So Harvard gave their seal of approval-their guarantee that this man was qualified “Harvard” material competent to run the country. And now America is in terminal National Decline-Thanks Harvard.”
Frankly, this would justify taking all of Harvard’s endowment, which would be a tiny fraction of the damages done by Bush.
Posted by: Barry | May 13th, 2008 at 6:47 pm | Report this commentAfter living near an Ivy League University and seeing the little they did for the local community; I see no reason why they should not be forced via taxation to help pay. Harvard owns business property around the school and has evicted the mom and pop stores in favor of chain stores. They raised tuition
Posted by: AJ Widget | May 14th, 2008 at 12:53 am | Report this commentexcessively and then through a rebate make it affordable for their middle class and poor students. It is time they paid back the communities. As for their quality of student leaders: all you have to look at is George W. Bush (Yale by the Bush family, and Harvard by large donation).