Wednesday, November 15, 2017
Wall Street Journal op-ed: A Hedge Fund That Has a University, by Thomas Gilbert (University of Washington) & Christopher Hrdlicka (University of Washington):
Whatever you may hear, the Republican tax-reform proposal isn’t an assault on higher education. The House and Senate plans include a new 1.4% excise tax on the net investment income of university endowments, but the levy applies only to private colleges with at least 500 students and endowments of more than $250,000 a student. Schools like Harvard, Yale, Stanford and Princeton—which together hold over $100 billion—are predicting doom. Yet this long-overdue tax will benefit higher education in the end.
Over the past 30 years universities have chased higher returns on their endowments, leading them to take greater risks. Our research shows that more than 75% of the assets in university endowments are now in risky investments: equities, hedge funds and private equity. Think of Harvard as a tax-free hedge fund that happens to have a university.
The proposed levy on investment income—dividends, interest and capital gains—is fundamentally a tax on this risk-taking, not on the endowments themselves. By taxing risk-driven income, the GOP plan doesn’t target higher education. It goes after hedge funds masquerading as university endowments. ...
In colleges’ defense, states have placed perverse restrictions on their ability to use endowments as rainy-day funds. The Uniform Prudent Management of Institutional Funds Act is a law in 49 states that limits the maximum endowment payout rate between 5% and 7% a year. Although well-intentioned, that and earlier restrictions prevent universities from tapping endowments to fill the kind of budget holes they experienced in 2008.
To have the best chance of improving incentives for endowments, the proposed investment tax should be accompanied by a repeal of these payout caps. But it’s a mistake to think that taxing risky investments by university endowments is an attack on academia. Discouraging superwealthy schools from pumping cash into stocks, hedge funds and private equity should lead to increased spending on education and research. Isn’t that the purpose of higher education?