Paul L. Caron

Wednesday, November 15, 2017

Harvard: A Tax-Free Hedge Fund That Happens To Have A University

Harvard 1Wall 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?

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Hey Rav -- Why don't those rich university foundations help out your poor PhD students?

Posted by: Mike Petrik | Nov 18, 2017 8:43:23 AM

In your venting, I'm afraid some of you have forgotten these entities are tax exempt. Even though they are just as profit oriented as Exxon, they don't pay taxes.

Posted by: Dale Spradling | Nov 17, 2017 4:56:58 AM

The Republicans have pretty much always tried to squeeze the middle class to reduce taxes for billionaires, at least since the 1980s. They've never been so brazen about it before.

The Republican Tax proposal is indeed about targeting Higher Education--it includes many provisions *in addition* to the endowment tax that specifically go after higher ed, like taxing graduate student tuition waivers, eliminating the lifetime learning credit, and taxing employer sponsored tuition remission.

Next thing the WSJ will be telling us is those PhD students living in penury are all secretly billionaire hedge fund managers.

If Republicans were actually concerned about rich people taking risks, they would go after people who are actually rich. The Forbes 400 are richer than the riches 400 universities. And that's 400 *individual people*, not 400 institutions with hundreds of thousands of students and employees to support.

But those rich people are getting a tax cut, while the middle class is losing its SALT deductions, healthcare deductions, mortgage interest deductions, and education benefits.

And soon the middle class will lose social security and medicare because with lower taxes and higher debt, those programs are no longer sustainable.

The Republicans are the biggest thieves in history.

Posted by: Republicans are vicious | Nov 16, 2017 6:05:40 PM

The tax cuts for the wealthy have to be partially paid for. If we reduce this 1.4% tax we will have to reduce entitlements more. After all, the wealthy think they are entitled to a large tax cut.

Posted by: Gator | Nov 16, 2017 6:32:29 AM

I don't think it's demonization. Tax=exempt hospitals have at least a minimal obligation of public access in return for tax exemption. Harvard doesn't. The issue should not be their endowment, but their entire tax exemption.

Posted by: mike livingston | Nov 16, 2017 2:20:08 AM

Yes, let's demonize universities so we can partially fund the repeal of the estate tax, continuation of the carried interest loophole, and other mechanisms that primarily benefit actual hedge fund partners.

Posted by: Unemployed Northeastern | Nov 15, 2017 8:23:39 AM

Mr. Gilbert evidently doesn't understand risk. If an investor diversifies across enough high-risk investments, the non-systemic risk inherent in those investments disappears. The premise that the 1.4% tax is a tax on taking risk is economic nonsense.

Posted by: Theodore Seto | Nov 15, 2017 5:38:47 AM