Tag Archives: Endowments

John Cochrane on the university endowment tax

John Cochrane:

How can we credibly proclaim that we, universities, provide the true public good and deserve subsidies, but the rest of you get lost? Do we not look just a little hypocritical if when a tax reform is announced, we jump in line with the rest of them to demand our pork back?…

Moreover, if indeed universities provide useful public goods — and they do, and I  include low tuition for low-income students and basic research — surely how that activity is subsidized matters. There are good and bad ways to subsidize anything…

Usually, giving a lot of money to a large opaque and competition-protected bureaucratic institution that does a lot of things, to spend as it wishes, does not produce the outcome you want. Usually, funding that subsidy by giving a franchise such as a little monopoly or the unique opportunity to run a tax-shielded hedge fund does not produce the outcome you want.

When you want  a public good from such institutions, conservative principles usually suggest that the subsidy be transparent, annually appropriated, reviewed, and given for the activity you want. Give federal scholarships to the students, chosen by federal rules, and studying things that taxpayer representatives find useful. Support research through competitive grants. Perfect? No. But a lot better than counting on tax-subsidized endowment profits to go where you want them to go.

Otherwise, you tend to get big administrative bureaucracies, sports and recreation programs, bloated faculties with high salaries, low teaching loads and a lot of silly research, and a few crumbs to the worthy students…

If income inequality is so bad, what about college inequality

College endowments have been in the news quite a bit lately, with some in Congress thinking about taxing them, and a debate about payout rates, with former Harvard president Larry Summers arguing universities should pay out less and Felix Salmon arguing they should pay out more. Tyler Cowen also considers a higher payout rate

A second view is that inequality is bad, and institutions tend to become sluggish and excessively bureaucratic in the longer run.  Perhaps every now and then they should be required to “start afresh”; a’ la Jefferson: “every now and then higher education must be refreshed…” etc.  That would suggest a higher payout rate. You will note that the law mandates a payout rate of five to six percent for charitable foundations…

but doesn’t quite endorse it. I reached a similar conclusion about 8 years ago, but since I hadn’t thought about it in awhile, I figured I’d take another look, and since inequality has become a bigger concern since then, I was curious about the distribution of college endowments. The figure below shows Lorenz curves and Gini coefficients, two dominant measures of inequality, for college endowments, college revenue, and, for reference, US household income. college_inequality

College endowment inequality is absolutely astounding, with a Gini coefficient of 0.91 (for reference, the Gini coefficient for US household income is 0.48). And that is excluding the for-profits, which don’t have endowments. Taking into account all college revenue (and bringing the for-profits back in) still yields a Gini coefficient of 0.55, considerably higher than income inequality among US households.

The main lesson I take away from this is how bizarre it is that many voices are arguing that US income inequality is intolerable (Gini = 0.48) and requires massive redistribution but are completely silent when it comes to arguing that we should redistribute college endowments even though they are so much more unequally distributed (Gini = 0.91).