Jorge Klor de Alva and Mark Schneider make the argument.
many of the richest universities in the country–sitting on hundreds of millions, if not billions, of dollars in tax exempt endowments, and garnering tens of millions of dollars of tax deductible gifts every year–receive government subsidies through current tax laws that dwarf anything received by public colleges and universities, institutions that educate the majority of the nation’s low- and middle-class students. For example, we estimate that in 2013, Princeton University’s tax-exempt status generated more than $100,000 per full-time equivalent student in taxpayer subsidies, compared to around $12,000 per student at Rutgers
University (the state flagship)
However, the flaw is not that rich educational institutions benefit more than other educational institutions from tax exemptions. The flaw is that our tax system has designated certain institutions as morally superior to others because they claim non-profit status.
The essay that I wrote on this topic is one of my favorites.
Other tax issues might be moot if instead of taxing income or profits we shifted to a tax on the consumption of goods and services. Such a tax system would place profit-seeking firms and nonprofits on an equal footing. It would continue to exempt donations from tax, but it would equally exempt other forms of saving and investment.
But endowments aren’t for the most part consumed and education is an investment, so no change then?
How can state subsidized schools complain about private schools not having their donations taxed (or the returns from investing those donations)?
It is also bizarre that state schools are even allowed to haveendowments. Can public high schools have endowments? How about the Game and Fish department? Or Job Services? It doesn’t seem prudent that each little fiefdom has its own sovereign wealth fund.
The biggest problem with tax exemptions and deductions is that they come with a huge string attached: the favor of the state.
Everybody knows that if you say or do the ‘wrong’ thing (the thing the state doesn’t like), or fail to do the thing the state wants you to do ‘voluntarily’ (so that what would otherwise be prohibited doesn’t run afoul of the State Action Doctrine), then they can decide to investigate you and remove your tax-exempt status, which makes you uncompetitive vs. your tax-exempt peers, which can spell doom for your institution.
Provocative numbers to be sure, but their methods look unforgivably shoddy. Based on their Appendix A, the authors looked at a table of endowments and compared 2013 with 2014 and simply multiply the difference by a combined capital gains tax rate.
Two glaring problems: (1) they ignore that much of the endowment growth is due to new giving, not capital gains; and (2) they compare for a single year in which endowment growth happened to be substantially above average across the board.
Re (1), would the authors seriously suggest that Yeshiva, (which spent down its endowment between 2013 and 2014 according to the table they reference) had a *negative* subsidy?