The Obama administration dropped its call for taxes on 529 college savings plans. These tax-preferred savings vehicles allow families to put away money to pay for Junior’s college expenses when the time comes. The outcry against the administration’s proposal was not surprising, and it makes no sense to undermine the program.
Nevertheless, the administration’s desire to rethink the funding of higher education is sound and to be encouraged. We have lots of perverse incentives in the current system that bloat costs. We also have a system that overemphasizes the classic four-year undergraduate residential model.
To this end I propose a progressive approach that should appeal to conservatives. The endowments of the wealthiest universities should be taxed to fund a common purse for education that can be spent on tuition tax credits to help all Americans afford some form of post-high school education, which is what we need today as the old student loan model becomes burdensome for young people.
Consider a tax of 2 percent on endowments that exceed $100,000 per enrolled student, stepping up progressively to a maximum of 5 percent for endowments that exceed $1 million per student.
Example: Harvard’s per student endowment is $1.8 million per student. Yale’s is $1.9 million. Both would thus qualify for the 5 percent endowment tax. Their combined endowments are $50 billion. My proposed tax thus provides the federal government with $2.5 billion in tax revenue earmarked for education.
Yale and Harvard are very rich schools. But there are others. I haven’t done the calculations, but I imagine my proposed tax would produce more than half of what President Obama wants to spend to expand access to higher education.
This is a tax progressives should love. America has a uniquely unequal system of higher education. We’re the only place in the world were gigantic sums of money have been accumulated by relatively few educational institutions. Just as redistribution makes sense when it comes to personal income, surely it makes sense when it comes the wealth of educational institutions.
This is also a tax that conservatives should love. Educational diversity should be our goal. That means creating the conditions in which niche colleges and new ones can flourish. We should want to break down the stranglehold a few elite institutions have on our educational culture. The $25–$50 billion raised by the endowment tax can offset tuition tax credits. This will empower families to make their own educational choices, rather than being seduced by outsized scholarship offers that only the rich schools can afford to make.
Some will say this will weaken our famous universities. Well, yes, to a certain degree. But there’s a great deal of waste at elite universities. Moreover, what we need is a strong system overall, not fifty or a hundred universities that prosper while the rest struggle.
Some will say this will discourage donors from giving to places like Harvard. Again, yes, to a certain degree. And is that bad? Aren’t we better off if billionaires think twice about adding to already obscene endowments and give to a local college or university instead?
Most of us recognize that higher education is broken. We need to do things differently. My proposed tax on outsized endowments is a good place to start.
R. R. Reno is editor of First Things
