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Higher Education Watch
How Much Should the Government Subsidize Harvard?

Donald Trump made headlines a few weeks ago by suggesting on Twitter that the federal government should cut off funding to UC Berkeley as a result of the Milo incident. While this provocation was characteristically hyperbolic (probably intentionally so) a growing number of serious thinkers really are considering ways that the government might substantially restrict the flow of subsidies to selective American universities whose priorities aren’t necessarily in line with the public’s. Former Bush administration official Mark Schneider and policy researcher Jorge Klor de Alva make a coherent case for this in the Washington Post:

Taxpayers, for the most part, unknowingly support private institutions primarily through tax deductions and exemptions. For example, gifts to university endowments are tax deductible and the earnings on these endowments are exempt from taxation, as are the endowments themselves. For elite private institutions, those with endowments in the billions of dollars, the size of these tax breaks can dwarf the direct subsidies that taxpayers send to public institutions.

These tax breaks are rarely debated because they are hidden in the tax code. Meanwhile affluent private universities, claiming their importance to the realization of the American dream, do everything in their power to silence any questioning of their right to enrich themselves through favorable tax treatment. However, it is important to remember that these tax breaks are not divinely ordained. Rather, they flow from congressional acts aimed at improving the public welfare. Without doubt, America’s richest universities use their wealth to provide important benefits to society, such as support for research and student financial aid. But their inherent exclusivity leads them to fail at fostering the most critical dimension of the American dream: social mobility. And that should lead Congress to ask whether the extent of the tax subsidies granted to the nation’s wealthiest universities is justified.

There are indications that policymakers and voters might be drawn to some of these ideas. Connecticut’s Democratic legislature recently mulled the tax-exempt status of Yale’s $23 billion dollar endowment. Residents of Princeton, New Jersey filed a lawsuit (settled in the fall) to force their local university to pay property taxes. And Congressional Republicans have been scrutinizing the way well-endowed colleges spend their tax-subsidized war chests.

Academia likes to think of itself as an independent enclave and that any government pressure to change its ways (unless it is in service of leftwing ideological goals in areas like Title IX or affirmative action) amounts to an attack on the integrity of higher education. And while universities should be afforded broad latitude to govern themselves, it’s important for academic leaders to remember the extent to which they are reliant on a massive network of government subsidies—both in the form of explicit grants and carveouts woven into the tax code—and that the political basis for their privileged position is looking more tenuous by the day.

So the way for elite universities to fend off austerity is not to simply accuse everyone who questions their performance as anti-intellectual or simply ignorant of their greatness. Rather, it is for these universities to reinvigorate the public mission that won them such lavish treatment in the first place: Invest more in their local communities; increase their class sizes; make more scholarship and courses available to the public; spend more time on scholarship relevant to Americans, rather than promoting boutique ideological fetishes. If they don’t, Schneider and de Alva’s point of view is likely to simply grow more compelling over time.

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  • KremlinKryptonite

    Had my first contact with Harvard, Georgetown, and Cornell students when I was in DC interning for Sen. Harkin.
    I was NOT impressed AT ALL.
    Of course, there is no shortage of tape from guys like Watters asking bamboozled kids at Harvard simple questions.
    Likewise, there’s no shortage of govt officials with “Ivy league” degrees who are of modest intelligence, like Clinton, W, Obama, Kerry.

  • Fat_Man

    “How Much Should the Government Subsidize Harvard?”

    $0.00

    Harvard is in fact a hedge fund that uses a college as a tax shelter. It should be taxed, and taxed heavily.

    • FriendlyGoat

      Great balls-o-fire! An endorsement for heavy taxation of pure trading!

      • Proverbs1618

        I can see your boner from here.

        • FriendlyGoat

          Heads up kids. Dad’s on the Internet again.

          • Proverbs1618

            I never left.

      • Fat_Man

        What did i tell the lady at the cheese counter?

        No Goat.

    • Jim Nelson

      Here’s a complementary thought. Maybe colleges and universities should get federal funds and grants based on ‘need’ just like students who are admitted to the schools. If Mommy and/or Daddy are well compensated in their jobs, the child tends to get little or no tuition aid to attend. Harvard’s endowment is huge, ergo, they get nothing from Uncle Sam whereas East Podunk U. whose endowment (and whose student body) is wanting. Let Harvard dip into that mammoth endowment to support qualified yet needy students. Likewise the other heavily endowed universities.

  • FriendlyGoat

    Without getting yet to the main subject, when we speak of the Milo “incident” at Berkeley, would it be okay to include the other more recent Milo “incident” with CPAC too?

    • Makaden

      No, since logically it doesn’t apply, and rationally it is clearly an attempt to troll on your part.

      • FriendlyGoat

        Why doesn’t it apply? Milo is a creep. Berkeley knew it. CPAC now knows it too—-at least to the extent of keeping his mud off their official holy robes.

        • Makaden

          Because Milo’s propensity to young boys does not relate to UC Berkeley’s bowing to violent protesters, since the revelation of the former came temporally after the latter?

          • FriendlyGoat

            Berkeley people simply had better radar to know a creep when they see one. With conservatives, well, they’re slower on the uptake about what creepiness is and who has it.
            For instance, “Grab ’em by the p____ ” doesn’t register on their screens, but grab a boy does. Whatever. Bye, Milo.

          • Psalms564

            Well, not like you have a known racist and anti-Semite soon to become a head of your party…. Oh wait. Actually, the opposite is about to happen. But it’s different. Because Democrats have halos. If you spout the right words, you can hate, lie, and cheat all you want. What about Bill Maher defending pederasty? IS he a conservative?
            Nobody is buying your tired bullshlt. You excuse violent suppression of free speech as long as it fits in with your ideological agenda. It is disgusting. Shame on you.
            On the other hand, I always appreciate it when the friendly mask slips a little bit, you let your guard down and we get to see your real duplicity. So overall, since knowledge is power, winning????

          • FriendlyGoat

            Shame on me for knowing Milo was nuts? Shame on me for knowing Bill Maher is nuts? Shame on me for knowing you’re nuts? Nah. It’s all the same BS-detector mechanism. If the messenger is mean, the message is to be questioned.

          • Proverbs1618

            You think I’m mean? I think defending people violently shutting down speech is deplorable. You seem to think that you not liking a speaker somehow justifies this behavior. This is exactly what I mean. You filter everything though the lens of your Leftwing ideology and excusing every behavior as long as it promotes your position. I would argue that it would become a lot less fun when it is your words being shut down because someone thinks YOU are nuts. Remember, fists, bricks and bullets fly in both directions. Be careful what you excuse.

          • FriendlyGoat

            Did you notice I rejected Maher and wouldn’t have minded if Berkeley declined to host him too on the excuse that he acts like an a$$hole? Would you be interested in knowing that I like Alec Baldwin’s SNL portrayal of Trump even less than I like Trump? Can you process that Berkeley’s war on Milo (an irrelevant nut) is a nuthin’ compared to Trump’s apparent war as President of the United States on the entire independent press?

            As for you, I wouldn’t have thought you mean at all if you hadn’t made a comment section career out of venting hostility—-mostly at me—but at some others too. But, our exchanges have been what they have been.

          • Proverbs1618

            Um, Presidents talked to some people and not others since the beginning of time. Obama did it all the time. Don’t remember you hyperventilating about that. It is almost as if something has happened that makes Obama’s everyday behavior seem bad in Trump. We have to deal with your savior, now you will deal with ours. Some bells can’t be unrung.

          • FriendlyGoat

            It’s not a matter of who Trump talks to. It’s a matter of what he is trying to do to mute an entire industry. He will fail on that point, BTW. As for you and the “savior” stuff—–it’s really sick. Pray that Jared and Ivanka can undo from their high positions the damage your mouth is doing from a low position.

          • Tom

            “It’s a matter of what he is trying to do to mute an entire industry.”

            Do your arms ever get tired from stretching the truth to the breaking point?

            “As for you and the “savior” stuff—–it’s really sick.”

            It’s called “snarking about the partisan flip.”

            Frankly, the two of you deserve each other.

          • Proverbs1618

            We do, don’t we? Don’t think the thought never crossed my mind.

          • FriendlyGoat

            You and Tom are like-minded on derision of savior talk. I know why you shouldn’t be and why he shouldn’t be—-but the comment section is what it is. You guys have a good day together, okay? I’ve got several other things to do.

          • Proverbs1618

            I disagree. I have no derision of the Savior talk. I believe in the Savior and have for a long time. That is why your insistence that a man like Barack Obama can be a savior, never mind The Savior, to be both obscene and intellectually bankrupt.

          • Proverbs1618

            “It’s a matter of what he is trying to do to mute an entire industry. He will fail on that point, BTW.” that is a lie. He is not trying to silence an entire industry. the second sentence is true. He will not do what he never set out to do. That seems to me fairly normal. Tom hit in on the nose
            “As for you and the “savior” stuff—–it’s really sick. ” I knew calling Barack Obama your own Personal Lord and Savior was one of the things that got me banned, so I thought I would allude to that. Seems like I hit the bullseye there. Don’t hate, congratulate.
            I pray for all the righteous, regardless of their religion for there are righteous men and women to be found everywhere. We both agree that Ivanka and Jared are righteous, so my prayer does indeed include them. Doesn’t include you, for I think you and the ideology you are a slave to are evil and to be fought/
            Mouth from a low position? I CAN go for a Yo Mama joke here. I can. But I won’t. Instead I will only say that my position is for One God to determine, not you. I never was, am not now, and never will be afraid of your judgement.

          • Makaden

            Does it hurt to be this wrong? Or is there a numbing effect?

            http://koin.com/2017/01/30/portlands-resistance-co-leader-charged-with-sexual-abuse/

            “Grab them by the _______” surely registered on my radar. And I didn’t vote for the man.

          • FriendlyGoat

            Tell me you wish Trump wasn’t president and I’ll take “I didn’t vote for the man” more seriously, okay? The “don’t blame me for Trump (but I like him)” excuse is too shop worn already. As for Micah Rhodes, bye-bye to him too.

          • Makaden

            I don’t wish either of them were president. I will judge his policies on an individual basis. I will not elevate character flaws and unsavory, rude speech to the “dirtying of holy robes,” as you surely have. And in so doing, I will refuse the establishment of a Manichean worldview, of which you have been so deeply possessed. You are just as poisonous as those you oppose. That’s the bottom line.

          • FriendlyGoat

            Oh, come on. The Right loved Milo until they found out that he really might mess up the holy robes of CPAC. Here is the fascinating story of how that came to pass:
            http://www.vox.com/policy-and-politics/2017/2/24/14715774/milo-yiannopoulos-cpac-pedophile-video-canada

          • Proverbs1618

            See, I’m not the only person who sees your duplicity, your hatred of those who don’t think like you, your creepy totalitarian side. Perhaps in a moment of quiet reflection you might ask yourself how come people who never meet and/or communicate with each other come to the same exact conclusion about you. Are you perhaps not as holy as you imagine yourself to be? We shall see….

          • teapartydoc

            Amazing. You believe vox.

          • FriendlyGoat

            Of course.

  • WigWag

    This post neglects to mention several of the ways that government subsidizes Harvard. Yes, gifts to the university are tax deductible to the donor and income on its endowment is not taxable to Harvard. And yes, parents can make tax deferred contributions to educational accounts that can be used to pay tuition for their children not to mention federally subsidized student loans. But that’s not the half of it.

    Most large gifts to Harvard are paid in the form of appreciated assets like common stock. When a stock gift (as opposed to a cash gift) is made, not only is the donor able to deduct from their federal and state income tax the full value of the gift, they are also able to escape paying any capital gains tax on the appreciation of the assset. The vast majority of gifts to Harvard are paid this way to escape capital gains taxation.

    It is not widely known, but large donors can take advantage of the same system to eliminate taxation on pension-like programs such as an IRA or 401K. If assets from these accounts are used to make a contribution to Harvard, the donor never pays a penny of tax on these funds even though the rest of us pay ordinary income tax on the amount of funds we take out of retirement accounts each year.

    • Makaden

      Wigwag, I do compliance with federal grant regulations for a living, and have so for more than 15 years, so allow me to comment.

      First, the thrust of your argument is correct: the rates are obscene, the system is structured to subsidize heavily, especially egregious given the other subsidies mentioned by you and the article.

      However:

      1. Indirect cost rates are only applicable to what the feds call the modified total direct cost base. Using the links you provided, you can see what the base consists of, since the negotiated terms are listed. So the rate doesn’t get applied to the whole grant most of the time, just the portion of the applicable base.
      2. Organizations must negotiate the rates with what is called their “cognizant federal agency,” which is basically the agency that gave them the most grant money last year. Sometimes cognizant federal agencies assign another federal agency to do this for them, often DHS.
      3. The rate is not paid IN ADDITION to the total grant award. It is included AS PART of the grant award. So your $100,000+$69,000 calculation is not correct.

      I still feel the thrust of your argument otherwise is on the money.

      • WigWag

        Thanks for your comment.

        In the context of NIH, for example, typically F&A is paid on personnel costs (excluding postdoc salaries), supplies, what are sometimes called “other costs,” consortium costs, consultants and in some cases travel. Equipment purchases are usually excluded. So your right, full indirects apply to some budgetary categories not others. They are still out of control.

        I think your comment about how indirect costs are paid is a bit of a semantic statement without a difference. Yes an investigator submits a budget for his entire project that includes F&A but the amount of F&A is based on the total direct costs approved by the funding agency. If, as an investigator I submit a budget with $100 thousand in direct costs the F&A percentage of my sponsoring institution is based on that direct cost request.

        It is also true that different F&A rates are applied to different activities; rates for teaching for example or off campus work are charged at negotiated rates that are typically lower.

        As you know, there are many problems with the system. It incentivizes investigators not to be frugal. The higher the direct costs the investigator can get away with, the higher the indirect costs the university can procure. It’s a perverse incentive.

        Also, as you probably know, universities can charge depreciation for university buildings as an indirect cost. The depreciation charge on new buildings is much larger than on older buildings, thus universities are motivated to construct new buildings that really aren’t needed.

        Worst of all is what the system has meant for faculty. When it comes to granting tenure, teaching has never mattered very much; the old adage publish or perish applied. It no longer does. Faculty evaluation and tenure decisions in the sciences are now based more than anything else on the indirect costs a faculty member brings into the institution. What does a Dean want in a new faculty member? Whether he can teach or whether he’s productive doesn’t matter any more. If he brings home the bacon in terms of indirect costs is what matters most.

        The whole system is wasteful and corrupt. No other country in the world utilizes this system. It’s a taxpayer rip-off of massive proportions. Do you suppose, for example, that the public understands how much NIH funding that everyone thinks goes to biomedical research actually goes to indirect costs?

        Even Obama recognized how horrific the system is. But the Harvards and MITs of the world called out their lobbyists. Any reform effort was still born.

        See,

        http://archive.boston.com/news/nation/2013/03/17/harvard-mit-thwart-effort-cap-overhead-payments/Ridc4YwDfkGlmWfUUJ0snI/story.html

        • Makaden

          Some really insightful stuff on how the boondoggle manifests that I hadn’t thought of. I’m thankful for that extra food for thought.

          As for the distinction without a difference, I would only say that it matters insomuch that if the public sees that X department got a $500,000 grant, they should not think that there are “hidden” costs over-and-above that $500k. The total grant amount is the total grant amount–there are no extra costs, per se. Let’s filet the system–deservedly so–but not give ammo to the special interests to knock our arguments down.

          I stand corrected: I had not realized that 2 CFR 200 Appendix III Part 11.a(1) assigned either the ONR or DHS to be the cognizant agencies for universities only. You were correct and I was wrong.

          To your other point: the cognizant agency won’t matter (of necessity). The factors you suggested in your original post do: what (individuals) are doing the submission of general ledger materials that are reviewed to determine the indirect cost basis at the organization’s end, and what (individuals) on the cognizant agency’s end are reviewing those materials for legitimacy. Indirect costs are terribly complicated, especially at IHE’s (as the federal guidelines call universities), and if the government reviewer doesn’t have the requisite training, is pressured for time, etc., they could simply not review the submitted materials in the detail they should. “Looks similar to last year, let’s go with that.” And the organization’s auditors won’t catch it, because they will simply look at the federally-approved rate and accept it (as long as it is applied to the right base), since auditors have to keep their costs down as well, and will happily let the feds assume the burden of protecting their own money in that case.

          • WigWag

            Thanks for the explanation. The lowest university F&A rate I could find (for on campus research) was in the mid 40s. The highest I found was NYU which exceeded 70 percent. My solution would be to apply a flat 33 percent rate for all research at all institutions. Let the universities make up the difference by cutting administrators, lowering faculty salaries and reducing their passion for new construction.

          • Makaden

            Brilliant. Sign me up.

          • Stephen

            Capping indirect as a function of endowment? Interesting. I’m not sure I’ve seen this suggestion before. That might work. But, now I have to noodle how that might be gamed.

          • WigWag

            Anything can be gamed, especially when many millions of dollars are at stake and you can afford to hire hordes of experts.

            The current system rewards the rich with far more federal money than they need and skimps on funds to poorer institutions that do great work. It’s irrational. The behavior of institutions like Harvard, MIT, Yale and Princeton is indefensible. As one of the other commentators said, it’s as if they are hedge funds masquerading as insinuations of higher education.

            Tens of billions of endowment money is enough.

            Let them pay for their own indicts.

        • Stephen

          Faculty evaluation and tenure decisions in the sciences are now based more than anything else on the indirect costs a faculty member brings into the institution.

          I’ve found that to be more true for engineering departments than any other. In physics and some areas of chemistry there remains space for the theoretician whose grant totals are going to be less. Also, indirect is a bit more specific than P&T committees consider in my experience. But, that’s a minor quibble.

    • Eurydice

      I don’t know if it will ever stop. but it certainly has been slowing down. The % of Harvard’s operating income that comes from federal sponsored programs is around 15% now – I remember it being well over 20% at one time.

    • rpabate

      It is also one of the reasons our universities are so supportive of climate change. Huge grant awards are made to study the issue usually by the EPA and the DOE.

  • MarkE

    It is not just the University endowments, trusts, and/or foundations that are the problem. As time goes by all or most of these highly tax sheltered organizations are taken over by political ideologs of one persuasion or another.
    Many do a lot of good initially, but end up with an entirely perverted agenda in time. Balancing the good with the bad why not put a lifetime on the tax breaks of these organizations of 75 to 100 years. After that time, they would be dissolved or at least pay taxes like an individual or corporations.

  • Anthony

    Is it really about Harvard and its Endowment, Tax Advantages, and Institutional Standing, or is there a tinge of class resentment (warfare) underpinning theme of Post – a point of view that is likely to grow more over time, perhaps.

    • Eurydice

      Hmmm, more than a tinge – perhaps a whiff? It’s a nice exercise, knee-jerking – but of nearly 50 undergraduate studies at Harvard, only 3 or 4 might possibly be described as fetishes. And since Drew Faust came on board the level of financial aid has almost doubled. Maybe Harvard should be taxed, I don’t know, but it’s still one of the world’s great institutions.

      • Anthony

        You’ve nailed it Eurydice – whiff and great institution (congrats to Faust).

    • Makaden

      Or is it a decent rebuttal to liberals wanting to yank the tax breaks afforded to churches, since ideological warfare lines can be drawn decently along those faults?

      • Anthony

        Depends whether you view all propositions within ideological lens.

        • Makaden

          Admittedly yours was more substantive, mine was a cherry.

          • Anthony

            Cherry (ies) is (are) good.

  • Stephen

    “…a growing number of serious thinkers really are considering ways that the government might substantially restrict the flow of subsidies to selective American universities whose priorities aren’t necessarily in line with the public’s…

    Ahh…What do you think the underlying threat of Title IX enforcement via the DoJ and DoE has been to colleges and universities, beginning with athletics, for the last 30+ years?!

  • jeburke

    I am at a loss to understand why we would not want to continue to encourage people to donate to schools and colleges through favored tax treatment, as we do for non-profits of all kinds. It’s pretty obvious that this is about wealth envy directed at a few highly successful universities that have big endownents because of generations of alumni giving.

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