Tax Harvard!

Jim Manzi discusses the Massachusetts legislature's plan to tax university endowments over $1B:

Viewed purely in terms of economics, Harvard is really a $40 billion tax-free hedge fund with a very large marketing and PR arm called Harvard University that has the job of raising the investment capital and protecting the fund’s preferential tax treatment.

The trick is that this hedge fund can’t remit earnings to investors, and has to keep them in the company’s account, renaming these retained earnings as an “endowment”. So how do the insiders extract value from this business? One way is by giving themselves cushy jobs that pay a ton of dough. Those who manage Harvard’s money are well-paid. The prior investment head, Jack Meyer, left after criticism of a compensation plan that paid some investment management professionals more than $35 million each in a single year. In spite of this, investment professionals often leave the Harvard Management Company because they can make yet more money as partners in private equity groups or hedge funds. Of course, the qualification of running Harvard’s pool of assets can be leveraged to get exactly such jobs – those who do this are called “Crimson Puppies” – while in the meantime enjoying a somewhat more relaxed work-life balance, and not having to do the hard work of actually raising the fund.

The worker bees in the marketing department (i.e., the faculty) are also quite well-paid. The average Harvard professor now has a salary of about $185,000 per year. Professors in the right disciplines, such as business, can reportedly double their salaries through outside consulting and other income sources. In 1980, the salary of a Harvard professor was about 5.5 times the average US per capita income; today, $185,000 is about 7 times the average national per capita income, and can often be leveraged into much higher actual annual compensation.

Harvard had about a $7B profit last year.

Notwithstanding that institutions of higher education presumably play by the non-profit rules, I find this proposal especially appealing for a very specific reason: some non-significant portion of its revenues come more-or-less directly from government (ie. from tax revenues paid by people not fortunate enough to attend Harvard) in a way that the revenues of the typical church or Museum do not. A seven billion dollar profit from those revenues ought to allow Harvard to give its education away for free; indeed, I think this is exactly what it should do. Until that time, I can't think of a compelling reason to oppose the legislature's plan.