A Tax to Grind

Nathan Richendollar (‘19)-

As most readers inevitably know, the Congress passed and the President Trump signed the Tax Cuts and Jobs Act. The main thrust of the bill was to slash taxes for America’s corporations, encourage the repatriation of capital held overseas, modest reductions in individual marginal tax rates, and the replacement of many itemized deductions with higher personal deductions, standard exemptions, and a higher child tax credit. But embedded within the monster (and monstrously glitched) tax bill is another provision that hits Washington and Lee close to home: a brand-new 1.4% tax on the income earned by university endowments. Although the exact definition of “income” from an endowment is still being hammered out at IRS, it is estimated that W & L will have to pay approximately $1 million in taxes per year on its endowment. Progressives and liberals the nation over called it an act of political vengeance against the Ph. D. crowd who so vocally opposed President Trump. They have argued that such a tax on university endowments is uncalled for and would harm universities’ ability to provide student aid. President Will Dudley wrote an article to this effect of late and railed against the tax increase as “unprecedented.” He commented that due to the tax, the number of scholarships would have to be cut, or the number of student internships, or faculty, or all the above. I have no quarrel with President Dudley, who seems like an upstanding fellow from the very limited contact that I have had with him and my conversations with friends who have spent more time in his presence, but this is pure nonsense.

Our endowment should not be a sacred cow of the same magnitude as Social Security, basic national defense, or border security, and this miniscule tax increase should not cause Washington and Lee to lose a single scholarship. If it does, that will be evidence of mixed priorities, not a lack of funds. What is incredible is that we are making these alarmist claims about a $1 million tax increase wiping out scholarships while loudly bragging about the cost of our newest constructions and programs on the website for all to see. We seem to have found $13.5 million ($6,250 per student) in the past couple of years, as the university’s website boasts, to build a sparkly new Center for Global Learning, $22.5 million ($11,000 per student) to build a pool with a constant pH of exactly 7.4 (apparently lest the non-existent aquatic life in the pool die of pH fluctuations) and untold millions to finance the construction of a utopia in third-year housing that forces students to overpay for their housing another year, not to mention a slew of questionable events, like Sex Week, paying Alex Rodriguez and Anthony Scaramucci over $100,000 combined to come to W & L, and airfare for such luminaries as Peter Singer, the acclaimed infanticide advocate, and Tariq Ramadan, the accused rapist profiled in our last issue. We have one of the nation’s highest endowment: student ratios, a generous-to-a-fault alumni base, and over a billion dollars banked. We completed a 7-year fundraising drive that took in over $500 million by its conclusion in 2015. To the extent that Washington and Lee is not financially secure, it is not due to a revenue problem, nor a taxation one, but an administrative spending addiction. In this context, we’re being asked to pay a tax, not on our raw endowment principle, but merely on the interest we earn, of a measly 1.4%, less than the marginal tax rate of even the most pauperized citizen, welfare discounted.

How astounding it is that the same folks who advocate for higher taxes on the wealthy and on ordinary Americans, who most directly benefit from the traditions of Western civilization and their protection, who claim to be the most altruistic and tax-tolerant, cry foul when the prospect of a tax increase falls on their sacred cow. Warren Buffet once famously said that because of the loopholes in the tax code, he found himself paying a lower effective tax rate than his secretary. While no one is arguing that learning institutions and equities investors like Mr. Buffet serve the same purpose, or that our tax rate should be commensurate with his, there does seem to be something rotten in Lexington when we contend that an average family should pay more than the 25% marginal tax they currently bear, when many of them are struggling to buy groceries and make ends meet for mortgage, insurance, and health care payments, but that a university should be able to waste tens of millions on frivolities like third-year housing without contributing a dime to Uncle Sam.

While we’re on the subject of universities’ supposedly self-interest-free allocation of resources, is there any distinction between scholarships that fund students’ education who otherwise could not afford it and a shiny new building constructed with the hopes of increasing interest in the school, applications, admittances, and thus rankings? The second scenario seems awfully reminiscent of the business world. One university (W & L) constructs a building in hopes of outdoing another (Princeton, say) so that students will favor their school, apply more, which, holding acceptances constant, lowers acceptance rates and increases the school’s ranking at the other’s expense, which in turn perpetuates the cycle. Quite frankly, this development also adds little if any societal value. No student’s education has been directly aided by the construction of a pool, or a more modern building in which to learn. This is business competition, not philanthropy or educational spending, as opposed to scholarships, which for the most part are philanthropic (though they might induce movement between schools and help rankings as a side effect). If Ford puts up a new factory to try to out-produce GM, there is no tax-free status conferred, nor should there be. Neither should we have tax exempt status on such competitive ventures. In fact, in order that I might not be counted as the “party of no,” I propose an alternative to the current tax plan: a 25% tax on endowment income that goes to development and a 0% tax on endowment income used to fund internships, professorships, and scholarships. This would greatly increase the incentive for alumni and student dollars to be channeled toward scholarships and more professors and would impose large penalties, for, say, putting a hiring freeze on business professors while constructing $22 million pools. But given the choice between the two, a 1.4% flat tax on all endowment income imposes a much smaller burden on the school, a burden we should not fret.

This tax requires a spending cut in shiny new things and social engineering projects like Sex Week and housing projects, or a slight increase of barely 2% in alumni fundraising, or smarter investing from our endowment management company (which somehow lost money in 2016 as the market boomed), or some combination of the above. To claim otherwise, to claim that it necessitates a draconian cut in scholarships and professorships, is to claim that killing a fly requires a bazooka. It is the same tactic that federal agencies use every time even the most modest budget cut is proposed (you’re proposing cutting the EPA’s budget by 1%....the environment will be destroyed!), and it is unfortunate that we resort to the same expedients. A 1.4% tax on our endowment income is not “chopping down the cherry tree,” as it were. It is pruning two or three of the smallest branches of our choosing. If the university chooses to ax scholarships and professorships because of a mere $1 million yearly burden, then it will be time for the alumni to demand a new administration, not in Washington, but in Lexington.