America’s Universities: The Best in the World—But at What Price?

America’s universities rank high on almost any list of the world’s best universities. And, in contrast to America’s below the OECD average K-12 system, our universities are held up worldwide as models of excellence.

However, this high esteem rests on a highly unequal distribution of wealth: in the US, only a handful of private not-for-profit universities are super rich. Yes, you know the “usual suspects”: Harvard, Stanford, Princeton, Yale, etc.—just think of any university that, in your heart of hearts, you hope you or your kids can get in to.

True, some public systems, such as the University of Texas, have large endowments. But that money is usually spread over far more campuses and many more students than private school endowments are. They just aren’t like the private universities, a handful of which have so much wealth that Congress and some state legislatures are beginning to question these educational powerhouses’ tax-exempt status.

And well they might. By law, the exemption given to university endowments is designed to promote the public welfare. But with so few universities amassing so much money, legislators are beginning to ask what that means and whether the public welfare is well served by the exemption in practice.  

So how big is that inequality? One standard way to measure inequality is through the “Gini coefficient.” This measure—which ranges from 0 to 1 and rises with inequality—has been used to show that the distribution of income in the U.S. stacks up poorly against other advanced economies. The Organization for Economic Cooperation and Development (OECD) pegs the U.S. at .40 while Germany, Canada, and France are all around .30 (the OECD average is .32). While this inequality is large enough to attract attention in the presidential campaign, it pales in comparison to the inequality in the distribution of endowments: At close to .90, the inequality in the distribution of endowments is more than double our Gini coefficient for income inequality.

Here’s another way of getting a grip on the extent of this inequality: Of the 1,600 or so not-for-profit private universities that report endowment data to the federal government, only 95 have endowments over $500 million and only 56 (less than 4%) have endowments more than $1 billion. Leading the pack, Harvard, Yale, Stanford, Princeton, and Massachusetts Institute of Technology each have endowments topping $10 billion. Together, these five alone hold almost 40% of the endowment wealth of America’s super rich universities. In contrast, the median size endowment across all the nation’s private schools is only $27 million. Almost 20% report no endowment assets at all.

Since endowments are not taxed, students at these well-endowed schools enjoy enormous public subsidies that are hidden from public view. A study Jorge Klor de Alva and I did found that each Princeton student receives on average over $100,000 per year in taxpayer subsidies. At Stanford, it is $63,000 and at Harvard $48,000. These taxpayer subsidies dwarf the direct government per-student subsidies that public universities or community colleges receive. Compare, for example, Harvard’s $48,000 in taxpayer subsidies to the direct government appropriations supporting students at the state public flagship, the University of Massachusetts, Amherst ($10,300), or Massasoit community college ($4,500).

These calculations exclude the added tax benefits these schools get because their real estate is tax exempt. While some well-endowed universities negotiate payments in lieu of taxes to help pay for such community services as fire protection or policing, these payments pale beside what schools would pay were they taxable entities.

Last year, if Harvard had been tax liable, it would have owed the city of Boston more than $47 million in property taxes. Under its “PILOT” programs (Payments in Lieu of Taxes), Boston asked Harvard for $10.2 million—and Harvard, with its $36 billion endowment and its $48,000 annual per student government subsidy—paid $2.6 million, less than 5% of what a taxable entity would pay.

Numbers like this have not escaped notice. The issue of taxing large endowments has periodically been raised in the Massachusetts Legislature. But these attempts have died amid intense opposition by the state’s rich campuses. The effort is picking up steam in Connecticut, where the state legislature has just held hearings on taxing the endowments of super rich schools (read Yale).

Congress is in investigative mode too. Recently, a joint letter from the Senate Committee on Finance and the House of Representatives Committee on Ways and Means and its Oversight Subcommittee went out to 56 campuses with endowments over $1 billion asking for detailed information on the size and use of their endowments. A key focus is on the size of their tax-exempt property holdings and payments in lieu of taxes.

The universities have until April 1 to respond. Assume a couple of months to analyze the data followed by hearings. Watch for some squirming from some very rich schools in the near future. And, if we are lucky, watch for some better tax policies that make sure that this vast accumulation of wealth can be put to better use serving the public welfare.

Mark Schneider is a vice president and an Institute Fellow at AIR. Prior to joining AIR, Dr. Schneider served as Commissioner of the National Center for Education Statistics from 2005-2008. Dr. Schneider is also a visiting scholar at the American Enterprise Institute and Distinguished Professor Emeritus of political science at the State University of New York, Stony Brook.