THE WEALTHIEST PRIVATE undergraduate institutions benefited from major growth in endowment resources in the nearly four decades since 1977, even as state funding per student declined for public universities. Endowment spending per student increased by 751 percent from $9,724 in 1977 to $92,736 in 2012 in the 99th percentile for private endowment wealth per student. In the 95th to 99th percentiles, spending per student grew by 297 percent from $8,275 in 1977 to $32,868 in 2012. This growing wealth extended to 14 liberal arts colleges, 9 research universities, and one specialty institution in the top 5 percent for endowment wealth per student.
The increasing endowment wealth at the top occurred as financialization provided new asset growth investment strategies for colleges and universities. But the state also played a key role by providing a triple tax break for the endowment growth. Wealthy colleges and universities enlisted this state support to a greater extent by repurposing old tax benefits in new ways and at a greater scale. In particular, university financial managers engaged in new strategies of indirect tax arbitrage and the allocation of more donations to the endowment. I estimate that the total tax federal expenditure was $19.6 billion in 2012 for the exemption of endowment investment returns, income tax deductions for donations to endowments, and municipal bond borrowing in place of funding capital expenditures from either donations to the endowment. This is consistent with other studies that have examined only one of the three exemptions (Congressional Budget Office 2010; Joint Committee on Taxation 2008; Klor de Alva and Schneider 2015).
I propose new linkages of important theories of financialization, inequality in social policy, and educational stratification by conceptualizing the wealthy undergraduate institutions that receive these benefits as ivory tower tax havens. I break new ground in showing how financialization has intensified the extent to which state resources are directed in support of colleges and universities that disproportionately benefit more advantaged social groups. Institutionalist scholars of social policy have extensively shown that US social spending is unusually skewed toward upper income Americans when it relies on indirect tax benefits and private benefits like employer-sponsored health insurance or pensions (Hacker 2002; Weir, Orloff, and Skocpol 1988). Theories of educational stratification have also long emphasized that elite educational institutions tend to reproduce inequalities in social status and economic wealth (Bourdieu and Passeron 1990; Karabel 2005). In our current era of inequality, however, financialization provides new channels by which the increased profits of corporations, the financial sector, investors, and financial professionals can flow to our private institutions of elite education.
Two problems arise from the increasingly disproportionate allocation of resources to the wealthiest undergraduate institutions. First, some of those resources are badly needed at public and poorer non-profit schools that are challenged by stagnant or declining revenue and increasing public demands for postsecondary education. In the wake of deindustrialization, automation, and growth of technology industries, postsecondary education is more than ever a key path to economic security and social status (Goldin and Katz 2009; Hout 2012; Piketty 2014). High school graduates and adults who seek re-skilling or career changes often struggle to find adequate enrollment offerings at public institutions or affordable programs at private ones (Quinterno 2012; Scott and Kirst 2017; Stevens and Kirst 2015).
Second, the surpluses of wealthy private endowments are bound to generate social resentment among the less advantaged. Most Americans can only imagine what it would be like to attend an Ivy League school based on the memes and narratives that travel through social media and popular culture. Provocateurs of both left and right are thus poised to foment resentment at the federal tax expenditures in support of the wealthiest endowments. Republicans in the US Congress have held hearings on proposals to tax endowments at the urging of free market think tanks (Faler 2015). So have Democratic Connecticut state legislators (Lorin 2016). Others protest the large cut that hedge funds and internal endowment managers take from university endowment returns (Tannenbaum et al. 2016).
Wealthy colleges and universities appear to have taken note and responded in two key ways. First, Harvard, MIT, and Stanford have begun to experiment with mass online programs at low or no cost for those outside of their exclusive undergraduate cohorts (Stevens and Gebre-Medhin 2016; Stevens and Kirst 2015). Second, I showed earlier that some liberal arts colleges have begun to increase enrollments of lower-income students (Hannon 2016). It remains to be seen if other wealthy schools will follow suit and to what extent they will dip into their endowments to do so. And it is unclear if these initiatives can actually narrow the gap between an elite schools’ undergraduates and America at large. But the initiatives signal a recognition of the problem.
Policy shifts may be necessary for wealthy universities to change in ways that truly alleviate rather than inflame growing tensions over inequality. Pressures to prioritize prestige from alumni, faculty, and the rankings system make it risky for individual institutions to blaze new paths. The rankings dilemma illustrates the collective action problem. If one college chooses to enroll more students or spend more on programs for students outside of traditional degree programs, its rankings could fall. If all comparably ranked colleges initiate these changes together, the changes per se should not affect the rankings.
Further research is thus warranted regarding the prospects for policy change. This aligns with new programs of research on the relationship between American state building and US higher education (Loss 2011; Mettler 2005, 2014; Stevens and Gebre-Medhin 2016). I hope to have underscored here the need for this research program to consider how financialization has changed the terrain of both American universities and American political economy