SOCIAL SCIENTISTS HAVE only begun to make sense of how inequality and the rising fortunes of the super-rich may have contributed to the social and political tumult of the twenty-first century (Gitlin 2012; Hacker and Pierson 2016; Hocschild 2016; Skocpol and Williamson 2013). An important piece of the puzzle is that anxiety about stagnant wages has been compounded by the lavish consumption of the super rich. The conspicuous spending of the wealthy raises the bar for maintaining social status and “keeping up with the Joneses” at the same time that household budgets are strained (Fligstein, Hastings, and Goldstein 2015; Frank 2013). Under these pressures, more than 7 in 10 voters in the 2016 presidential election agreed that “the American economy is rigged to advantage the rich and powerful” and that the US needs a “strong leader who can take the country back from the rich and powerful” (Kahn 2016). In the domain of higher education, there are parallel signs of growing popular resentment towards perceived excesses at the wealthiest private colleges. Both Democratic and Republican lawmakers, not to mention author Malcolm Gladwell, have promoted legislation to tax the endowments of wealthy colleges for overly favoring the well-off (Faler 2015; Fleisher 2015; Gladwell 2015; Lorin 2016).
Consistent with these public perceptions, I argue that private colleges with substantial endowment wealth have increasingly become ivory tower tax havens. This metaphor encapsulates how exponential endowment growth at these colleges has been supported by large tax expenditures that disproportionately benefit a small elite. I build on recent scholarship regarding how the state has long supported and structured US higher education (Loss 2011; Mettler 2005; Stevens and Gebre-Medhin 2016). And I posit that exponential endowment growth benefited from the interlocked hands of state support and financialization. (Krippner 2011; Quinn 2012; Tomaskovic-Devey and Lin 2011).
Financialization refers to the increasing concentration of wealth and power among investors and financial managers, a phenomenon that has grown through the escalating use of financial markets and new financial strategies and technologies to manage the economy (Davis 2009; Epstein 2005; van der Zwan 2014). When imported to higher education in the 1970s, new strategies for investment asset growth enabled increased endowment investment returns. The rapid growth of endowment assets was also later fueled by increased donations to endowments as financialization contributed to the increasing wealth of the super-rich as potential donors (Tomaskovic-Devey and Lin 2011). As with other expansions of financial markets and financial management strategies, the new endowment investment strategies depended on state policies (Krippner 2011; Quinn 2008, 2012). Namely, endowments have been supported by a triple tax break: 1) a tax deduction for donors to the endowment, 2) a tax exemption for investment income from the endowment, and 3) a tax exemption for interest on municipal bonds used in place of capital expenditures from endowments—a strategy known as indirect tax arbitrage. By existing tax expenditure estimates and a new estimate based on average annual endowment investment returns, I calculate that the triple tax break currently involves a federal tax expenditure of $19.6 billion per year—just $8.6 billion less than the current annual expenditure for the federal Pell Grant financial aid program.
Using new annual college-level data for more than 800 four-year colleges going back as far as 1977, I also show that large new inequalities have indeed emerged between the wealthiest private schools and the rest of America’s higher education institutions. Rapid increases in endowment wealth are at the center of these new inequalities.
Throughout the decades since 1977, but especially since the mid 1990s, endowments provided fast-increasing surpluses to increase annual per student spending on operations and wealthy colleges and universities. For US undergraduate enrolling institutions in the 99th percentile for endowment wealth per student, annual spending per student from endowments increased by 751 percent from $9,724 in 1977 to $92,736 in 2012. In the 95th to 99th percentiles, spending per student grew by 297 percent from $8,275 in 1977 to $32,868 in 2012. Public universities and less wealthy private schools saw no comparable increase in resources from endowments or other areas of support (Bound and Turner 2007; Eaton, Brady, and Stiles 2016; Quinterno 2012; Weerts, Sanfordeah, and Reinert 2012).
I also find that the growth of endowments has overwhelmingly supported colleges that remain islands of privilege, as distant as ever from lower class Americans. These findings offer a longitudinal picture that fits with recent research showing that 38 of the most elite schools in the US enroll more students from the top 1 percent of the income spectrum than from the bottom 60 percent combined (Chetty et al. 2017). The wealthiest five percent of schools have kept the overall number of undergraduates flat for the last 40 years. The share of these undergraduates from low-income households has also been flat at the wealthiest private research universities since data became available in 2000. Though there was some increase in low-income enrollment shares at wealthy liberal arts colleges during the Great Recession. At the same time, the wealthiest five percent of schools have used endowment surpluses to more than double instructional spending per student since 1987. The findings suggest that new scholarship on the role of the state in US higher education should incorporate old insights that colleges and universities often serve to reproduce inequalities in social status (Bourdieu and Passeron 1990; Collins 1979; Karabel 2005; Sewell and Hauser 1976; Stevens 2009). Even amid increasing endowment wealth, elite colleges still appear to follow the incentive to keep undergraduate enrollments flat from college ranking formulas that reward schools for admitting fewer applicants (Espeland and Stevens 1998).
Within the theoretical frameworks of financialization and educational reproduction of elites, I will next offer an historical account of the adoption of new investment logics and the re-purposing of longstanding tax benefits. In doing so, I explain the estimated $19.6 billion dollar annual tax expenditure from tax break related to endowments. I then detail the new data and measures assembled to see if endowment growth, tax avoidance, and endowment uses actually track this historical account. Afterwards, I review how the data supports the argument in three separate sections on: 1) the growth of endowment wealth, 2) tax supports for using debt and donations to grow endowments, and 3) the ivory tower tax haven as an island of privilege in undergraduate education and instructional spending. I conclude by discussing how some wealthy colleges have begun to address resentment over endowment wealth. Responses include using endowment surpluses for broader postsecondary education goals.