Paradise Lost for Higher Education
One of the most famous poems in English literature is “Paradise Lost” by the British writer John Milton. Originally published in 1667, it deals with the biblical story of the temptation of Adam and Eve by Satan and their expulsion from the garden of Eden.
On November 5, the German newspaper Südeutsche Zeitung revealed a trove of leaked documents from the Bermudabased law firm Appelby. Those documents show that a large number of individuals – from Queen Elizabeth II to U.S. Commerce Secretary Wilbur Ross, and companies from Apple to Nike – were using what is commonly called “fiscal paradises” or tax havens in order to reduce or even eliminate their tax obligations.
But they were not the only ones. Among the 14.3 million documents released, the names of many institutions of higher education also popped up. One may ask why colleges and universities, usually already exempted from paying taxes, had money in offshore accounts. Here is the story.
In addition to tax-free investments, such as U.S. equities, many colleges and universities have taken a more aggressive stance by putting their money into private equities and hedge funds. Once they earn money from enterprises unrelated to their core educational missions, they may be required to pay taxes. The regulations behind that were put in place in order to prevent non-profits from unfairly competing with for-profit businesses.
To avoid paying taxes on such incomes, some institutions of higher education and other non-profit organizations, established a corporate layer between the private equity fund and their endowments in countries that are no-tax or very low-tax jurisdictions, such as the British Virgin Islands and the Cayman Islands. That is why these intermediary corporations are called “tax blockers.”
Needless to say, this kind of operations cost the U.S. treasury billions of dollars every year. According to the Haas Institute for a Fair and Inclusive Society at the University of California at Berkeley, institutions of higher education benefit from three tax breaks. First are the tax breaks wealthy donors get when they donate to colleges and universities. Second are from the tax-free municipal bonds that allow institutions of higher education to borrow money at low rates, and, third, is the fact that endowment investments returns are generally tax-free. Total cost saved in federal taxes? $19.6 billion a year.
Also, we must consider that these offshore accounts can also be used to cover illegal operations such as drug trafficking or plain tax avoidance, and by doing some colleges and universities are becoming complicit in those kinds of operations.
The “Paradise Papers” show that among the colleges and universities using tax blockers are not only elite colleges such as Colgate, Columbia, Dartmouth, Duke, Stanford, the University of Southern California, and Johns Hopkins University, but also the University of Texas system, Indiana University and Texas Christian University. According to a 2015 Congressional Research Service, college endowments account for more than $500 billion, most owned by a handful of private, elite colleges.
Needless to say, all this raises a number of ethical questions. To begin with, colleges and universities pride themselves on forming the new generation of citizens, which includes, but is not limited to, matters of ethical behavior. When you are engaging with businesses such as fossil fuel companies (something that is derided by many campus constituencies) you are not being transparent in your operations, particularly when using schemes set up by tax dodgers and criminals to hide their operations. Therefore, you are far from being a model of rectitude.
This behavior also raises other questions that are more political in nature. For quite some time, conservative politicians have been criticizing institutions of high education – particularly private ones – for not using their endowment dollars for the benefit of their students (which is not entirely true) and always wanted to tax those dollars. It is not because conservative politicians suddenly became supporters of new and higher taxes, but because they see elite private institutions as “liberal nests” and also because it plays well with their anti-intellectualism stances.
Additionally, this plays well with populist rhetoric accusing colleges and universities of unnecessarily raising tuition and generating more and more student debt, when in reality that has occurred mostly among public institutions that continue to receive less and less financial support from their states. Further, most college debt is generated by for-profit institutions that conservatives tend to favor. It also attracts more criticism from those on the left, who sometimes see elite private institutions as places that only rich whites can afford.
Therefore, it is not surprising that the current House Republican tax plan contains a 1.4 percent tax on the investment income of institutions of higher education with endowment assets of $250,000 or more per student. And will apply only to private colleges and universities.
So why are so many of these institutions getting involved in these schemes? It is not just the money, but also a matter the prestige. One thing that rich institutions of higher education like to do is to tout the size of their financial endowments. Believe it or not, the larger the endowments the higher the chances they will have to raise more money from other wealthy individuals. Big time donors like to “join the club” of other wealthy individuals. As they say, money attracts money.
The other reason is that schools with larger endowments often move up in the many meaningless college ratings guides.
Greed and status have combined to form a new kind of Satan from the one described by Milton in “Paradise Lost.” This new evil is leading these institutions to shoot themselves in the foot by becoming easy targets of those who push forward ideologies in tune with anti-intellectualism, and with those who keep denying higher education as a public good.
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Paradise Lost for Higher Education