1/ One cannot understate how radical a change this provision is to our tax system. Large endowments have been a point of criticism for a while. In truth, endowments can become harmful to a rational tax system because they can continue to grow without taxation.
2/ If the endowments just grow and are not being spent for charitable purposes one wonders why they are being allowed the exemption.
3/ The US tax system long ago figured out a way to deal with this problem in the context of private non-operating (i.e., grantmaking) foundations. You can't just grow these foundations forever.
4/ The Internal Revenue Code forces private foundations to use at least 5% of their net investment assets for charitable purposes annually (or pay a fine on the shortfall).
5/ What's disturbing about the new tax regime is that it simply imposes taxes on large university endowment income. There's no way to get out of it, even if the payout would meet the foundation rules.
6/ For example, while Stanford has a large endowment it pays out 5.5% percent of endowed funds annually. But that doesn't matter under the bill. Endowment income is taxed no matter what.
7/ What's odd is that if the non-operating Gates Foundation, which has zero students and is bigger than Stanford's endowment, simply granted 5.5% of its income to Stanford every year to use in its operations, no one would be taxed.
8/ If the issue is building large amounts of untaxed wealth then requiring spending on operations solves the problem. But here they've done something very strange, which is to tax colleges unless they have a proportionally large number students.
9/ But large endowments are needed to support research on top of teaching, so the tax code now implicitly favors teaching over research when it comes to educational institutions.
10/ Similarly, the tax code also now favors most institutions that provide religious instruction (i.e., churches) over colleges, as church endowments are allowed to grow with no restrictions or taxes.
11/ This provision is not tax reform. Taxing operating endowments that are clearly & materially being used for charitable purposes is a tax revolution. This is not rational tax policy. It is a specific, directed attack on our nation's top private universities and it cannot stand.
*overstate
