On Wealth Gap, Old Song, New Words

Inside Higher Ed's recent article on the growing chasm between wealthy institutions and “poorer” (in dollars) institutions begs us to answer this question: How should we deal with the reality that the 40 wealthiest institutions (the Elite 40) hold 66 percent of the higher education endowment wealth, receive 60 percent of private donations and have highest percentage of endowment growth in recent years among higher education institutions? Can we and should we live with this reality?

Regardless of one’s views of wealth distribution as a generalizable matter, the concentration of wealth in the Elite 40 is problematic for many within and outside government. I suspect that this concern is not because of a distaste, per se, for wealth and its benefits. Rather, it is the felt need to provide affordable quality education for the thousands upon thousands of vulnerable students currently and prospectively in the educational pipeline coupled with the current lack of resources at many of the institutions that have served and continue to serve these students.

In situations like this, I worry that current and future proposed solutions (whether public or private) will suffer from three defects: they will be overbroad, they can have dramatic unintended consequences and they will not lead to enabling educational opportunity for those most in need.

Take this example from the Inside Higher Ed article. One of cited colleges' presidents suggested that instead of redistributing wealth from the Elite 40 to others, we should redistribute students. This is, in essence, a call to address undermatching, an issue of keen interest to the Obama administration, among others. It sounds good; it sounds right. It appeals, at least on the surface, to our sense of fairness.

Would that the fix were that simple.

Even if elite institutions were to take more Pell students (say, double their current percentages), that alone will never address the growing chasm between the wealthy and the poorer (in dollars) institutions. Further, many vulnerable students would not succeed at or be a good fit for the Elite 40. Moreover, and perhaps of greatest significance as a reality check, given the growing percentage of vulnerable students in America, the Elite 40 cannot meet these needs, even if they so desired.

One Proffered Solution: Altered Taxation

So, we need to consider other solutions. There is a long history of using federal and state taxation to redistribute wealth.

Best to start with the most commonly proposed solution: taxing nonprofit institutions at the local, state and federal level. Unfortunately, this solution is at once overbroad and misguided.

Assuming the focus is on all nonprofits, such an approach would mean that churches, hospitals (many) and educational institutions could be subjected to property, income and capital gains taxes, as for-profit corporations are now. Such a solution would put many vulnerable institutions in jeopardy, as they would not have the capacity to meet these multilayered tax burdens. To be sure, one could determine that only some taxes paid by for-profits should be carried over to the nonprofit sector.

Putting nonprofits in financial jeopardy is unwise for many reasons. Nonprofit institutions truly contribute to their communities in meaningful ways and can be seen as having a positive economic impact, absent taxation. Some nonprofits actually pay local taxes on newly acquired property or renovations; others pay for water and sewerage. Others contribute space to the community or offer programs that benefit communities’ well-being -- like being a disaster relief site or immunization site in the event of a massive outbreak. They are often large employers in small communities, and they bring in revenue through visits and parental/family/friend stays. Just look at some of economic impact statements prepared by institutions.

Now, one could suggest a progressive tax solution where nonprofits with the largest endowments would pay the highest tax (federal and state) and then that rate would lower as endowment size diminished. Obviously, institutions could game the system (not unheard of in the world of tax); for example, instead of holding money in endowments, they could shift the monies to trusts or other nontaxable vehicles to avoid taxation.

Another tax approach would be to change the deductibility of donations (of individuals and organizations) to institutions with endowments of a certain size. For example, donations to endowments over $1 billion would be taxed at a predetermined rate. Alternatively, one could make this a regressive tax to encourage large gifts, where the deductibility would be greater than smaller gifts. This approach shifts the burden to donors, rather than receiving institutions and could reduce the level of giving to all institutions, an unfortunate outcome.

Some Out-of-the-Box Solutions

Instead of tax-based solutions, here are three other solutions worthy of consideration. They offer approaches that encourage giving, that retain revenue for the benefit of educational improvement and fit within the framework of how educational institutions currently function or could effectively function prospectively.

Before turning to them, a pragmatic note: for these approaches to succeed, the Elite 40 would need to see their obligations to other institutions and society more broadly. They would need to see that there is a price for wealth in terms of giving back to the larger community of students who want and need an education.

Idea One: For educational institutions with endowments over $1 billion (the threshold is a matter that could be adjusted), 5 percent of all dollars received as donations from private sources (whether individuals, corporations or foundations) would be placed into a national (or regional) designated fund designed to improve education across the pre-K-to-20 pipeline. (One could debate whether the right figure is 5 percent or 1 percent or 10 percent.) This fund could be managed by an existing or a to-be-created foundation. The Elite 40 (and those with endowments over $1 billion -- the Elite Plus) would be contributing to the same fund. How the fund operates, how it elects to distribute its interest and corpus can be determined.

In essence, this 5 percent “penalty” is akin to the penalty (often termed luxury tax) charged to professional athletic teams that have salaries over a mandated cap. Interestingly, the rationale is comparable in a sense: to create parity among competitive teams, salaries are capped so that the richest teams cannot accumulate all the talented players. Or, the fund could be analogized to the cy pres awards in class action lawsuits. These funds, made up of undistributed awards, must be given to nonprofits that will use the monies for a similar purpose. By way of example, a cy pres in a class action award against a credit card company could go to a nonprofit that engaged in financial literacy education.

Idea Two: The Elite Plus would be able to retain all donations received if they entered into meaningful partnerships with one or more colleges/universities that served at least 40 percent Pell-eligible students, 60 percent first-generation students or 50 percent minority students. (To be sure, these percentages can be re-evaluated.) The key here is meaningful partnerships, and how that would be assessed on an ongoing basis is a critical issue, as one wants to encourage compliance rather than gaming the system to further self-interest. The costs of these partnerships would be borne by the Elite Plus and would have to equal or exceed the dollar amounts identified in Idea One.

Examples would include reciprocal faculty swaps, payment to faculty from the Elite Plus or who are newly hired to teach at the partner institution; cross registration with the requisite transportation to/from the Elite Plus; shared or funded student support systems including tutoring, mentoring, psychological services, academic advising, career planning and graduate school preparation; creation of shared multicultural events and programming with joint participation from both campuses; and summer programming starting in the year between high school and college and each summer thereafter.

Viewed through a positive lens, these partnerships are not one-way transfers of dollars, knowledge and capacity. There are reciprocal benefits, creating a win-win rather than mandated largesse. Professors may learn from teaching students who are less privileged, and that learning can benefit their home institution. Research opportunities, mentoring and shared academic programming can be enriching. Consider a conference on homelessness or drug abuse or incarceration; might students who have had these experiences in sizable numbers enrich the understanding of these problems and their solutions?

Idea Three: The Elite Plus could create institutionally funded centers designed to study, reach out to and assist institutions serving vulnerable student populations (based on the criteria established in Idea Two). These centers would be funded from a percentage of the donations made (calculated as described above); their contributions would have to be tangible, producing scholarship, empirical research, conferences, engagement opportunities and the like.

A current example, although now funded through grants and donations from outside sources, would be the Penn Center for Minority Serving Institutions. As its website reflects, the center is engaged in a host of research projects designed to improve the outcomes for students at minority-serving institutions, including HBCUs. It issues white papers and publishes books, holds conferences, and its grants usually include monies to be distributed to fiscally constrained minority-serving institutions to enable them to effectuate change effectively.

Conclusions: Process and Theory Concerns

It is easy to critique the solutions presented here.

Some of the challenges are what I would call design questions: What institutions fit within the Elite Plus? How would the various financial thresholds be determined and would they come with automatic inflators (or deflators)? How would the fund created in Idea One function and who would oversee it? What would be the structure of the partnerships and how would success be measured and collaboration ensured in Idea Two? How would the centers within the Elite Plus would be created and overseen in Idea Three?

But there is another set of questions about how we want to treat the Elite 40 and whether they have obligations to others and whether strategies to redistribute wealth are apt in this situation, recognizing that we redistribute wealth regularly in this nation through any number of means at both the state and federal levels. Fundamentally, these questions go to the core of how we want to function as a nation, what obligations we have to others and how we view charitable giving, education (particularly higher education) and wealth disparities.

Process questions matter, but until the deeper philosophical questions are addressed, progress will be limited. To that end, here are two guiding principles that, at least for me, justify the suggestions made here.

First, whatever the challenges, it seems wiser to have the solutions developed and vetted by those with a real stake in the outcomes -- public and private educational institutions, organizations that support educational and social reform, including think tanks from all sides of the proverbial aisle, and philanthropists. Solutions delivered from the states or federal government are less likely to meet everyone’s needs effectively.

Second, as a nation, we are only as strong as our weakest citizens. As such, we all benefit by lifting the bottom -- overtly. We create a greater likelihood that more and more individuals will contribute meaningfully to their families, their communities and our nation. Our economy will be better off if more and more individuals have access to postsecondary education and career opportunities.

Failure is expensive. Think about the costs of prisons and psychiatric treatment. Ponder the costs of the criminal justice system. We pay a price for poverty. Poverty impacts health, education and community safety, among other negative consequences. Social support systems, even minimal ones, are expensive. There is no question about that.

So, it seems wiser to pay for success, to pay to create pathways to and through postsecondary education. Rather than paying for the consequences of failure, let’s develop ways to fund success. Indeed, the promise of opportunity is the bedrock of this nation. We need to make good on that promise. The ideas suggested here start us on that pathway.