Take Away Harvard’s Nonprofit Status

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Photo: Gunther/EPA/Corbis

The world’s richest university just got a little richer. On Monday, Harvard announced that it has received its largest-ever gift of $350 million and it will rename its school of public health after its benefactor’s father.

Public health is a wonderful and worthy cause, of course, and Harvard has a stellar program dedicated to it. But this gift — like so many other megagifts to megaendowments — has a hint of the ludicrous about it.

There's an old line about how the United States government is an insurance conglomerate protected by an army. Harvard is a real-estate and hedge-fund concern that happens to have a college attached. It has a $32 billion endowment. It charges its rich students — and they are mostly from rich families, with many destined to be rich themselves — hundreds of millions of dollars in tuition and fees. It recently embarked on a $6.5 billion capital campaign. It is devoted to its own richness. And, as such, it is swimming in cash.

“But, wait!” you might say. “That $350 million is going to support an educational institution with tremendous public spillover! Harvard does basic scientific research! It teaches doctors! It studies cells and stars and history and it educates underprivileged youths!”

True, true, all of it. Still, from a purely utilitarian perspective, there are causes that need that $350 million more. Groups like GiveWell are devoted to figuring out where a dollar does the most good. It recommends initiatives like deworming in very low-income countries. Harvard, at the same time, is spending a billion dollars upgrading its coeds’ convenient, riverfront housing. If it wanted to maximize its $32 billion worth of utility, it could, say, admit more students, especially poor ones, reduce its focus on property development, and double down on its focus on research, which currently makes up $800 million of its $4.2 billion in annual operating expenses.

But there is a way to encourage the university to do that, or at least to ensure that it is also contributing more to the public good. That is to take away some of Harvard’s tax exemptions, as suggested by legislators in Washington and Massachusetts, as well as a number of economists. The idea is that such megarich schools hoard funds and real-estate, tax-free, to the detriment of local communities or federal coffers, a situation that could be remedied with a wealth tax on endowments over $1 billion, property taxes, or a tuition sales tax.   

Harvard and other universities are the Platonic ideal of nonprofits in a technical sense, and thus exempted from paying taxes like businesses do. The school does not distribute its operating profits as dividends. It has no shareholders. It does not exist to make anyone rich. Yet nevertheless, it is rich, as are a several other universities in its cohort. Harvard manages about $32 billion, Stanford about $19 billion, and Yale about $21 billion.

All that money can have some perverse effects. Harvard, for instance, has purchased a tremendous amount of land in Cambridge and the surrounding towns — pushing up real-estate prices without contributing much, if anything, in property taxes. If the school lost its nonprofit status, it would owe the state of Massachusetts $80 million a year. (The $350 million donor owns $100 million of real estate in Harvard Square, by the way.) For now, it owes close to nothing on its land or its investment portfolio. 

Were it to face the burden of some taxes, Harvard might shift its strategy. And “if donors knew that the money they bequeathed to their alma mater would partially or fully be heading to the state,” wrote the Harvard Crimson debating the issue back in 2008, “they would think twice before writing that check.” Exactly.