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Two events have recently made the University’s endowment a subject of debate: the GOP tax plan proposal and the release of the Paradise Papers. Together, these highlight the multifaceted controversy over how universities handle their billion-dollar endowments and how the government moderates that use. On one hand, University officials expressed formal opposition to the proposed taxes on the grounds that the endowment funds academic work and financial aid, and on the other, Princeton and others have drawn criticism precisely for employing funds in offshore investment.

My simple reply to these criticisms is that the University has every right to employ its capital free from restraint so long as it abides by the law. 

The Paradise Papers, which comprise of leaked documents from Bermuda-based law firm Appleby, name 104 American universities as having offshore interests and their release raises several obvious concerns. They reveal a disconcerting lack of transparency, despite the fact that a university is not required to disclose the risk of investment, even to its board of directors. While Princeton has not been cited as investing in fossil fuel industries, multiple universities have departed from making only “green” investments, rousing alarm among students. As a private institution, Princeton correctly maintains the right to discretion with its investments, as long as no illicit activity is suspected. 

The leaked documents also make evident how universities cleverly avoid taxes by investing in blocker corporations offshore. Investments in these corporations in tax-exempt jurisdictions have cost the U.S. treasury millions of dollars and have contributed to Princeton’s 12.5% investment gain, which have brought the endowment value to $23.8 billion. Together with tax breaks already in place, these investments continue to swell university endowments across the country. 

Tax avoidance in the media has come to mean something close to “theft,” placing the spotlight on these maneuvers as if they were an evil not yet made illegal. What makes this “evil” is that Fed has less money in its pocket. Princeton and other universities have done nothing against the law and they can use their money as they please. Made to seem like a sign of guilt, their secret use of blocker corporations is simply good business practice. When investments depart from a school’s core mission, they incur a tax like other corporations, and so also like them, they invest in areas with less or no tax.

The proposed tax bill, which aims at drawing revenue from universities with endowments determined to have too much money, appeals to the arguments of equality with other businesses and of anti-elitism. Princeton holds more than 4% of total endowment assets, according to a 2015 analysis by the Congressional Research Service. Moreover, with money being lost to the U.S. treasury by offshore investments, the move would seem all the more reasonable. But what does it mean to have too much money? 

Princeton, with the highest endowment per capita in the U.S., receives criticism for using only very small portions of its revenue toward financial aid, in spite of its boasts of generosity. This does not mean Princeton has too much money – there is no such thing – but it points to an issue between students and the school. The government has no place. Taxes on revenue, if anything, will decrease the amount of aid a great percentage of students receive, which is higher than other private universities. They cause less investment in human capital and the economy in general.

Surely there is a sense of elitism, which generally carries a negative connotation, but it is an elitism that brings tremendous good and (potentially) leads to a common benefit, especially in education on all levels. There is nothing wrong about intellectual elitism. Princeton provides a wealth of resources to the country in research, intellectual dialogue, professionals, and academics. As University officials have expressed, the returns on investment support these resources. They provide opportunities for students in academic pursuits and in their clubs and projects. Regardless of the fact that returns may not be used to a fuller potential, the University provides a greater good to society than the federal government. 

I think it’s enough to point out that in 2017, the government allocated $525 billion dollars in tax revenue for the armed forces. It has no position to talk about taxing wealthy organizations when its military draws more funds than Walmart, the largest company in the world. The government does spend this money, but one should question how much it does for the general populace from which it took this money to begin with.

Princeton University is tax-exempt because it is a non-profit institution. Its central concern is education, placing it on par with charitable organizations. The managers of the University endowment work in the legitimate interest of education.  When it earns those funds by investing in hedge funds and private equity, then it abides by the same rules as businesses. Investing offshore brings in legitimate capital which in one way or another supports education. If education is good, then no federal restraints should be placed on its funds. 

Miguel Caranti is a first-year from Houston, Tex. and can be reached at mcaranti@princeton.edu.

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