But colleges vary widely in their contribution to this dream because taxpayers support colleges in different ways—and at vastly different levels. Public institutions frequently go begging because they are supported by a combination of steadily rising tuition and declining tax revenue. And state legislatures must publicly balance the share of tax revenue allocated to these colleges against competing budget demands, such as highways, health care and public K-12 education.
In contrast, taxpayers, for the most part, unknowingly support private institutions primarily through tax deductions and exemptions. For example, gifts to university endowments are tax deductible and the earnings on these endowments are exempt from taxation, as are the endowments themselves. For elite private institutions, those with endowments in the billions of dollars, the size of these tax breaks can dwarf the direct subsidies that taxpayers send to public institutions.
These tax breaks are rarely debated because they are hidden in the tax code. Meanwhile affluent private universities, claiming their importance to the realization of the American dream, do everything in their power to silence any questioning of their right to enrich themselves through favorable tax treatment. However, it is important to remember that these tax breaks are not divinely ordained. Rather, they flow from congressional acts aimed at improving the public welfare. Without doubt, America’s richest universities use their wealth to provide important benefits to society, such as support for research and student financial aid. But their inherent exclusivity leads them to fail at fostering the most critical dimension of the American dream: social mobility. And that should lead Congress to ask whether the extent of the tax subsidies granted to the nation’s wealthiest universities is justified.