Rethinking The Endowment Tax: Could Higher Ed Play By NBA-Style Rules?

Forbes

10-06-2025

The NBA Finals is a contest between two of the most frugal spenders
It's easy to be against a bad idea. What's harder—and more useful—is to ask what truth that bad idea may be pointing toward.
By most expert accounts, the endowment tax is a bad idea. For example, Douglas Holtz-Eaken, an economist who worked for George W. Bush and John McCain, made the case in an article last November that it will hurt universities and their students.
The idea's origin is widely understood to be ideological: a targeted penalty imposed on elite universities perceived as culturally liberal, framed as populist retribution rather than fiscal strategy. The policy applies only to the wealthiest private institutions—those with more than $500,000 in endowment per domestic student. The newest proposal, included in the 'Big Beautiful Bill', replaces the current 1.4% flat rate paid on investment returns with a tiered system that tops out at 21% for schools exceeding $2 million per student in endowment resources.
Leaders from across higher education have rightly noted its bluntness. Colleges and universities, as summarized by a recent article in Higher Ed Dive, believe the tax complicates long-term financial planning, threatens the research mission that distinguishes many of these institutions, and disincentivizes donors. But for all its faults, the tax does something elite higher education has struggled to do for itself in recent decades: it makes the cost structure morally visible.
That's because, behind the legalese and legislative motives, there lies a deeper and more uncomfortable question—one that goes well beyond party politics: Why are America's wealthiest colleges still charging tuition?
At the liberal arts college in western Michigan where I serve, we've been working toward a goal of funding our education, not through tuition, but through a pay-it-forward model. Somehow, the proposal got the attention of Malcolm Gladwell, who featured us in an episode of his Revisionist History podcast. The episode didn't just highlight what we are attempting to do, but also pointed out what the Ivy League schools are doing wrong, by comparing them to our model. It was a contrast deliberately drawn: the multibillion-dollar endowments of elite institutions alongside a small Christian school attempting the very thing those elites could afford to do with relative ease.
The numbers are not hypothetical. Multiple elite colleges and universities in the U.S. possess endowments large enough to support full-tuition scholarships for every undergraduate student—indefinitely—without drawing down principal. Instead, many have chosen to expand campuses, grow research budgets, and continue charging high tuition while aggressively fundraising.
That choice—not the political vendettas behind the endowment tax—is what deserves scrutiny.
Rather than defending the tax as written or rejecting the entire concept out of institutional self-interest, higher education leaders might consider a more productive proposal: tie tax liability to whether funds are being used to directly support students.
Under such a model, any endowment spending used for the direct education of current students would remain tax-exempt. Tuition support, academic services, mental health care, library access, career preparation, student life programs—all shielded from taxation.
But non-essential expenditures? Luxury facilities, non-teaching research ventures, speculative real estate holdings—those could justifiably be subject to tax. In other words, tax what functions like private wealth; protect what functions like public trust.
Such a shift wouldn't penalize success. It would encourage alignment. The question would no longer be 'How much money does this institution have?' but rather, 'What is that money doing for students—right now?'
Professional sports have long understood that unchecked financial power distorts competition. Major League Baseball, with no robust salary cap, sees powerhouse franchises like the Yankees and Dodgers dominate year after year, leaving smaller teams struggling for relevance. By contrast, both the NBA and NFL introduced caps and revenue-sharing measures designed to level the playing field.
The result? Greater parity, more upsets, and sustained fan engagement. This year's NBA Finals is a match-up between two of the league's lowest spending teams: the Pacers (ranked 18th in payroll) and the Thunder (ranked 25th). The rules didn't suppress excellence; they ensured that financial muscle alone doesn't dictate outcomes.
The same idea animates copyright and patent law. Creators are granted exclusive rights, but only for a time. Eventually, that work enters the commons. Why? Because a permanent monopoly would suffocate innovation and consolidate power. The aim is to reward excellence without allowing it to calcify into dominance.
Endowments could be treated similarly: protected while advancing the public good, regulated when they drift too far from that mandate.
None of this conversation would be necessary had elite institutions chosen a different path.
Several of the nation's most well-endowed colleges and universities could have eliminated tuition decades ago. They had the financial capacity. They had models of success available to emulate. They had the moral justification. But instead of leading with generosity, many chose insulation. Instead of modeling bold reforms, they pursued institutional advantage. In doing so, they helped create the very cultural backlash now threatening them.
What is playing out now—through the endowment tax and other policy battles—is not just a struggle over money. It is a contest over legitimacy. And legitimacy is not inherited. It is earned—through trust, through transparency, and through service.
The public is asking: Why are these institutions so rich, and yet so inaccessible? Why do they hoard wealth while charging more than ever? Why do they receive federal subsidies while behaving, in key respects, like private investment firms?
Those are not partisan questions. They are civic ones. And the longer they go unanswered, the more justified future interventions will appear, however misguided their intent.
Among the public, there is a growing recognition that the old model is failing. The business of higher education has become disjointed from its purpose. And according to Gallup, public confidence in higher education is at an all-time low.
For college administrators, the temptation is to deflect—to focus on the attacker rather than the vulnerability being exposed. But moral leadership requires more than defensiveness. It requires self-examination—and reform.
If elite institutions had cut ties with federal loan systems years ago, and redirected their immense resources toward tuition-free models, the current crisis might never have emerged. If their endowments had functioned more like public trusts than private stockpiles, their moral authority might still be intact.
It is not too late to course-correct.
A reimagined endowment tax could function like the NBA's salary cap—not to punish excellence, but to protect fairness. Like copyright law, it could reward success without permitting indefinite accumulation. Like the tax code itself, it could incentivize behavior through carefully targeted exemptions, while still holding institutions accountable.
This is neither central planning nor deregulation. It is capitalism with rules. Competition with conscience. A reminder that systems work best when everyone remembers the purpose of the game.
The higher education sector can lead this shift. But that will require more than lobbying for exemption. It will require asking what these institutions owe—not to donors or rankings, but to students. And answering with action.
Generosity offered voluntarily is always preferable to redistribution by force. But when institutions with billions in reserve continue to charge full freight while spending lavishly on everything except tuition relief, they invite exactly the kind of backlash now unfolding.
The better path is still open. The question is whether institutions will take it—before the public demands it for them.