Date

2019

Department or Program

Economics

Primary Wellesley Thesis Advisor

Phillip B. Levine

Additional Advisor(s)

Eric Hilt

Abstract

In 2017, Congress passed the Tax Cuts and Jobs Act, which imposes a tax of 1.4 percent on the investment returns of highly endowed colleges and universities. One motivation for the law was that these colleges have not sufficiently used their extensive resources to reduce the high prices students pay. My thesis examines the relationship between changes in endowment values and colleges’ overall spending and spending by category, with a particular focus on financial aid. I take advantage of the exogenous variation in endowment values generated by the 2008 financial crisis to establish a causal relationship. I find that changes in endowment values consistently result in changes in non-financial aid expenditures in the same direction. In the context of the 2008 financial crisis, falling endowments caused colleges to cut overall spending and spending in each category. However, colleges continued to support low-income students by providing financial aid to even more of them. My results imply that the tax is unlikely to be effective, since the income loss it generates is unlikely to prompt colleges to increase endowment spending, or spending on financial aid without an increase in students’ financial need.

Share

COinS