Published by the Students of Johns Hopkins since 1896
July 11, 2020

University implicated in Paradise Papers leak

By MORGAN OME | November 16, 2017

Hopkins is one of over 100 colleges and universities named in the Paradise Papers, a set of 13.4 million documents that shed light on how the world’s wealthy and elite hide their assets in tax havens.

First made public last week by the International Consortium of Investigative Journalists, the Paradise Papers reveal that many universities have invested parts of their endowments in offshore funds, where there are little to no taxes.

By investing in these funds, some of which are known as “blocker corporations,” universities can avoid paying taxes on parts of their income earned through business ventures.

According to The Guardian and The New York Times, Hopkins, along with Stanford University, the University of Southern California, Columbia University and Dartmouth College, were partners with H&F Investors Blocker, a blocker corporation located in Bermuda. It was dissolved in 2011.

The University did not respond to requests from The News-Letter to disclose how much it had previously invested with H&F Investors Blocker and whether it currently invests in offshore funds.

In a statement, the University wrote that it manages its endowment to maximize returns and ensure that the endowment is a stable source of long-term funding. The University emphasized that it adheres to the law in all of its investments.

“Johns Hopkins, like many universities, foundations and other non-profit organizations, invests a portion of its endowment in pooled funds that include capital from other investors and that sometimes make foreign investments,” the statement read. “In doing so, as with all of our investments and income, Johns Hopkins complies with all tax and reporting requirements.”

Although many universities are tax-exempt institutions, they may be taxed if they earn income through activities outside of their educational mission, such as profits made through investments in private equity funds. Such taxes are intended to prevent organizations from unfairly benefiting from their nonprofit status. The University did not comment on whether it earns taxable income.

According to Associate Professor of Political Science Nicolas Jabko, investing in offshore funds is not unusual, since universities often look for investments that best serve their interests.

“[Universities] have a fiduciary responsibility to find the investments that are most profitable. That is their main responsibility,” he said.

According to The New York Times, H&F Investors Blocker invested with Hellman & Friedman, a private equity firm, in shares of Axel Springer, a media company that publishes magazines and newspapers. As of 2012, Congress’ Joint Committee on Taxation estimated that blocker corporations cost the U.S. Treasury close to $1 billion a decade.

Collectively, U.S. college endowments are estimated to be valued at $500 billion. According to the University’s 2015 990 tax form — which all 501(c)(3) nonprofits are required to fill out annually — the endowment is $3.3 billion.

Anton Korinek, an assistant professor of economics, explained that it has become common practice for universities to seek the help of lawyers and accountants to maximize their investments, which may include using blocker corporations.

“There is a large industry that helps all kinds of investors, including colleges and universities... structure their investments in the most tax-advantageous way,” he said. “I assume that... what the managers of the endowment at Johns Hopkins were doing was taking advantage of the services offered by this industry.”

Jabko said that although the Paradise Papers leak is not surprising, it is noteworthy because the documents brought the widespread practice of offshore investing to the public’s attention. The list of entities and individuals named in the Paradise Papers is sweeping, ranging from corporations such as Apple to leaders like the Queen of England.

“What is coming out also in these papers is that everybody is doing it: big companies, nonprofits, institutions such as universities,” Jabko said. “Everybody is using these tax optimization methods, and that’s part of the problem.”

Even if investing in offshore funds is not illegal, Jabko noted that the practice contributes to other problems, like growing global wealth inequality. He emphasized that most individuals do not have the resources to put their assets in tax havens.

“The only people who are not using these things are people who don’t have tons of money to invest and save from taxation. People like you and me, we don’t do this,” he said.

Offshore investing perpetuates a system of inequality that, Korinek said, is exploited not only by the elite, but also by criminals.

“The same system can be taken advantage of by criminals to launder money and hide their identities,” he said. “They can invest alongside entities that do it in a legal manner.”

Jabko does not believe that preferential tax treatments will be eradicated anytime soon, since the individuals who have the power to get rid of such treatments often benefit from them.

“It’s unlikely they would kill the goose that laid the golden eggs,” he said.

Korinek is hopeful that in the future, tax systems will be more equitable and not disproportionately serve the interests of the wealthy and elite in society.

“Ultimately, it is society who determines [its rules] and who determines how many tax havens we allow to exist,” he said. “I personally really hope that we can establish a tax system that will be fair for 100 percent of the population.”

Korinek also noted that there is intense lobbying against efforts to curb offshore investing. Currently, Congressional Republicans are working to reform the tax code by imposing additional taxes on some college endowments. The proposed tax reforms would directly affect Hopkins.

In a statement, the University expressed concerns with the recent tax reform legislation, since it could affect future funding for initiatives like scholarships, research and patient care.

“We are working to oppose any changes in the tax code that could be detrimental to students, other members of our university community and the university itself,” the statement read. “Among other provisions, the proposals to repeal tuition-related exemptions and to impose a new tax on university endowments are especially concerning.”

The House of Representatives is scheduled to pass a tax reform bill on Thursday Nov. 16.

Sarah Y. Kim contributed reporting.

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