Welfare for the rich foundations

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Imagine if your gas station charged you its regular price for a gallon of gas, but billionaires only had to pay a nickel.

This is pretty much how universities handle the rates they charge for overhead costs on research grants. Taxpayers pay a rate of almost 60%, while billionaire-backed foundations pay between 0% and 15%.

Our new study illuminates exactly how taxpayers are forced to pay more than the foundations of billionaires through the near-inscrutable process by which universities bill out the overhead — or indirect — costs of academic research.

An academic research project incurs direct costs, such as researcher salaries and lab equipment. But it also carries indirect costs, which are overhead expenses for facilities and administration. Direct costs are itemized and accounted for in each grant. Indirect costs, impossible to precisely quantify, are paid for through a flat, arbitrary rate that is “negotiated” by each university. This is known as the indirect rate. 

The federal government is the largest funder of university research. It awards thousands of research grants each year through agencies such as the National Institutes of Health and the National Science Foundation. However, billionaire-backed foundations also fund academic research.

The problem is that the taxpayer pays a substantially higher indirect rate than nonprofit foundation funders. The money that foundations would have spent on overhead costs if they had to pay the same rate as taxpayers can be spent on more research of their choosing. In a clear example of cronyism, this represents a transfer of money from taxpayers to very wealthy foundations backed by corporate interests.

We’re not talking chump change here. Our analysis suggests that, in 2019, the average cross-subsidy from taxpayers to foundations was somewhere in the range of $87 million to $133 million per university. In our sample of 82 universities from across the country, this adds up from $7.1 billion to $10.9 billion.

As an example, taxpayers pay Harvard an indirect rate of 69%, while the Chan Zuckerberg Initiative and the Bill and Melinda Gates Foundation refuse to pay more than 15%. And only a handful of foundations pay 15%; many pay nothing, and no foundation pays an indirect rate that comes close to the 58.3% average rate that universities charge taxpayers.

Sometimes foundations fund important research. Occasionally their projects seem just as frivolous and wasteful as government-funded research into the endurance of fish on a treadmill.

But far too often, the research they commission is clearly designed to support the private foundations’ left-leaning agendas. For example, George Soros’ Open Society Foundations funded a 2020 project at New York University “to support climate litigation, education, and communications related to climate change.”

To be clear, private organizations should be able to fund any research project they choose with money they receive voluntarily. However, even if it weren’t ideologically motivated, why should taxpayers pay for the research of billionaires like Soros, Bill Gates and the Walton family?

Taxpayers should not pay universities an indirect rate that is higher than the lowest rate that is accepted from private organizations, such as foundations and businesses. The federal government must eliminate the crony cross-subsidy from taxpayers to billionaires. At the very least, this would incentivize universities to spend money more efficiently.

Taxpayers get the short end of the stick in terms of economic growth, too. There is empirical and historical evidence that the innovation and scientific progress that improves our lives is not driven by university research. A shift in the current paradigm of research funding is desperately needed.

Congress should reduce federal research spending and taxes so that more money is invested in organizations that compete in the marketplace of innovation — not the marketplace of writing grant applications.

Indirect costs are yet another example of how the federal government wastes taxpayer money and aids in the leftist capture of major societal institutions.

• John Schoof is a research associate and project coordinator in The Heritage Foundation’s Center for Education Policy, where Jay Greene is a senior research fellow.





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