I can't profess precisely how endowments work or how they're used, but they sound like giant slush funds, serving as tax deductions for those who put in, and a big pot of money for a relatively select few to "direct" to schemes "projects" they find redeemable. Sounds a little like a foundation. I wonder if they ever use them for political purposes?
I like your sense of humor. These days, I doubt there is even one endowment that isn’t managed by some wildly-overpaid political crony or dedicated to Leftist causes.
Universities use endowments the same way individuals use retirement accounts. The idea is to build up the principle until the yields/dividends provide income sufficient for whatever goals one may have. For universities it may be a new department, for an individual it may be taking the grandkids to Disney.
As far as levying an excise tax on these endowments, I have several misgivings. I assume endowment donations can be tax deductible, but it is not dollar for dollar so much of this money has already been taxed once. It will be further taxed if it is paid out as salary or to pay for a new building. Additionally, endowments are used to provide need based scholarships, the burden of which would otherwise fall upon the taxpayer in the form of financial aid or government provided student loans.
My main objection is that this seems to be an attempt to use the tax code to punish disfavored institutions. Endowment funds are investments, meaning they are a source of capital. If you tax something you get less of it. Why would we want to impose an incentive that deliberately shifts capital away from productive use? Universities will end up holding more cash, to the benefit of no one.