Tag Archives: taxes

Taxing the Campus Plutocrats

One provision in the new tax legislation is going to give scores of colleges and universities a lot of heartburn –the 21 percent federal excise tax on compensation of employees making $1 million a year or more. The idea of extra taxes on supersized salaries is not new: private corporations have paid excise taxes on direct salary payments exceeding $1 million annually to top executives for years, although they have found ways to evade much of the tax by turning most compensation into performance-based bonuses.

The public believes that enterprises receiving special tax treatment and even public subsidies should concentrate on serving the good of the general public by offering affordable schooling along with some socially beneficial research. They should not be able to use those special privileges to make large payments to top employees. The excise tax is a way of letting our not-very-astute higher education leadership realize that the government, representing the people, is angry with the way they have been treating top employees like private business plutocrats.

Money at the Top

Over the past decade, even as colleges complained about real reductions in state government appropriations, stagnant growth in federal research monies, and other perceived affronts, salary increases have accelerated for those at the top of the academic heap –college presidents and, especially, what salary data suggest are the most important people in academia, those coaching young adults in how to throw and otherwise manipulate footballs and basketballs.

In 39 of 50 states, the most highly paid employee of a nonprofit organization was a college football or basketball coach. Nick Saban, football coach at the University of Alabama, makes an extraordinary $11.1132 annually, which starting next year will result in the Crimson Tide receiving a federal tax bill exceeding $2 million. The best-paid basketball coach, Duke’s Mike Krzyzewski, earns more than $7 million a year. In 2015, well over 50 football coaches made over $2 million annually, and now there are assistant coaches (“offensive and defensive coordinators”) whose salaries will force their university to pay federal excise taxes. A rough guess is that without downward salary adjustments, American universities will have to fork over perhaps $50 million annually in taxes just to cover the uber-pay of these sports gurus.

College Presidents Doing Well

But there are a few other persons in higher education who make as much as the likes of Nick Saban, Ohio State’s Urban Meyer, or Kentucky’s John Calipari (all making over $6 million annually): endowment managers who run the endowments at rich schools like Harvard and Yale. There were reports of payments reaching into the tens of millions annually, although stun by alumni criticism, recent Harvard endowment managers have made “only” $6 to 8 million annually. Harvard’s Narv Narvekar currently makes “only” $6 million, while Yale’s legendary investment wiz David Swensen has made $4 or $5 million annually in recent years.

University president salaries have soared in recent years. In 2008, there were only nine private-school presidents (and no public-school ones) making over $1 million annually; by 2015, there were 58 (and also eight public-school ones). Topping the list was Nathan Hatch at Wake Forest at $4 million); making over $3 million a year were James Wagner (Emory), C.L “Max” Nikias (University of Southern California), and Amy Gutmann (University of Pennsylvania).

Gutmann exemplifies the collegiate salary explosion. In 2008 and 2009, her salary was slightly under $1 million a year, or a bit more counting some deferred compensation payments. By 2015, she made $3.086 million, implying double-digit annual salary increases over a prolonged period. For all private school presidents, in 2015, salaries rose 9 percent, quadruple the rate of inflation and dramatically more than salaries of others, both in universities and the broader economy. Although the Chronicle of Higher Education listed the Savannah College of Arts and Design (SCAD) president Paula Wallace’s 2015 salary as “only” $1,901,841, Georgia newspaper reports indicate she actually made around $9.6 million in both 2014 and 2015 –in a school with a budget of only about $350 million.

Call the Profits ‘Surplus’

Jim Duderstadt, president emeritus of the University of Michigan, once told me he made $175,000 a year in his last year as president, 1995-96. The current president makes about four times that, implying average annual salary increases over nearly a generation of well over four percent –after accounting for inflation. As tuition fees soar, universities have used some of the surplus (better known as “profits” among competitive corporations) to enrich the people with clout in universities. They have abused the public trust, and the privileges granted them. Their arrogance, contempt for the public mood, and sheer greed are one reason public support for universities is waning. Universities are starting to lose their privileges, as evidenced by things like excise taxes on huge endowments and supersized salaries.

For some time, universities and their senior employees have been wards of the state. Thus they heavily favor progressive politicians who want big government with the attendant high subsidies for universities. They mostly give their financial contributions to liberal Democrats and condemn conservative Republican candidates and ideas. Congress, controlled by the Republicans, are sick of it and are sending universities a message. Already reeling from falling enrollments and declining public confidence, universities can ill afford to antagonize the elected representatives of the people further.

The Case for Taxing College Endowments

Republicans inserted many provisions in their House and Senate tax reform bills that have inflamed the higher education establishment, including a proposed excise tax on endowments exceeding $250,000 per student at private schools. Although only about 70 schools are affected that collectively enroll under 10 percent of the students attending four-year American universities, from some rhetoric of university leaders you would think that the very foundation of American higher education has been dramatically impaired.

Now Universities Have Detractors

There are two good reasons why the endowment tax makes sense to some politicians. First, public attitudes toward universities have distinctly soured in recent years. What the public perceives as outrageous student behavior, feckless university leadership, and excessive tuition fees has combined with a growing hostility by Republican lawmakers angered over the large political donations and public criticism that academics have made attempting to oust them from office. Lawmakers are growing tired of feeding the mouths that bite them. Revenues raised by taxing colleges can modestly help fund other tax reductions that lawmakers want to make, which are probably economically beneficial to the well over 90 percent of the population living outside the Ivory Towers of Academia.

Second, our econometric examination of college endowments suggests a large portion of endowment income is dissipated in relatively unproductive fashions, financing a growing army of relatively well-paid university administrators and giving influential faculty low teaching loads and high salaries. We estimate that roughly only about 15 cents out of each additional dollar of endowment income goes to lower net tuition fees (published tuition fees—sticker prices– are much higher at highly endowed schools, but those schools also give more scholarship aid). When a newly endowed scholarship is created, schools typically either reduce their student aid support from other funds or raise sticker prices to capture some of the newly funded endowment resources for other purposes.

Academic Gated Communities

The late Henry Manne once suggested that so-called “not-for-profit” universities actually are “owned” in reality, if not legally, by powerful faculty and administrators. These schools generate financial surpluses that, while not legally profits, are viewed by powerful university constituencies that consider themselves the true “owners” of the university as the equivalent of profits, a large portion of which are then distributed as “dividends.”

A healthy portion of these dividends are used to provide higher salaries or other perks such as hiring lots of new administrative assistants such as more assistant deans, “sustainability coordinators” or “diversity officers” to perform irksome jobs or meet politically correct objectives such as fighting global warming or achieving the optimal skin colorization of the students and faculty. As endowments rise, so do full professor salaries and the numbers of professors serving a given number of students. To a considerable extent, endowments are a successful rent-seeking scam of the power brokers within universities

At public universities, subsidies are provided by state governments that usually are less than $1,000 a student but are occasionally higher. The five highest state appropriation levels per student among the 13 public Big Ten universities range between $10,000 and $15,000, equal to the amount that would be provided by an endowment of $250,000 per student where the annual spending rate is four to six percent of the endowment principal. Thus, the GOP excise tax on endowments takes effect only at institutions where endowment spending is generally well above the public subsidies provided at state universities.

At Princeton, the endowment per student far exceeds $2 million, providing probably at least $100,000 in university spending per student. Despite these extraordinary resources, the school still has published tuition and fees for next year of $66,510 –and, if the Princeton website is to be believed, 40 percent of students pay the full price. Why should governments subsidize gifts to increase even further the extraordinary amount of spending that goes on at academic gated communities like Princeton?

Moreover, the proposed endowment tax is actually relatively modest. Suppose a school with a $10 billion endowment (about the size of that at Northwestern or Columbia universities) had a pretty good year, making $1 billion from dividends, interest, rents, and unrealized capital gains. As I understand the proposed legislation, it would pay less than $15 million in federal excise taxes.

We usually subsidize universities because they have what economists call “positive externalities” –good spillover effects that benefit all of society. But campus riots and other campus pathologies can lead to negative externalities –bad societal spillover effects. The GOP excise tax proposal reminds me of an email written me in 2002 by Milton Friedman, in which he suggested “a full analysis…might lead you to conclude that higher education should be taxed to offset its negative externalities.”

Alerting Clueless Administrators

An endowment tax would typically raise only a few hundred million dollars annually. Why bother? It likely will not dramatically alter behavior. Still, the proposal has considerable symbolic and informational value. It does send a warning to politically relatively clueless college administrators that their special privileges as institutions should not be taken for granted, and, indeed, are under intense scrutiny.

The call for an endowment tax also receives some modest support from the fact that very large endowments have sometimes eschewed the conventional belief that these investments should be made conservatively, emphasizing publicly traded stocks and bonds. The traditional view is that investments supporting public institutions should emphasize risk minimization more than wealth maximization. Exotic hedge fund investments in the Cayman Islands and the annual payment of tens of millions of dollars to endowment managers strike many as inappropriate for universities or at least something that should not be subsidized through special tax preferences.

An excise tax on large endowments is unlikely to alter collegiate investment behavior dramatically, nor is it going to be a large revenue raiser at the proposed rate. However, neither is it likely to do much harm and it has some positive symbolic value.

The Liberal Arts Can’t Fix Higher Education

For the past two autumns the two leading academic reform organizations, the National Association of Scholars (NAS) and the American Council of Trustees and Alumni (ACTA), have held events offering high praise to the liberal arts as a means to improve students’ writing and to provide them with the classical culture that Mathew Arnold calls sweetness and light.

On September 30, 2014. NAS held a screening of Andrew Rossi’s CNN documentary Ivory Tower, which is about students’ inability to afford tuition in light of their poor record of achievement and poor job opportunities.  Following the screening, Professor Andrew Delbanco, who is featured in the film, together with his colleague Roosevelt Montas, Director of the Center for the Core Curriculum and Associate Dean of Academic Affairs at Columbia, spoke about the need to refocus American higher education so that all Americans get a liberal arts education.

This year, at its ATHENA roundtable, ACTA featured an impressive array of speakers, three of whom–ACTA’s president Anne Neal, education researcher Richard Arum, and popular  historian David McCullough—also advocated expansion of liberal arts, English, and history departments to strengthen students’ competencies, especially with respect to writing and history.

I disagree: The liberal arts cannot fix higher education. First, the American professoriate, including the liberal arts faculty, is not interested in teaching liberal arts.  In the late 1930s Robert Maynard Hutchins, president of the University of Chicago, argued, as do Delbanco and Montas,  that liberal arts should be the universal foundation for undergraduate education.  Hutchins reorganized the undergraduate program at Chicago along those lines, but Hutchins’s reforms foundered on the rocks of the German research university model, which Daniel Coit Gilman had introduced at Johns Hopkins in 1876 and which Chicago had adopted from its inception.

Today’s professoriate is specialized, research-oriented, politically correct, and narrowly focused.  In contrast, good liberal arts instruction is broad and integrates flashes of insight with competency building.  The cadre of faculty necessary to do a first-rate job of teaching liberal arts to American students hardly exists. Moreover, it is as likely to exist in departments outside the liberal arts as within it.

Second, the majority of students has no interest in and lacks the ability to benefit from liberal arts.  Charles Murray has written that only about 16 percent of the population has the IQ to benefit from college. According to the New York City Board of Education, 35 percent of 2015 New York City public high school graduates are college ready, but the college at which I work, which rejects half its applicants, accepts students with SAT scores of 1,000,  the 50th percentile.

In part because there has been a belief among progressive educationists that development of cognitive skills like writing and the multiplication tables is unimportant to basic education, high school preparation has been deficient. As well, political correctness influences the content of history courses at both the high school and college levels; further, English departments, which specialize in literature, often do not see teaching writing as part of their educational mission.

In their Academically Adrift Richard Arum and Josipa Roksa find that nearly half of all sophomores show no gain in their scores on the College Learning Assessment, an innovative measure of critical thinking, reasoning, and writing ability.  Nevertheless, in the 2015 ACTA panel Arum claimed that the same liberal arts departments that have failed to nurture students’ skills are the ones best equipped to address the skills gaps.

Via email, I suggested to Professors Delbanco and Montas that many of my students, who come from low socioeconomic status, inner city backgrounds, have not benefited from my college’s liberal arts requirements.  Despite fourteen years of education, the business student I quote lacks practical skills.  She will pay a penalty in the job market.

Professor Montas’s response was this:

[T]his student would most decidedly benefit from a rigorous liberal arts education…. I understand a liberal education as aimed at developing a student’s full humanity: the humanity of the welder as well as the humanity of the lawyer.  The aim of the liberal arts is not that you excel in the liberal arts, but that you excel as a human being in whatever individual form that takes.

The unconstrained vision of liberal arts as all things to all students, including students who lack ability and motivation, ignores costs. Students who cannot benefit will lose years of their lives and will spend tens of thousands of dollars—as will taxpayers–for pursuits in which they are not interested and from which they will not benefit. They will in the end fail to find the kind of jobs they seek.

Mitchell Langbert is an associate professor of business at Brooklyn College.  

A Close Look at Clinton’s Student Debt Plan

Nearly everyone recognizes that student debt has risen to a level that will be difficult to sustain in the future given the nation’s slow growing economy and the sagging incomes of too many college-educated Americans. Nearly 40 million Americans are carrying some form of student debt; more than 7 million are in default on their loans and many more have missed scheduled payments. Roughly 70 percent of all college students today are leaving school with debts owed to either the federal government or to private lenders, with the average debt per student now well in excess of $30,000. The total amount of outstanding student debt is estimated to be $1.2 trillion, with about two-thirds of this sum underwritten by the federal government.

It is not difficult to figure out the reasons for exploding student debt. On the one hand, high-school graduates and their parents understand that a college education is essential for entry into the narrowing world of high paying professional jobs. College and university enrollments increased by more than a third between 2000 and 2014, from 15 million to more than 21 million students. At the same time, college tuition and fees have been growing at more than three times the rate of inflation for three decades now and at more than twice the growth in the median family income over the same period. In 2015, the average tuition (plus fees) for in state students at public universities is in the neighborhood of $10,000 per year and over $40,000 per year for students attending private universities. A fair amount of careful research suggests that these soaring costs are partly attributable to the increasing availability of loans encouraged by federal policy.

Hillary Clinton’s new $350 billion (over ten years) proposal takes aim at this vast constituency of voters currently paying off student loans or worried about the costs of taking them on. She says that her proposal will enable most students to meet college expenses without taking on loans, a claim that is surely exaggerated in view of the scale and scope of her plan.  At best it is a proposal to mitigate the problem somewhat by permitting borrowers to reduce interest rates on current loans and to use the carrot of federal funds to force states to invest more public funds in higher education.

There are three major parts to her plan:

First, (borrowing an idea from Sen. Elizabeth Warren) she wants to allow borrowers locked into loans at high rates of interest to refinance those loans at current federal rates for student loans, much as people are allowed to refinance their home mortgages when interest rates fall.  Federally subsidized student loans are given at fixed rates (set by Congress), generally for a period of up to 25 years.  The current interest rate (as of 2014) on federal loans is about 3.9 percent, down from 6.8 percent charged a decade ago. That reduction would save a typical borrower carrying a loan of $20,000 or $30,000 between $500 and $1,000 per year.

It is hard to find fault with her proposal, at least in the abstract. Many Democrats and even some Republicans are sympathetic to it as a means of providing some relief for overburdened borrowers. Still, there is less here than meets the eye. Private lenders have long offered variable rate loans that move up and down with interest rates. In addition, borrowers have long been able to refinance their student loans through private lenders, which is already a common practice.

Mrs. Clinton’s plan would allow borrowers carrying federal loans to do so through the federal system rather than through private lenders. This may be a step in the right direction, but it is a very short step when one considers the options already available.  Further, her proposal carries an estimated cost of between $60 and $100 billion per year to the federal government, depending upon where interest rates happen to be and how many borrowers take advantage of the plan. This is one of the sticking points: Congress is reluctant to appropriate such funds in a time of deficits, rising entitlement costs, and generally tight budgets.

Second, she proposes to establish an income-based repayment system so that borrowers will never have to pay more than 10 percent of their income on student loans (the standard in the past was 15 percent) with the possibility of loan forgiveness after twenty years of faithful payments.

This is also a reasonable but modest proposal, and one that has been endorsed by other national leaders, including her fellow presidential candidate Republican Sen. Marco Rubio. One problem with it is that the Obama Administration, following the advice of a task force led by Vice President Biden, has already implemented most of it under a law that took effect in 2014. Under that law, borrowers choosing an income-based repayment plan will pay no more than 10 percent of their income toward student loans and those who faithfully repay their loans for twenty years are eligible to have the remainder of their debt forgiven (those who work in public service for ten years can have the remainder of their loans forgiven after ten years). Mrs. Clinton’s proposal “tweaks” current policy at the margins by consolidating existing income based repaying programs into a single plan, but it does not significantly add to it.

There is another problem with income-repayment schemes that is now beginning to emerge. The Financial Times reported last week that Moody’s Investors Service is reviewing the credit worthiness of some student-loan-backed bonds in response to falling repayment rates on loans.  Moody’s review was triggered by wider use of income-based repayment plans which allow borrowers to repay loans more slowly, creating the possibility that bonds may reach maturity before the underlying loans have been repaid.  This could lead to defaults, even if the debt is backed by a government guarantee.  Such concerns have led to a doubling of the yield on Triple-A rated bonds in recent months and to the possibility that Moody’s might downgrade its ratings on those bonds. As the FT reports in its article, “sharp downgrades could spur an exit from the sector by investors banned from buying low rated debt.” This would drive prices down and interest rates higher on those bonds, which in turn could lead to higher interest rates for new borrowers, and perhaps even to an exit from the sector by private lenders.

Third, Mrs. Clinton proposes to spend $175 billion over ten years to encourage (bribe) state governments to invest more resources in higher education so that tuition charges can be reduced at four-year institutions and eliminated entirely for two-year community colleges.  Under her plan, the Department of Education would make funds available to match state budget allocations for higher education and to reward states that keep a lid on tuition increases.  She would also expand work-study programs to permit more students to work off college expenses during their student years. The combined federal and state funds, perhaps as much as $35 billion per year across the country, she claims, would allow states to maintain tuition at affordable levels for students so that loans would be unnecessary. This is, as already noted, an exaggerated claim. An additional point worth emphasizing:  she is not making tuition “free,” but rather substituting taxpayer funds for student-paid tuition.

Total tuition charges at public institutions across the country in 2012-13 amounted to something like $300 billion, plus expenses for fees, books, room, and board. A mix of federal, state, and private scholarships subsidizes a significant portion of this sum. The federal government, for example, spends about $30 billion per year on Pell grants to support tuition and other expenses for more than 9 million students from lower-income families. Mrs. Clinton’s contribution of $17.5 billion in federal funds per annum would make a dent in this package but it is hard to see how it will ever allow reductions in tuition and fees to levels that would allow students to dispense with loans.

Appropriations for higher education in states across the country have fallen off by an average of 16 percent since the onset of the financial crisis in 2008.   Mrs. Clinton, along with the liberal think tanks associated with the Democratic Party, claims that this is a major cause of tuition increases at public universities and thus a major source of the student debt crisis.   This is another exaggerated claim:  student debt was accumulating for years and decades prior to the financial crisis due to rising college costs and the wide availability of federally subsidized loans.   The financial crisis made many problems worse across the country, including the student debt problem, because it provoked a budget crisis for state governments that extended to all publicly funded programs.

Mrs. Clinton and her advisors might ask themselves why so many states found it necessary to cut appropriations for higher education in the years following the financial crisis.  The major reason was that governors and legislators had other priorities, among them paying for public employee pensions, meeting federal mandates to pay for Medicaid, welfare, and K-12 education, and finding revenues to meet law enforcement and transportation budgets.  Medicaid for years has been the fastest growing item in state budgets, followed by spending on K-12 education. Together these two items now claim close to half of all state expenditures across the country.   In ramping up spending on these two items, governors and legislators have necessarily taken into account the carrots (matching funds) and sticks (mandates and court orders) of federal policy.   In view of federal policies and the hard-nosed politics in play in the states, it is not hard to understand why higher education has been squeezed out in the keen competition for state funds.

Mrs. Clinton would now hold out federal dollars to induce states to appropriate more funds for higher education, just as the federal government already does with Medicaid, welfare, K-12 education, and transportation projects. Her proposal would compel governors and legislators either to raise taxes to cover those added expenditures or to cut budgets in other areas — or, alternatively, to dispense with the federal funds altogether.  The federal government has contributed to the budget crises in the states through its mandates and matching programs, and Mrs. Clinton now proposes to address that problem by adding still another mandate and matching program.  This will only make a difficult problem worse, especially when the next recession intensifies the scramble among interest groups for scarce public funds.

Mrs. Clinton’s plan is undoubtedly one of the more inefficient ways through which we might address the student-debt problem.  The major problem in higher education today is one of cost and expense, and only secondarily who pays for it (students or governments).  American colleges and universities are highly inefficient enterprises that maintain scores of useless, duplicative, out-of-date, and politically correct programs for no other reason than that there are interest groups on campus that would protest if any of them were eliminated.  Too many universities maintain masters and doctoral programs in fields for which graduates have no hope of finding jobs.

This is also true of many undergraduate programs currently in place.  Most of those programs should be eliminated in the service both of long-run efficiency and educational integrity.  Ideally, this kind of streamlining should take place state-by-state and campus-by-campus as governors, legislators, and academic leaders grapple with priorities and limited resources.  It is a nagging problem that academic leaders, particularly in public institutions, should begin to address.  Yet Mrs. Clinton’s plan would encourage them to put off the day of reckoning in the hope that all programs can be maintained with still another infusion of federal funds.

Mrs. Clinton proposes to pay for this program by (no surprise here) eliminating tax breaks and loopholes for the wealthy. Her main target is the charitable deduction, which (like President Obama) she proposes to cap at 28 percent for taxpayers in the highest- income brackets (individuals earning more than $200,000 per year and couples more than $250,000). President Obama, who has included this proposal in his annual budget proposals for the past five years, estimates that such a measure would bring in an additional $320 billion to the U.S. Treasury over eight years (another dubious claim). Ironically, in proposing such a measure, Mrs. Clinton is likely to provoke opposition from academic leaders who rely upon generous contributions from wealthy donors to fund scholarships, new buildings, and important research programs.

Mrs. Clinton’s approach is a typical kind of Democratic plan that relies upon subsidies, higher taxes and more spending, and cost-shifting among participants in the higher-education industry.  It will do little or nothing to encourage restructuring or cost-cutting among institutions of higher learning.  It stands in contrast to the approach taken by Sen. Rubio, who proposes to overturn the accreditation system to allow more participants into the industry, thereby encouraging competition among providers and eventually lower costs to consumers. This is the kind of debate we should have over the future of higher education – between those who wish to prop up the current system and those who propose to introduce competition into the industry as a means to restructure and reorganize it. If it does any good, then Mrs. Clinton’s proposal may provoke such a debate.