Friday, December 21, 2007

Soak the Rich!!!

By Richard Vedder

As one who has been accused of being to the right of Genghis Khan with a severe hangover, the headline on today's blog may seem a bit startling. Herbert Allen, who Forbes Magazine tells us is the 410th richest man in the world, in today's New York Times argues that endowment inequality is huge and growing. That, in turn, disadvantages most American universities and contributes to the costly academic arms race. Hence, let us tax rich universities. Harvard made $7 billion or so last year from its endowments --why not tax them 15 percent of that ($1 billion) and give the proceeds to other, but poorer schools? Allen is an investment banker, a director of prestigious corporations (e.g., Coca Cola), and is a respected name on Wall Street. When the Wall Street establishment starts calling for taxing Harvard, that is news.

Actually, what Allen is proposing is similar to what I suggest as one option in a study I have just completed, but not posted yet, on federal tax policy towards universities. If we are going to give huge tax breaks to wealthy schools, they should use those funds in a way to serve the broader public interest --perhaps by expanding supply (e.g., opening up Harvard West in Arizona, Princeton South in Alabama), or by providing assistance to "less developed universities” similar to the way foreign aid is handed out by prosperous countries to less affluent nations. If, however, they fail to spend the funds appropriately, we should tax them.

The libertarian side of me has some problems with all of this --but it has problems also with taxing kids who inherit the family farm in Iowa upon their parents' death, but then make Meg Whitman exempt from taxation for providing luxury hotels for upper class kids going to Princeton.

I have proposed an Under Spending Tax—set some threshold spending level based on the fairly long run past investment return of the institution in question (say the last 10 years). Spending below that threshold will be taxed at 15 percent. If Harvard has a 10 year rate of return on investment (excluding endowment growth from new gifts) of, say, 12 percent, set the threshold at, say, 7.5 percent (12 percent minus 3.5 percent for inflation minus an additional 1 percent because of alleged inherent difficulties in reducing college costs). On Harvard's current endowment, that would mean spending about $2.6 billion annually. Harvard in fact spends a little over $1 billion. Impose the under spending tax of 15 percent on the $1.5 billion differential -- about $225 million a year.

Allen, I think, would give this money to poorer universities. My inclination would be to give the money to students—the consumers, not the producers. GIVE IT TO THEM DIRECTLY, not to the financial aid offices of the schools, who then manipulate their own aid so the total aid package is what they want it to be, independent of the student's best interest.

Suppose my under spending tax raises $2.5 billion a year (not implausible, I think). Give one million new $2,500 vouchers to students annually who are: 1) from low to moderate income families, 2) who show good academic promise and 3) who will agree to repay the amount with interest if and when their post-graduate income exceeds by 50 percent the minimum annual earnings of full-time, year round American workers. This creates a redistribution of wealth away from plutocratic universities towards moderate income kids with ambition and academic success, but does it in a way that does not seriously jeopardize the supremacy of the rich schools. It is a politically doable approach --not ideal, but perhaps better than doing nothing.

To be sure, this is a Second Best type solution. Ideally, the government should be getting out of the financing of higher education—period. I think its infusion of funds has corrupted the academy, led to inefficiencies and promoted an arrogance towards the general population that is both astounding and revolting. But as long as tax-exempt private financing is going to continue, let us start to channel funds to students, not institutions, and let us use those funds to promote equality of educational opportunity as well as institutional equality amongst American universities. Just a thought.

3 comments:

Mad Dog said...

The equal distribution of unequal income is what I consider socialism. Our government already engages in class warfare and the redistribution of wealth through the use of the convoluted and overly complex tax code.

What is being proposed in this blog amounts to opening a new branch of the IRS to levy new taxes on higher ed in an attempt to reverse the unpleasant affects of the existing tax code that facilitated the inequality in the first place. If this is the solution to resolve the problem, then the root cause of the problem is not being addressed -- it’s the “band-aid” approach and it won’t work because it will create another set of “unintended consequences”.

I can only imagine a program such as this being subjected to the irresistible an instinctual urge by tax and spend politicians to expand such a program to private sector business because McDonalds is making more money than Taco Bell. It stymies competition and innovation -- as well as other important consequences. But I digress.

“…endowment inequality is huge and growing. That, in turn, disadvantages most American universities and contributes to the costly academic arms race. Hence, let us tax rich universities. Harvard made $7 billion or so last year from its endowments --why not tax them 15 percent of that ($1 billion) and give the proceeds to other, but poorer schools?”

What is a “rich university”? Some are obvious, but others are not. Who is the judge? What is a “poorer school”? I would think that inequality is a quintessential ingredient of capitalism and free market competition.

I’m not wealthy by any means. But I believe that redistribution of wealth is no fairer than the tax system itself. I don’t like it. Going down the tax road to make college more affordable will not work in my opinion. I believe any additional tax expense will be passed right on to the consumer.

I hope that CCAP does not become an advocate for manipulation by taxation and a haven for bashing the rich - both people and business. If it does, it will be deleted with extreme prejudice from my "Favorites".

On to your next blog post.

Martin Steiner said...

This is all typical tax & spend democrat demagoguery. Accumulation of wealth is bad and should therefore be penalized by imposing specious or spurious tax disincentives.

“Tax the rich, feed the poor,
‘Til there are no rich no more”

I would like to see this CCAP organization do some regressions to show that increased endowment spending will result in reduced tuition or some sort of measure to show that the result would be an increase in affordability.

Max is right, writing tax code to tinker with the part of favorable tax code that we don’t like is not an answer.

Grassley doesn’t run the Senate Finance Committee any longer, which means that the chairman, Max Baucus (D-MT) must be on board. And what they need to do is come up with legislation similar to Sarbanes-Oxley which would simply require the use of GAAP to file a quarterly (10Q) and FY (10K) Balance Sheet and Income Statement with a plain English explanation of how the endowment money was used – whether directed by any number of donors or not. This would provide the public with needed information. A potential donor could make a more informed decision as to how any potential donation should be directed. Students and their parents could use this information to see what a particular college’s priorities are. And the rest of the public could possibly acquire information as to why college tuition is increasing at such a high rate. I strongly believe that shining the light on the greatest chunk of a college’s finances would do much more good than using the tax code for class warfare and the redistribution of wealth.

Colleges and Universities are businesses and should be treated as such.

Chris said...

let us use those funds to promote equality of educational opportunity as well as institutional equality amongst American universities. Just a thought.

Why? Why should the tax code be used to promote "institutional equality?" This hardly strikes me as a "conservative" position from either an economic or political perspective. It strikes me as sour grapes. It strikes as typical Athens jealousy directed towards a certain institution in Columbus. Because Ohio State's alumni and supporters have built up a two billion dollar endowment, while Ohio U's have failed to get much past 200 million, it's time to use the levers of government power to enforce "institutional equality?"

This strikes me as not too far away from an old maxim that went, "from each according to his abilities; to each according to his needs."