Jumat, 09 Maret 2018

Mankiw on endowment taxes

Greg Mankiw wrote a New York Times column December 24 criticizing the university endowment tax. I disagree, not so much with the wisdom of the tax, but with the wisdom of writing such an article.


The tax is small -- 1.4% of endowment income. So if $100 of endowment earns 10%, or $10 of income, the university pays 14 cents. Still, with $38 billion of endowment like Harvard's, or $22 billion like Stanford's that adds up to some real money.

Greg writes that it is "hard to justify this policy." Universities invest in "human capital, which means educating our labor force" and "the knowledge that flows from basic research." Mainly, though, Greg's against the tax because the few elite universities with more than $500,000 endowment per student, (unlike the community colleges and state schools that actually do train the labor force)
"use their resources [to offer] need-blind, full-need admissions...."
"At Princeton [$24 billion] about 60 percent of undergraduates get financial aid. This aid covers the entire cost of tuition, room and board for students from families with income below $65,000 a year."
In sum, Greg feels that universities provide a public good, of refraining from charging tuition for low-income students, so should retain this subsidy. And subsidy it is. While I think all capital taxes should be zero for everyone, given that everyone else pays capital taxes, the fact that universities can borrow at tax-free rates, accept tax-exempt gifts, put the money into endowments which are run like funds-of-funds, hiring high-priced managers to send money to high-priced managers of hedge funds, private equity, venture capital, and real estate, and pay no tax on dividends, interest, capital gains, ever, amounts to quite a subsidy relative to everyone else. And it comes out of taxes that universities do not pay, which means everyone else pays more.

Lower rates, broaden base?

Does not every claimant on the public purse, anxious to preserve a tax deduction, claim that they provide a public good? The home builders, the mortgage bankers, and the real estate agents went apoplectic over limiting the deductibility of home mortgage interest. Because it was going to destroy the American Dream of Homeownership. Because building home equity is the tried and true, well, "engine of economic growth for the middle class!" Farmers demand agricultural subsidies to defend their storied way of life. Why, without the Family Farm, the fabric of American society is lost! The bankers demand immense leverage, deductibility of corporate interest, and a range of anti-competitive regulation because otherwise, who will lend to the middle class!  The solar cell and electric car manufacturers want tax credits and subsidies because they're saving the planet. And on we go.

Conservative, "Republican," free-market principles used to be to advocate for lower marginal tax rates, and a broader base, in which everyone gives up their little deduction or subsidy. (I use "Republican" as Greg uses it, so don't go all nuts in the comments about Republican failings to live up to these ideals.)

How can we credibly proclaim that we, universities, provide the true public good and deserve subsidies, but the rest of you get lost? Do we not look just a little hypocritical if when a tax reform is announced, we jump in line with the rest of them to demand our pork back?


Greg started his oped well:
"The tax legislation approved last week by Congress....combines some badly needed reforms with various messy provisions seemingly designed to keep accountants and tax lawyers fully employed."
The reason it ended up that way is that the minute it was announced, every Tom, Dick, Harry, Susan, and Jane rushed to Washington to protest losing their deductions and credits, and given that passage relied on reconciliation rules, no democrats and a tiny margin in the senate, Congress caved in quickly. The hope to lower marginal rates and broaden the base got swiftly rolled back. (There is some progress -- state and local and mortgage deductions are limited. But a lot less than we have hoped for these last 31 years.)

Should not the role of a renown economist, public intellectual, like Greg, to be to explain lower the rates broaden the base from the rooftops -- and when the time comes, to say that yes, we will give up our subsidies, and we will in doing so lead the fight for everyone to give up theirs too?

Yes, this is a tiny tax, in a bill that only begins to cut deductions. But if there is any hope for reform, our time will come. If we want to lower rates and broaden the base, we will have to cut the holy trinity -- employer health care, charitable, and mortgage interest. While there are many worthy charities and nonprofits, including both Greg's and my employers, charitable deductions and nonprofits have become a cesspool of tax shenanigans and politics. When the time comes that a real cut is on the table, will we say, "yes, we accept ours too,"  or will we run to Washington to plead "everyone else yes, but spare us?"

How to subsidize

Moreover, if indeed universities provide useful public goods -- and they do, and I  include low tuition for low-income students and basic research -- surely how that activity is subsidized matters. There are good and bad ways to subsidize anything. That is a second "principle" of good conservative, "Republican" and free-market governance.

Usually, giving a lot of money to a large opaque and competition-protected bureaucratic institution that does a lot of things, to spend as it wishes, does not produce the outcome you want. Usually, funding that subsidy by giving a franchise such as a little monopoly or the unique opportunity to run a tax-shielded hedge fund does not produce the outcome you want.

When you want  a public good from such institutions, conservative principles usually suggest that the subsidy be transparent, annually appropriated, reviewed, and given for the activity you want. Give federal scholarships to the students, chosen by federal rules, and studying things that taxpayer representatives find useful. Support research through competitive grants. Perfect? No. But a lot better than counting on tax-subsidized endowment profits to go where you want them to go.

Otherwise, you tend to get big administrative bureaucracies, sports and recreation programs, bloated faculties with high salaries, low teaching loads and a lot of silly research, and a few crumbs to the worthy students. You also get admissions offices selecting students by all sorts of crazy criteria suiting the admissions office, including some rather stunning obstacles to asian-Americans. If the taxpayers are footing the bill -- and they are here -- shouldn't they get some say in who gets the goodies and what they do with them?

So, if sending low-income students to Harvard and Princeton is a good idea, conservative, "Republican" and free market principles direct us to argue for a direct, budgeted subsidy, not a hidden special opportunity to run tax-advantaged hedge funds on the hope universities will spend the profits in some publicly useful way.

Just in time, the WSJ "notable and quotable" which seems to be running a series on abstract abstracts from academic journals ran a good one. From the original source, Stephanie Springgay writing in the journal Research in Eduction,
The idea that the world is composed of moving and constantly transforming materialities that are vibrant, quivering, and indeterminate has shifted how we think about human and non-human relations. Matter is not a stable entity, but one that is continuously vibrating and differentiating. This materialism is crucial for thinking about possible futures of educational research. In this paper, I turn to the materiality of rhythm, movement, and affect to suggest a more vital understanding of participation and thus politics... 
It goes on like this.

Really, Greg? Taxpayers should support more of this "basic research?" (Yes, argument by anecdote is unfair, but this is a blog, and we're having fun.) Is this not an example of what happens when you hope that public goods are supported by an obscure wealth transfer, rather than on-budget spending? (Again, there are plenty of horror stories at the NSF too, but at least they are transparently linked to the subsidy.)

More 

Greg does not question why such universities charge tuition ($43,450 at Princeton) in the first place, then pat themselves on the back for using endowment payouts to pay themselves this tuition for favored students. Nor does he discuss the  incentives that income-based and asset-based financial aid leads to. Greg is usually on top of marginal tax rates. (Hint, if you're anywhere near this income class, with a kid that can get in, working harder or saving a few pennies for college will cost you dollar for dollar in less aid.) Greg calls such "well-endowed universities "engines of economic growth for the middle class." Greg does not address what fraction of "middle class" students are admitted to Harvard, Princeton, Yale, Stanford or other universities with half a million per student endowment.  Is it 0.001%? Community colleges are the engines of economic growth for the middle class.

After the excellent first sentence, above, Greg writes
"the part of the bill that most disappoints me is.. a new tax on large university endowments. " 
(my emphasis.) I can think of a few greater disappointments! (And, to be fair, hopes for future reforms if this is successful. They did limit mortgage interest. So it's just a low voltage plug, not a third rail.)   

Greg notices that some of this tax may be blowback for the uniform partisan sympathies of major research universities.
"Senartor Kennedy then said 'and they're from Harvard. For all I know they are a bunch of weenie liberals. Probably were if they're from Harvard.'" 
Greg points out that Senator Kennedy was wrong in this case, as he was referring to Robert Barro, But the Senator was right on conditional probability. Beyond Greg, Barro, and Feldstein just how many self-identified Republicans are there at Harvard?

Greg also writes
"Most professors leave their ideology at the door when they teach the next generation of leaders"
That isn't even true in economics, and a wispy dream in the humanities. (For an example, just see my next post.)

Greg is, I think, right that this some of the endowment tax is blowback. If conservatives remain in charge in Washington, and universities keep going as they are now, it may only be the beginning.