I know that this will have a lively comments thread because Wick is here and participating in EphBlog, so I have my work cut out for me.

The shortest summary of Wick’s paper is that US tax policy allows educational non-profits to save much more of their endowment than other non-profits. Because colleges don’t have to spend as much of their endowments, Wick asserts that this requires the government to issue more Pell Grants to make up the difference, and implies that in the alternative, colleges would make up more of the difference by lowering tuition. Consequently, Wick argues that Colleges are “raiding” the federal treasury by decreasing the base of taxable income when they raise money to increase their endowment. Wick also correctly points out that the debate is not so much over the answer he proposes (with which I disagree in large part, unsurprisingly, but more on that later), but that this question has not yet been asked at all.

Wick, I certainly commend you for pointing out this issue, and I agree that it’s something that warrants a great deal more discussion than it currently has. However, I think that it cannot be limited to colleges, or even education, and that it’s much more difficult to logically draw a bright line around colleges than Wick thinks it is.

A more detailed summary, interspersed with commentary, below the cut.


At least to me, Wick’s analysis, though provocative and well-reasoned, is incomplete in a few areas that seem to resonate throughout the work. First, Wick incorrectly conflates the private sphere (private donations) with the public sphere (targeted government grants, tax treatments, pell grants), and then moreover, treats these as substitutes rather than complements. Moreover, Wick assumes that money granted to colleges would otherwise go to the treasury, when far more plausible scenarios abound (donating to other foundations or other tax deductible areas, colleges establishing a multitude of targeted satellite charities that would contribute to the running of the college). To a reasonably clever group of tax and corporate attorneys, this would merely be an interesting challenge, rather than an insurmountable barrier.

But to me, Wick’s telling admission is that “the following discussion could apply to all non-profits falling one way or another under federal 501(c)(3) status, ranging from hospitals to museums and orchestras.” Why stop there? You’re forgetting unions, political parties, even your religion of choice (and its buildings, grounds, and endowments. Why, just changing the tax treatment of the Catholic and Mormon Churches, with their vast holdings of land, could revolutionize the country’s fiscal picture! And that, to me, is the critical weakness — there’s no logical stopping point for this. Much of Wick’s logic also supports taxing ANY benefit exceeding the sticker price; while he targets towards elite higher education, there is no logical distinction for not including elite secondary education as well, as we all know the endowments of those private schools are quite large (witness Annenberg’s $100M to Peddie, just for one). Other things potentially captured by Wick’s rubric include: the value of religious service by attendees, and the differential between the sticker price and cost of: art shows, museum exhibitions, non-profit musical groups such as county and state orchestras and symphonies, and performing art groups. The logical end point of Wick’s argument is a fundamental reordering of charitable donations of both money and services, with massive effects that could sharply reduce the overall amount of charitable giving by individuals.

Analytic Frame
Wick ponders why “these [tax-deductable contributions] receive scant reiew, alongside other federal appropriation and budget spending decisions for the Department of Education.” These “sustantial subsidies” are disconnected from “our national assumptions about eduaation.”

Wick thankfully points out that changing the tax treatment shows an alternative that highlights the amount of money at stake on this issue, rather than a concrete recommendation. This paper certainly does an admirable job of that.

Current U.S. Education Policy and Plan
Wick asserts that “Our national policy is to believe that the Founders, who didn’t mention education in the Constitution, left higher education to the states. This ties the hands of anyone trying to devise a national higher education policy.”

This is wrong on several levels. The policy of construing the Constitution is that it is a document that creates a federal government (or, at least a legislature and a judiciary) limited to the powers that are enumerated in the document. Since education is not one of these, it is granted to the states under the 10th Amendment. This is not a policy; it is a structural limit on the very foundation of government.

However, despite Wick’s concern, all is not lost, for he is saved by the Commerce Clause. Nothing stops a national policy other than people’s unwillingness to grant the Federal Government even more of a role in education than it already has allocated itself.

Wick also asserts that “Our current national education policy seems to be that we will ignore the poor. Our current national policy is to let Medicaid and rising medical costs crowd higher education out of state budgets.”

I think the first statement is heavy on rhetoric and light on substance. Many elite colleges already have need-blind admissions, and Wick even admits earlier that the AVERAGE state college tuition is $5800, while Pell Grants are “frozen” at $4050. Moreover, many colleges have a wide variety of privately-funded scholarships, through those “undesirable” charitable contributions. But as Wick doesn’t point out, Pell Grants are not the only federal funding available; it is also curious that Wick ignores the tax treatment of personal educational expenses when he focuses so heavily on the tax treatment of the institutions. Moreover, Wick also misses out on the role that STATE taxes and funding play in colleges, whether public or private. nothing stops any state from creating a higher education tax credit, and one specifically targeted towards low-income families.

As for Medicaid, well, my solution would be eliminate it. Voila — more funding for colleges. And as a quibble, it seems paradoxical to talk about a national policy on state budgets, which are of course only determined by the states and not the nation as a whole. If Wick is really complaining about the lack of state say in the formulation of national policy, then I am more than happy to invite him to join the “Repeal the 17th Amendment” bandwagon; there’s plenty of room.

Federal Tax Policy on Donations and Endowments
Here Wick goes through some examples of donations to colleges, using Williams and Yale as examples. Wick also rightly points out that “[c]urrent policy makes no distinction on the uses of the [tax-deductible] gifts [to colleges]. Athletics, new buildings, and scholarships, for example, have equal deductibility rules.” Wick is correct, in my opinion, in pointing out that we should definitely reconsider equal tax treatment for the various uses of money, and also implies that we should treat targeted contributions (rather than general ones) somewhat differently than we currently do.

However, Wick also sees it as a problem that tax treatment does not discriminate based on the operating budget of a college or on its endowment. And again, this is problematic to me on several levels. First, I don’t find it problematic that colleges reap the rewards of having their own alumni being successful, and contributing disproportionately to their alma maters. To the contrary, I think it’s an incentive for colleges to produce people likely to contribute to the economy ala Gates or Buffett (and perhaps subtly counteract the modern trend towards majors like the postmodern hermeneutics of the sociopolitical structures of sub-saharan Africa), and also provides an incentive for philanthropists to give to a cause that they feel passionately about.

Moreover, I don’t see the disparity in endowments as a bug; I see it as a feature, just as it’s a feature that people invest more in IBM or Microsoft than they do in the stocks that appear in email spam. Would we want all business to have the same endowments and market capitalizations, despite their widely varying purposes, locations, and most importantly for me, abilities? Once we account for the “passionate cause” of the donor, it seems that most gifts are based on either a “bang for the buck” or a “hedonic impulse”, or varying elements of both. If certain colleges have more money because they give the impression that they’re better at educating and at using it than others, why should federal tax policy punish, rather than reward (or at least not disincentivize) those efficiencies?

Wick implies that Williams and Bunker Hill Community College have a different marginal utility for a dollar donated to each, and suggests that Williams by comparison doesn’t really need the money. This may be the case, but I think that Wick needs to make the case, and has not, that Williams does not merit that money even if it does not also need it. Maybe Williams’ educational efficiency balances out for its lower marginal utility, maybe it does not. But Wick does not discuss that issue.

I’d also like to add that Wick apparently agrees with a point I made earlier about more money to colleges “ensures raising tuitions” (citing Vedder 2004), and one with which Richard did not agree.

College Admission and Lottery Winnings
Here, Wick discusses the disparity between the cost of tuition and the colleges’ cited costs to educate students, and cites Gordon Winston’s argument that elite colleges pay for talent through the “value” of education.

Wick then gets very provocative, asserting that because a large number of students from wealthy families go to elite colleges, this “value above tuition” is “[i]n a fundamental sense, … the equivalent of a highly regressive tax that soaks the poor relative to the rich.” (emphasis added). That’s some awfully strong language, dripping class warfare rhetoric, and a statement that I think is fundamentally incorrect. Not receiving a benefit, particularly one determined in large part on merit, given all the financial assistance granted to lower-income students, is certainly distinct from actively harming others. If I give a rich kid a dollar for getting an A on his exam, am I harming a poor kid who got a C?

Moreover, lotteries are pure chance, whereas elite college admissions, though they contain a small but significant element of chance, are overwhelmingly merit based. If Wick could show me admissions officers pinning applications on a giant roulette wheel, and spinning a ball, I’d take his metaphor a bit more seriously. The metaphor to lotteries actually serves to undercut Wick’s point as lotteries, though they raise money for the state, are essentially regressive taxes on the participants, disproportionately poor, and without a developed sense of probability that would allow them to realize that they’re lighting their money on fire, statistically speaking.

Wick then goes onto to suggest that we should tax this above-tuition benefit as an in-kind donation to the students’ families. This, to me, was the most provocative and wrong-headed part of the paper. It’s the basic tenet of a free market that BOTH parties are better off for an exchange, or at the very least, not worse off. Should we then tax people at what they value something, rather than what they pay for it? Should we tax the families of public school students, as they pay nothing for the school, but nonetheless receive an education for over a decade worth substantially more than zero, no matter how inferior the school district, as even a school acting only as a babysitter is still benefiting the family.

Wick suggests that “given the nature of college admissions, why not tax the differential as lottery winnings?” For somebody who advocates greater inclusion of the poor in colleges, Wick’s proposal seems tailor made, like the minimum wage, to hurt those it purports to help. A family of 3, with the student at Williams, just under the minimum taxable total income, would be drastically hurt by this proposal. Sure, the student is getting a benefit, but where is the family supposed to get the additional money for this supposed benefit that they’re receiving? Students from the wealthiest families, on the other hand, would have no problem meeting this additional charge. Just like the minimum wage, this one would hurt the poor and the middle class under the guise of helping them. Of course, the casualties of the minimum wage are more random, whereas the casualties of this would be the best and brightest middle class and poor students and their families, rather than a more-or-less random sampling. So in a very real sense, it would be even more harmful.

Federal Research Funding in Higher Education
Here, Wick focuses on scientific funding, and in particular on the tax treatment for overhead of scientific research, which he argues creates perverse incentives to spend more and more money because the feds will repay it. While Wick drastically underestimates the electricity and building costs for certain scientific experiments and labs (which I know first hand, having worked in a semiconductor fabrication lab in two different levels of clean room), he correctly points out that the federal funding currently allocated does not incentivize efficiency. While Wick’s suggestion of capping overhead at 15% may work in some, or even a majority of cases, it is far too restrictive for sensitive scientific or engineering work that by its very nature requires enormous amounts of electricity and specially designed or retrofitted buildings (even ignoring all the expensive requirements that EPA and OSHA have added as well).

Wick also ponders the effect of shifting 5% of health research from certain subfields to “community college workforce readiness — creating a 21st Century workforce, with high math skills.” I have two quick points: (1) as New Jersey’s horribly flawed experiments with school funding show, money does not equal results. In fact, the worst schools are the ones that get the most money, in part because the worse they do, the more money they get to improve things. Despite the obvious parallels between this result and college tuition rising as they get more money, Wick does not make the connection. (2) There’s an old adage that “You can lead a horse to water, but you can’t make him drink.” Watching Season 4 of The Wire is VERY instructive in this regard.

So What? Why Focus On A Few Wealthy Institutions?
Wick nakedly asserts that “a price hike in New Haven always finds its way to a community college in Iowa” because “the elite universities set the pricing policies for the nation.” This may have rhetorical appeal, but I find it completely implausible, as this is just stated without even a scintilla of argument, let alone proof. It also seems to fly in the face of the proliferation of small, for-profit colleges, which seem to be undercutting traditional colleges by offering lower-cost night courses.

Wick then elevates the rhetoric further, saying that the “avowed purpose of being a nonprofit institution of learning is the creation of some public good. Do the institutions receiving these federal benefits have the right to pick and choose which national issues to tackle?” Unlike Wick, I think the answer is “ABSOLUTELY!“. It doesn’t take somebody who’s read Hayek (or does it?) to realize that private institutions, even in dealing with “national issues”, identify the existence of problems and potential solutions much more rapidly than a bureaucrat in Washington can. Centralization is slow and does not respond well to new information, which is why Soviet Russia was full of lines. A centralized approach would be like trying to squash a bug with an anvil… a year after it had been in a particular spot. Wick also ignores specialization and its attendant comparative advantages. I am a very poor long-distance runner, and I suspect that Wick would not be a particularly skillful patent lawyer, but all non-profits should march to the beat of the same drum? The rhetoric of that position is also troubling; Wick seems to suggest that the Federal Government, or “we the people”, have not just the right but the duty to tell each and every single non-profit in the country what it should focus on, simply because it receives tax-exempt status from the Federal government.

Wick then writes breathlessly that the Forum on the Future of Higher Education, a non-profit whose “members represent billions in federal funding and benefits” “refused to invite Charles Miller, the chairman of the Spellings higher education commission, to join their discussions.” Godforbid, a bunch of non-profits refuse to invite a bureaucrat into their meeting!

To Wick, this is “opt[ing] out of essential national debates.” But I fail to follow the logic; I don’t see how failing to invite a bureaucrat to a meeting is “opting out” of anything. Moreover, Wick’s rhetoric is once again troubling — who decides (a) what’s up for debate? (b) what’s an essential debate? (c) and whose freedom of association and academic freedom should be violated for those debates, and under what circumstances? Is it Wick Sloane? David Kane? Me (I certainly hope not!)?

Actually, people have made this decision; Congress has chosen to allow this to happen. Under the Spending Clause, Congress can basically condition the receipt of federal funds on whatever it wants (which is why convicted felons and drug users are often ineligible for federal financial aid for higher education). Congress has chosen not to require that educational recipients of federal aid open their meetings to bureaucrats, and even if Congress did so require, I’m not sure that the Spending Clause would trump the 1st Amendment right to Freedom of Association, given the extraordinary leeway that colleges are granted under the rubric of Academic Freedom. To Wick, the proper organization for those decline to invite a government bureaucrat to a private meeting is “a private club”. But Wick is confusing the Forest (The Forum on the Future of Higher Education), which is a private club, for the trees (the member institutions), which are institutions of higher learning. Nothing precludes non-profits from having private meetings, and nothing requires that they open these meetings to government bureaucrats, even if they do have tax-exempt status.

Recalling Wick’s admission that this discussion is applicable to all 501(c)(3) organizations, this logic leads to a police state intrustion that dwarfs even the most febrile exaggeration of McCarthyism. Political party conventions, Church Council meetings, collaborations between multiple musical non-profits or museums… if you don’t invite the right bureaucrat, then they have to give up their non-profit status and be a private club… even though you are already a private club. Wick’s error comes, once again, from failing to make a distinction between public and private; simply because private organizations receive some benefits from the government does not make them subject to the government’s control.

Wick then asserts that these organiztions are NOT creating a demonstrable public good for the nation as opposed to their immediate campuses (ignoring that the very definition of a public good requires that it be neither rival nor excludable). I could point out countless examples of true public goods from college campuses just in the field of technology, but apparently even scientific research isn’t public good enough. To Wick, “possible solution” is eliminating all tax benefits for the Ivies and all liberal arts colleges with endowments above $500M, to be restored “based on measurable results when US low-income students have literacy second to none.” Huh? So colleges are supposed to educate everybody in the entire country? Or use their resources (and thereby diminish the quality of their students’ education) to pay for students at Bunker Hill Community College, because Wick thinks that’s a good idea? This rhetorical excess is frightening at best… not least because second to none logically entails “better than high-income students”. It does not take a quantum physicist to see what this would do the incentive to attend an Ivy or a top LAC.

What Is A Nonprofit? &c.
Apparently, Wick thinks that people think that a nonprofit is “an entity always operating at a cash deficit, while struggling to do God’s work.” I, like most other people who can read the word “nonprofit”, have always realized that it can be anything that doesn’t make money for its employees or shareholders. This was even before law school or having taken Corporations. While many nonprofits are the way Wick describes, anybody with even a passing familiarity with American society realizes that this is not the case, from religious institutions, to colleges, to political parties.

Wick does spend some time in college-class warfare rhetoric, but he does identify one good solution. Rather than hamper successful non-profits as Wick proposes, by making donations only 25% tas-deductible, Wick’s additional proposal of making donations to endow need-based scholarships 125% tax deductible is an elegant and sound way to direct money towards need-based scholarships. Moreover, rather than hurting people for donating to their alma maters, Wick’s logic would suggest that perhaps donations to state schools or community colleges should be tax-deductible at a similar multiple, or should even include a small tax-credit. But for some reason, Wick does not reach those sensible, market-friendly conclusions.

Endowments vs. Foundations
Here, Wick notes that colleges, unlike charitable foundations, do not have to spend any set portion of their endowments (while foundations, though not all non-profit entities, have to spend 5%/year). Wick wonders why Yale’s endowment has grown 17.2%/year while Yale’s student body has only increased slightly in size and Yale only spends 3.8% of its endowment/year. However, this is incomplete, as Wick does not include information on the average tuition paid by students, university grants to faculty, the number of faculty hired, faculty salaries, or any other expenditures. The picture may be as Wick describes it, but this paper provides far too little information to draw the conclusion that Wick does.

A Modest Proposal: For Discussion Only
Wick proposes “A tax policy that ensures that 90% of US residents, b the time they are 20 years old, can pass the AP exams in English Language and Composition and Statistics…. [to] put everyone on a path of their own choosing.”

First off, 90% of people CANNOT pass (i.e., get a 3, 4, or 5) on an AP exam. That’s not how they’re graded. In order for that to happen, based on the already self-selecting people who (to move outward in the venn diagram) do well on the AP exams, choose to take AP exams, gaduate high school, the exams would have to be SHARPLY recentered. It’s highly doubtful that as the exams currently are, that 90% of US residents have the IQ necessary to pass the AP Stat exam, no matter how much schooling they have.

Second, a tax policy can’t ensure much of anything, least of all educational results in the secondary education/first 2 years of college arena. Now, if Wick wanted to bring back something like an expanded Poll tax, and not let people VOTE until they could achieve those results (which I obviously DO NOT ADVOCATE), then those results might even be within striking distance, as there is an individual incentive to pass those tests. But tax policy does not create any incentive to achieve those results, certainly not in any way that most of us would find humane or reasonable, let alone politically palatable.

There’s a long and meandering path from tax structure to individual skill and achievement, and connecting the two is incongruous, if not downright unachievable and counterproductive.

My Suggestions About Tax and Government Treatment of Non-Profits
How many people know why the March of Dimes was founded? More troublingly, how many people know why the March of Dimes is still around? To me, one problem with endowed non-profits is that they suffer from an enormous amount of what is known as “mission creep”.

The March of Dimes was founded in 1938 as an organization to cure Polio. Salk’s vaccine was announced in 1955. So, why is this organization still around 52 years after the Polio vaccine? Because unlike for-profit corporations, charitable organizations are not tightly held to their corporate charters. Task-specific organizations like the March of Dimes, or more ominously, like MADD (which has morphed from “Mothers Against Drunk Driving” to a neoprohibitionist organization renamed “Mothers Against Drinking and Driving”).

This is one of the classic insights of public choice theory — if these charities fulfilled their missions, their organizations would seek to exist. Consequently, they either change their mission (MADD, March of Dimes), or trumpet a new and ever-increasing cascade of horribles with which they must deal. These organizations have a disincentive to do their jobs and only their jobs. Political mission creep, in particular, is why, for example, The Olin Foundation closed down in Fall 2005, because John Olin placed a time limit on his bequest, so it had to spend all its money within a certain relatively small amount of time, and no mission creep or ineffectiveness could keep anybody employed for a day longer.

I’d say that one potential solution is to require task-specific charitable organizations to give their money to another organization when their task is done, rather than morphing. Moreover, non-profits should have to have detailed articles of incorporation, elaborating their specific tasks, and the non-profit status would be limited only to expenditures for these clearly delineated tasks. This would, for example, remove the non-profit status for college athletics expenditures, as Wick desires, and by hewing more closely to the corporate form rather than creating special burdens. When their missions are completed (though note that some may not ever be), non-profits would be required to donate their money to no fewer than 10 other non-profit organizations.

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