Friday, December 01, 2017

A tax on the American Dream (?)

Larry Summers below is a smart guy but he is overlooking TWO elephants in his room. He fails to notice that most of the universities and colleges in America these days have made themselves into Leftist Madrassas, deeply antagonistic to anything conservative.  Trump is simply responding to that and hitting them where it hurts.  A resumed interest in real scholarship will be needed to turn that around.

Secondly, he assumes that universities offer the best path towards upward mobility.  They probably do enable social mobility for the most part but they certainly are not the best path to income mobility. Tradesmen earn more than most graduates.  Apprenticeships are the best path to upward income mobility.

Equipped with de-identified tax records, economist Raj Chetty and his team at the Equality of Opportunity Project have provided the hard numbers to confirm what many have long feared: Upward income mobility in America is on a steady downward trajectory. Whereas 95 percent of sons born in the United States in 1940 made more money than their fathers, this was true for only 41 percent of sons born in 1984. These data points seem profoundly important for anyone hoping to interpret the current state of our politics and national dialogue. But they also merit the close attention of both our university leaders and legislators working on the tax code. In a country of declining intergenerational mobility, the proposed endowment tax is seriously misguided.

Educational institutions should be important actors in reversing the American Dream’s decline. A new paper released by Chetty’s team this year has helped to affirm the potential for higher education to foster more broadly shared opportunity. The research, published alongside a set of mobility report cards for all 2,199 US colleges and universities, shines a light on the relative success (or lack thereof) of American institutions in creating pathways to economic success for low-income students.

What one might call the “manifest inadequacy of . . . higher education’s contribution to equality of opportunity” is unfortunately not a new phenomenon. Over a decade ago at Harvard, we were similarly troubled by the striking underrepresentation of the bottom half of the income distribution. During the Summers presidency in 2004, Harvard initiated the most ambitious expansion to date of financial aid, specifically targeting families of low and moderate incomes. Along with eliminating parental contributions for parents earning under $40,000 (since increased to $65,000), the college made changes to applicant review and launched new outreach and recruiting efforts across the country. The idea was that the most talented students should know that Harvard was an option for them, no matter their economic background.

No doubt, this has been a persistently stubborn problem to address. And yet, data show that efforts at Harvard, unlike other elite institutions, appear to have borne some fruit. Harvard’s mobility report card shows noticeable upticks in the mid-2000s share of students from the bottom 60th and 20th percentiles of the US income distribution, beginning with the class of 2009, right after the new policy was announced. These gains occurred even as real incomes of these families were declining over the same period due to widening inequality.

Notably, Harvard has outperformed other Ivies and top-tier peers, who did not experience similar increases in the fraction of low- or middle-income students. And here in Boston, data for Boston University, Boston College, and Northeastern actually all show declines in proportions of low- or moderate-income students over the same period, with especially visible drops during the Great Recession.

This contrast with other Boston private universities helps illuminate why Harvard is able to continue admitting and supporting more low-income students, irrespective of economic conditions or parents’ ability to pay. Harvard’s financial aid budget, totaling $414 million university-wide this year (including $175 million in need-based undergraduate aid) is directly supported and enabled by the returns of the university’s endowment. As its largest source of revenue financing operations, Harvard’s endowment is precisely the reason the school can strive toward more economic diversity. Today, 90 percent of American families would pay the same or less to send their children to Harvard as a state school — this would be impossible without these funds.

It is especially troubling, then, that the Republican tax plan seeks to compensate for lost corporate tax revenue by penalizing a select group of educational institutions. The $43 million annual hit on Harvard would directly impact the college’s efforts to further expand financial aid for low-income families. It is hard to take Republicans’ claims of economic fairness seriously when other nonprofits, like exclusive prep schools and opera companies, are ignored. It seems especially preposterous in a piece of legislation that simultaneously repeals the estate tax, which benefits only the wealthiest 0.2 percent of Americans. Instead, this all smells of a certain kind of politics — where rather than careful welfare analysis, tax policy instead is a political weapon used to reward supporters and penalize perceived opponents. Coupled with the House bill’s proposed elimination of the student loan interest deduction and repeal of the tuition tax waiver, the tax plan will make pursuing higher education more difficult for anyone not at the top of the income distribution. Those who would suffer disproportionately are the young adults whose lives could be most transformed by a place like Harvard — students from the bottom 20 percent families who rise to the top 1 percent as adults. Harvard ranks in the 99th percentile nationally on this metric.

Of course, this is no warrant for complacency. Harvard’s top-heavy skew in the admitted class limits mobility potential, as does its still small bottom-quintile share (Berkeley has almost double Harvard’s percentage). We know that there are a lot of low-income high-achievers who aren’t applying or making it to the Ivy League. Economic diversity has often not received the same intensity of attention rightfully paid to racial diversity. But the Chetty data show earnings outcomes at elite institutions for students from modest economic backgrounds look almost identical to higher-income peers. It would be an unfortunate irony if “need-blind” admission policies, intended to protect low-income applicants, had the effect of preventing institutions from giving preference to these applicants, who succeed when given the chance. Universities should be more ambitious in recruiting low-income students, expanding their classes to provide more access, and admitting more transfer students from public institutions.

Whatever your political persuasion, equality of opportunity should be a major concern. If America is going to make the progress we all want to see, its private universities need to take on an increasingly active role. The federal government is right to call on them to step up. But Congress and the president are gravely wrong to levy punitive taxes on engines of opportunity at a time when they need to be enabled to do more, not forced to do less.


Want a Choice Not an Echo in Education? Then Keep the Feds Out

A provision of the recent House GOP tax plan would allow parents to use up to $10,000 of their 529 college savings plans for K-12 expenses including private school tuition. Parental choice in education is a bedrock Republican principle, and President Trump along with Education Secretary Betsy DeVos are leading advocates.

Yet even if the proposed federal K-12 education savings account (ESA) does pass, it may benefit a relative handful of parents, but it likely won’t expand non-public educational choice to parents whose children need it most. Even worse, such help would come at the cost of further expanding the federal government into K-12 education.

Under the proposed change to 529 college savings plans, included in the Tax Cuts and Jobs Act, “higher education expense” is expanded to include up to $10,000 annually for elementary and secondary school tuition expenses, including public, private, and religious schools. Qualified expenses also include costs associated with apprenticeship programs, such as textbooks, supplies, and equipment. (See Section 1202 Consolidation of College Savings Rules, summary pp. 9-10; full bill text, pp. 91-94. See here also.)

This idea isn’t new. In fact, the feds got the idea from the states, which began implementing prepaid college and savings plans more than 30 years ago, starting with Michigan in 1986. A handful of other states had also enacted similar plans by the late 1980s and early 1990s, including Florida in 1987 and Ohio in 1989.

Originally, those state plans were subject to federal income tax because they are investment vehicles. That situation began to change in 1994 when the state of Michigan beat the IRS in the U.S. Court of Appeals for the Sixth Circuit by having its prepaid college plan declared tax-exempt. In response, the IRS threatened to challenge the tax status of all other existing state college savings plans. Congress intervened by passing the Small Business Protection Act of 1996, which created Internal Revenue Code 26 U.S.C. § 529 granting tax-deferred status for qualified state tuition savings programs. By 2000 fully 30 states had enacted tuition savings programs, or Section 529 Plans as they’re now called. (See here also.)

The Economic Growth and Tax Relief Reconciliation Act of 2001 spurred another expansion in education savings by making Section 529 Plans tax-exempt. Today 529 plans exist in every state except Wyoming and have maximum lifetime balances that average nearly $400,000. Anyone can open or contribute to a 529 plan, and there are now nearly 13 million 529 plans averaging more than $21,000 each and worth a combined $275 billion.

Such statistics seem like good news since children with dedicated college savings accounts are far more likely to attend college.

Nevertheless, for all the potential of 529 plans, there’s little reason to believe this federal proposal will expand educational options for parents who need it most, including lower-income parents and those living in states that do not have non-public-school parental choice programs.

Fully two-thirds of Americans are unaware of these plans, even though they originated in the late 1980s. (See also here.) What’s more only families with sufficient disposable income to deposit into savings accounts benefit from 529 college plans. (See here, here, and here.)

Better approaches (again) are coming from the states, where K-12 ESA programs have been proliferating since 2011, when Arizona became the first state to enact such a program. Although existing programs rely on government appropriations, more recent state proposals would be funded privately similar to how tax-credit scholarship programs are funded.

Yet perhaps the biggest risk of all to the proposed federal ESA plan is the further expansion of the federal government into K-12 education. While some parental choice proponents may downplay the likelihood of federal regulation of private schools (see here and here), just wait until the D.C. bureaucrats with a hand in crafting tax policy start having ideas about which K-12 private schools they think parents should choose.

For example, would private schools have to participate in Common Core-influenced state testing? If so, how frequently? Would faith-based schools be required to offer curricula that violates their core beliefs about gender, marriage, birth control, and abortion?

These are not unreasonable concerns given the ongoing controversies involving private postsecondary institutions and the federal government.

As the Cato’s Institute’s Neal McCluskey recently summed up, “We have abandoned federalism to our detriment.” D.C.-driven policies intended to improve K-12 education, including No Child Left Behind and Common Core, have actually made matters worse with seemingly endless testing, invasive data collection, and school curriculum that’s of dubious academic quality, not to mention the homogenizing effect these national policies have on American education.

And such homogenization is perhaps the worst possible outcome. After all, expanding educational options is supposed to be about offering parents alternatives to, not echoes of, the status quo.


Australia: University dropout rate is telling us something

The disappointing news from the Federal Government on university completion rates and employment outcomes should inspire reflection. Is university a wrong path for many?  Youth career coach Steve Shepherd comments:

“These figures clearly highlight a systemic problem with the way we educate young people on their career path. We’ve created a herd mentality, where high schools, parents and peer pressure are pushing young people towards university, saying it’s the only way to get a good career, earn good money and get ahead.”

“As such, is it the University’s fault that so many young people end up dropping out? Are we encouraging too many young people to go to university, when it doesn’t really suit their strengths? Is this creating a problem where young people pick any degree to say they’ve been to university, without thinking about the impact it will have on their careers?”

According to research from TwoPointZero, nearly a quarter (24%) of young people are unsure of which career direction to take, with over half (55%) coming to regret their electives.

Should we be blaming universities?
“In my mind, the problem starts before university. Applications for university are higher than ever but you can’t tell me everyone wants to go to university or is suited to it? In reality, that’s not really the way it should work.”

“Many of the most in demand jobs at the moment, don’t require a degree. So why all the pressure to go to university? There needs to be a better balance and we need to start educating young people on their career paths much earlier. This would help prevent people from taking a degree for the sake of it and better align their education with their chosen career path, making it more relevant to the employment market.”

“And, if they still want to go to university, we need to have safety nets in place to intervene if they are likely to drop out. In our experience, one small tweak to the subjects they take or changing course can prevent them from dropping out and see them succeed.”

Performance funding a distraction from the real issue
“Performance funding is not the answer. It doesn’t actually address the issue, just distracts from it and could lead to higher education being out of reach for many young people today.”

“We need to better fund career education in schools, as most schools currently spend less than a cup of coffee per student per year on careers advice. We need to provide more guidance to parents to help them understand the employment market isn’t the same as when they left school. And, we need to stop thinking going to university is the be all and end all.”

“Everyone is different. Everyone likes different things. Everyone has different strengths. It is time we accept that and better align our educational institutions to encourage diversity and create better career paths for our young people.”

“Otherwise, we’ll continue to see the youth unemployment rate rise. Continue to see an increase in drop-outs and more young people in debt. And, will end up creating a huge problem for the Australian economy, as we will not have a strong workforce to support our country moving forwards.”

Via email

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