Elite Universities and Federal Tax Policies

Tom Bonan, Opinions Editor

The United States is currently in the midst of a severe education crisis. Within the last couple of years, student loan debt surpassed credit card debt and currently stands at about $1.2 trillion dollars, not including money that students or parents diverted from other accounts such as retirement savings or money that parents borrowed for their children.

At the heart of the crisis is a lack of affordable education. Public schools–which have historically received significant funding from state and local income taxes–are now raising tuition rates as their state-allocated money begins to dwindle. One prominent example is University of Virginia, one of the most reputable state schools in the country, whose state funding dropped from 46 percent of total costs in 1980 to 5.8 percent for the university as a whole for the 2012-13 academic year.

As costs rise, both public and private institutions are reaching out to private donations to fund operations and increase their endowments. Schools that have access to a wealthy alumni base have fared much better over the last few decades than less-established institutions.

Adding to the problem, the government currently allows large tax deductions for donations to universities and doesn’t tax income generated from endowments or capital gains because it is seen as a commitment to a public good.

The lack of taxes levied on this type of funding is essentially a de facto source of government funding. Instead of giving universities money outright, they are subsidizing some of the standard costs associated with investment operations. In this case, however, the larger the amount of money being brought in yields a larger tax break and therefore a higher government contribution–a regressive system that rewards larger, more prestigious schools.

According to Robert Reich, a former Clinton adviser and professor at University of California, Berkeley, the amount of money (both federal and state) given to public institutions is around $4,000 per student, whereas the amount it gives to schools like Princeton (and others that attract large donors and have endowments in the billions of dollars) is effectively $54,000 per head. According to Richard Vedder, a writer for Bloomberg, during the 2010 school year Princeton saved around $240 million that should have been paid out in taxes.

The result of this system is that elite schools have a significant advantage when it comes to raising money and getting students to pay higher tuition rates. Schools like UVA or University of Colorado in my hometown of Boulder–both highly respected public institutions–are more adept at coping with this loss of state funding because of their established resource bases. On top of that, private institutions such as Harvard, Princeton, and Yale are also reaping the benefits of having large donors and huge income generated on their endowments. Meanwhile other public schools are seeing their funding drop without any way of generating enough money to cover operations except by raising tuition.

This increased disparity between schools that can afford to cope with rising costs and those that can’t have forced many schools to raise their tuition beyond the means of most Americans. Increased costs and this form of government subsidy for elite institutions have helped usher in an era where higher education is not only not guaranteed, but also may even be impractical for children of college graduates, let alone lower-income Americans who never received any post-secondary education.

This country has reached a precipice in higher education. In an era where social mobility, debt, inequality, and unemployment is on everyone’s mind, taking on rising costs and inequality between education institutions should not be resigned to the back burner. These tax incentives are by no means the sole cause of inequality and the seeming decline of the American Dream, but how can we as a country stand for self-advancement if resources are being allocated to the wealthiest few?

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