CHARITY WON’T SOLVE STUDENT DEBT
Around the turn of the last century, steel magnate Andrew Carnegie paid to build 1,689 libraries across the United States. Many are still in use, celebrated as monumental works of philanthropy.
They should be seen as monuments to the failure of public policy. The United States could have built a lot more libraries by taxing the incomes of Carnegie and his fellow Gilded Age plutocrats, but, at the turn of the last century, there was no federal income tax.
Now history is repeating itself. A new generation of plutocrats has amassed great fortunes, in part because the federal government has minimized the burden of taxation. Americans once again are reduced to applauding acts of philanthropy necessitated by failures of policy.
Robert Smith, a wealthy financier, announced last Sunday during graduation ceremonies at Morehouse College that he would repay the student loans taken by the 396 men in this year’s graduating class. The promise, which may cost Smith up to $40 million, was an act of generosity gratefully received by the new graduates of the historically black, all-male Atlanta college.
But their gratitude underscores the reality that hundreds of thousands of other members of the class of 2019 will be carrying unrelieved burdens of debt as they begin their adult lives.
On average, recipients of bachelor’s degrees in 2016 left school owing about $30,301, according to the most recent federal data. Parents on average incurred another $33,291 in debt.
The substitution of philanthropy for public policy is most glaring in the realm of health care, where it has become appallingly common for Americans to beg friends and strangers for the money necessary to pay for treatment. The fundraising website GoFundMe estimates that it hosts about 250,000 fundraisers for medical expenses each year. Over the past nine years, the site has processed about $5 billion in donations — about a third of which went toward medical expenses.
The same dynamic is at work in higher education. Since 2001, a handful of elite institutions led by Princeton University have committed to tap their endowments to provide funding for students to graduate without loans. Last year, Michael Bloomberg pledged $1.8 billion to Johns Hopkins to reduce the reliance of Hopkins students on borrowed money. But most U.S. colleges, including Morehouse, lack the resources to make such a commitment.
Over the last quarter-century, average tuition rose by 85%, adjusting for inflation, while average state spending measured on a per-student basis declined by roughly 5%.
The problem facing policymakers is not merely a lack of will but also a lack of money. The federal government collected 16.5% of the nation’s economic output last year — well below the 17.4% average federal share over the last half-century. The primary reason for the shortfall, of course, is the steady reduction of income taxation. No one has benefited more from that trend than financiers like Morehouse College’s 2019 graduation speaker.
Smith co-founded the private equity firm Vista Equity Partners, which invests in software companies, and he has amassed his fortune thanks in part to a provision of federal tax law known as the “carried interest loophole” — a provision he has publicly supported.
Private equity firms skim a percentage of the returns from the investments they manage. That money is their compensation, but instead of being taxed as earned income, at a rate of up to 37%, it is taxed as investment income, at a rate of no more than 20%.
The loophole is projected to cost the government about $15.6 billion in lost revenue between 2016 and 2025. President Donald Trump promised to close it during the 2016 campaign, and he promised to close it as part of his 2017 tax bill. But he did not keep that promise.
Closing that loophole would be a much better graduation present for the class of 2019.
An affordable college education should not require an act of largess. It should not require our applause. It merely requires adequate public investment, funded by equitable taxation.