Wednesday, August 31, 2016

Reduce Inequality? Not If It Affects My Livelihood!

Most leading American universities have established “Centers for the Study of Inequality.”  Reducing inequality is one leg of the holy academic triad of diversity, sustainability, and reducing inequality.   Inequality scholars assert that the future of democracy and social justice requires reducing inequality in income, wealth, educational opportunity, health care, neighborhood safety, and so on, that harms the less well-off members of society.

Scholars disagree on the best way to reduce inequality.  One school of thought favors more progressive income and heavier wealth taxes to reduce the income and wealth of the top 1% percent of households, and redistribute the additional revenue to middle- and lower-income households in the form of lower taxes and/or more spending.  Another school wants targeted spending programs to provide greater pre-K education, smaller class sizes, higher teachers’ pay, more local health clinics, and other services to lower-income households.

Universities rely on tax-deductible gifts to pay salaries and build and maintain physical facilities. For the 2016-17 fiscal year, Stanford projects $350 million in gifts, about 6% of its projected revenue of $5.88 billion.  Stanford also has a capital budget of $4.1 billion for the three fiscal years 2016-17 through 2018-19, of which gifts are estimated to provide 21% of funding.  Harvard is in the midst of a $6.5 billion fund raising campaign.  It received $436 million in expendable gifts in 2015-16.

Gifts are tax-deductible up to certain IRS limits.  Rich donors, who are in a higher income-tax bracket than lower-income givers, receive a larger tax deduction for their gifts, thus contributing to inequality.  These are the very people that help fund (inequality) research centers.  The wealthy also fund the bulk of capital projects. Nine-figure millionaire and billionaire donors, the 0.001% and 0.0001%, are the principal source of gifts for new buildings and research facilities.

IRS Statistics of Income and Itemized Charitable Deductions

In tax year 2013, 4.81 million households filed tax returns with Adjusted Gross Income exceeding $200,000. Their itemized charitable contributions totaled $91.0 billion.  Altogether, 36.43 million household filed returns with $194.7 billion in itemized contributions.  Households with AGI exceeding $200,000 constituted 13.2% of all returns, but itemized 46.7% of total contributions.

So, those who propose higher taxes on the income and wealth of the rich are financed, in part, from the tax-deductible contributions of the rich on whom they want to impose higher taxes.  One way to achieve greater equality of income is to eliminate the tax deductibility of gifts to universities.  But the majority of scholars do not think that this is a good idea.  Wonder why?

Let’s dig a little deeper into the numbers.  Membership in the top 2% of income-earners requires an annual AGI of about $250,000.  Many full professors in leading universities fall in the top 2%, and certainly in the top 3%.  Academic stars reporting $430,000 and above in AGI are in the top 1%.  (It takes $1.9 million to join the 0.1% club.)

It’s no surprise, then, that academics that want to levy higher taxes on the rich limit their recommendation to the top 1%, not the top 2%.  But, and a very important but, they believe that any new taxes should retain the home mortgage deduction, which they utilize, and the charitable contribution, which helps pay their salaries.  Development departments in universities are concerned their scholars’ proposals to reduce inequality do not reduce gifts from the unequal rich.

Nonetheless, these professors teach students that the income and wealth of the 1% is harmful to society, but that their contributions to universities are not.  Wonder why so many students and graduates are muddle-headed?

PS.  When Robert E. Hall and I first proposed our flat tax in 1981, which eliminates charitable deductions, we got nasty comments from Stanford’s development department.  Its fund-raisers expressed concern that eliminating the tax deductibility of charitable contributions would reduce giving to Stanford.

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