Around the turn of the last century, the 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 on 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 Mr. 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 fund-raising website GoFundMe estimates that it hosts about 250,000 fund-raisers for medical expenses each year. Over the past 9 years, the site has processed about $5 billion in donations – about one-third of which went toward medical expenses. The site’s chief executive has said that GoFundMe wasn’t developed as a substitute for health insurance, and he regrets the necessity. “We shouldn’t be the solution to a complex set of systemic problems,” he said. “They should be solved by the government working properly.”
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 American colleges, including Morehouse, lack the resources to make such a commitment. This is not merely a problem for students and their families. Economic growth requires an educated workforce. Americans who entered their working primes in the 1990s were far more likely to have college degrees than their peers in other developed nations. Now the United States has fallen behind much of the developed world – and one reason is that the average cost of obtaining a college degree is among the highest for any developed nation.
The sea change at American public colleges and universities is particularly striking. Over the last quarter-century, average tuition rose by 85 percent, adjusting for inflation, while average state spending measured on a per-student basis declined by roughly 5 percent.
A number of the Democratic candidates for president have proposed large increases in federal funding for higher education to offset the rise of tuition costs and the decline of state funding.
The problem facing policymakers is not merely a lack of will, but also a lack of money. The federal government collected 16.5 percent of the nation’s economic output last year – well below the 17.4 percent 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.
Mr. 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 percent, it is taxed as investment income, at a rate of no more than 20 percent.
The loophole is projected to cost the government about $15.6 billion in lost revenue between 2016 and 2025. President 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. Instead, the White House and congressional Republicans honored the wishes of the finance industry.
Closing that loophole would be a much better graduation present for the class of 2019.