Economy & Business

Do Not Raise Taxes on Ph.D. Students

(Reuters photo: Mike Segar)
Taxing tuition waivers could undermine American dominance of graduation programs worldwide.

If, as the ancient philosopher Polemarchus and the labor leader Samuel Gompers agreed, justice and politics are about rewarding friends and punishing enemies, then I can see the appeal to the House Republican caucus of taxing the tuition waivers that universities grant to Ph.D. students. After all, Vegas bookies list doctoral students as the odds-on favorite in any contest for the group of people least likely to support the GOP on anything, ever, for any reason. Likewise, a green-eyeshade analyst who lacks vindictiveness but is enamored of tidiness of mind could favor taxing tuition waivers on general accounting principles.

But these inclinations should be weighed against the substantial risks to a sector where America decisively leads the world. Depending on which ranking you use, American universities take between 17 and 19 of the top 25 slots in rankings of worldwide universities. At the top levels, what matters is research, so this ranking is almost entirely measuring the strength of our graduate programs.

As a rule, doctoral students at American universities enter on merit fellowships, with two major components to their fellowship: stipends and tuition waivers. Stipend is the student’s living expenses. In my field of sociology, stipends at top programs range from about $17,000 to $28,000, with public universities clustering at the lower end and private universities towards the top. Tuition waivers negate the sticker-price tuition, which is typically about $14,000 at public universities and $45,000–$50,000 at private universities. Current law and the Senate bill tax only the stipends (that is, income the student sees), whereas the House version treats the tuition waiver as taxable in-kind income.

If we imagine a Ph.D. student at a public university who gets a $17,000 stipend and a $14,000 tuition waiver, plus a health plan, then the House bill would raise this student’s taxes by $2,112. A Ph.D. student at a private university who gets a $28,000 stipend and $50,000 tuition waiver, plus a health plan, would see his taxes go up by $10,752, cutting his take-home pay by more than a third.

In the short run, the impact of the House plan would be that doctoral students either drop out or take on significant debt. Those who complete their Ph.D.s might not be the ones doing the best research but those with the least need for income (such as childless students), students with other household income, and those with the least attractive job opportunities if they leave grad school prematurely.

The more interesting thing to consider is how universities would adapt. The most immediate change is one that schools could make unilaterally at the department level: admit fewer graduate students so that those who are admitted could receive higher stipends to compensate for the tax on tuition waivers. Universities could also find substitutes for graduate-student labor: adjuncts for teaching; postdocs for research. Again, this could happen at a low level. Departments could hire adjuncts to teach undergraduate classes left unstaffed by smaller graduate cohorts, and faculty who are writing grants to hire staff for their labs would realize that postdocs cost less than graduate students.

The glib response to criticism of taxing tuition waivers is that if the tuition-waiver tax passes, universities could simply eliminate graduate tuition and thereby also eliminate the tax their doctoral students would pay on tuition waivers. But simply eliminating tuition for Ph.D. students could be complicated by one aspect of schools’ current practice: Ph.D. programs often list but seldom charge tuition; professional-degree programs, on the other hand, really do depend on tuition; listing widely discrepant tuition between professional degrees and academic degrees would probably invite fines for tax evasion.

In practice, if the tuition-waiver tax passes, we will probably see schools adopt a model of listing high tuition for the first few years of graduate school and then low tuition for later years. In effect, this would mean tuition or tuition-waiver taxes for professional degrees and the coursework half of Ph.D. programs, and then nominal tuition, implying minimal waiver taxes, when students are no longer taking classes but are just working on their dissertations. Many top private universities (such as Harvard, Princeton, Duke, and Stanford) already list high graduate tuition for the first few years and then cut tuition by 75–90 percent for dissertation work. If the House plan to tax graduate tuition waivers passes, expect to see Yale, as well as most public universities, also adopt this tuition model. Charging low tuition to students working on their dissertation would probably pass muster with the IRS and would mitigate, but by no means eliminate, the effect of the tuition-waiver tax.

Another issue with simply making tuition free or nominal to Ph.D. students is that charging tuition lets you bill it to someone. Often these are just internal flows, which can get Byzantine, and it would be a painful process to watch university administrations unwind the current model of robbing Peter to pay Paul without overly enriching Peter or starving Paul.

A more serious issue is that third parties sometimes pay the tuition of doctoral students. At some universities, the tuition is covered by grants that fund the salaries of graduate students working in a faculty member’s lab, a practice that is common in STEM fields. Likewise the National Science Foundation pays the first $12,000 of tuition for those students to whom it awards fellowships. So universities that charge low graduate tuition to avoid the tuition-waiver tax would forgo a lot of grant revenue.

In theory, universities could have their cake and eat it too by having low tuition and charging higher indirect costs (overhead charges that universities charge to grants), but that works only if every crank and cog in the Rube Goldberg policy machine works just right. As we know from the example of Obamacare, this is highly unlikely.

While American K–12 education is lackluster, our universities are world-class, and our doctoral programs in particular dominate. Not only are American Ph.D.s the most prestigious, but they are a plurality of all Ph.D.s worldwide, at almost 30 percent of the total. About 40 percent of American Ph.D.s (and a majority in physical sciences and economics) are granted to foreigners; this is a source of high-skilled immigration if these students stay in the United States, and cultural influence with foreign elites if they go home. The dominance of American universities is a major reason that English became the lingua franca of science decades before it achieved that role in business. American dominance of doctoral education is all the more remarkable given that our doctoral programs are relative latecomers. American higher education dates back to the establishment of Harvard in 1636, but the American Ph.D. system is much younger, dating to three Yale doctorates in 1861 and especially to the establishment of Johns Hopkins in 1876. Prior to this, Americans who attained doctoral degrees mostly did so in Germany. If we are not careful, we could lose our dominance over graduate education, just as the Germans lost their dominance in the early 20th century to American and British universities that were aggressively expanding their research and graduate missions.

The intellectual center of gravity might shift to nations that are not anglophone liberal democracies. China is aggressively expanding its doctoral programs.

Currently, top American doctoral programs compete almost exclusively with one another for the best students. Should the tuition-waiver tax make it through reconciliation and into law, I will probably start hearing from top students whom my department is trying to recruit that our offer is not as good as the ones they have in hand from the University of Toronto, the University of British Columbia, or McGill. Over the space of a few years, we could see these foreign schools poaching top American faculty who want to work with the best graduate students. Canadian intellectual hegemony is not the worst thing I can imagine, but the intellectual center of gravity might shift to nations that are not anglophone liberal democracies. China is aggressively expanding its doctoral programs, but the quality of American Ph.D. programs ensure that they remain the current gold standard, and many faculty at Chinese universities have American doctorates. Regardless of the arguments for a tuition-waiver tax — and whether they’re based in economic calculations or motivated by sheer spite at the ideological skew of universities — it would be folly to sabotage a field that America so thoroughly dominates.

READ MORE:

Senate and House GOP Make Tax Deal

Why the Tax Bill Favors the Middle Class, Not the Rich

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Gabriel Rossman — Gabriel Rossman is an associate professor of sociology at the University of California, Los Angeles.

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