Ugliest part of the Republican tax plan: What if universities were forced to calculate the value of a graduate education?

Here’s a WIRED article on the latest Republican tax plan:

the devastating impact the GOP’s recently unveiled tax-reform plan could have on the university’s PhD candidates. Buried in that plan is a proposed repeal that would cause graduate students’ tuition waivers to be counted as income—making them subject to taxes.

The annual stipend for a PhD student in Carnegie Mellon’s school of computer science is about $32,400. The university covers the student’s $43,000 tuition, in exchange for the research she [your typical CS grad student is a woman, as it happens!] conducts and the courses she teaches. Under current law, the government taxes only a student’s stipend; the waived tuition is not taken into account. But under the GOP bill, her annual taxable income would rise from $32,400 to $76,234. Even factoring in new deductions also included in the proposal, the CMU document estimates her taxes would amount to $10,209 per year—nearly four times the amount under current law. That would slash her net annual stipend by 25 percent, from $29,566 to $22,191.

Many academics fear the tax burden would waylay efforts to increase social and intellectual diversity at their institutions. “You have to advocate for folks who are coming down the pipeline,” says UCLA neuroscientist Astra Bryant. She says that’s especially true of women and underrepresented minorities. “I mentor two underprivileged undergraduate women, and my concern for them is that an increased tax burden would make it financially impossible for them to afford to pursue a PhD.” [but if the typical STEM grad student is a woman, as suggested above, why worry specifically about women?]

The idea is that the IRS will assess tax based on the university’s absurd fiction that, absent a “stipend,” grad students would have coughed up the rack rate $43,000 per year. Schools could address this by cutting the official (fictitious) tuition price for graduate school (as distinct from professional school, such as med school or law school) to something close to the actual cost or perhaps to zero. If the IRS were to challenge the new number that’s where it gets potentially interesting. If we accept the principle that people should pay tax on value that they receive in exchange for employment then we must calculate the value received by spending six years as an English or Physics grad student. But a lot of university majors end up reducing the student’s lifetime income and therefore students would actually be entitled to a deduction as a result of their waived tuition? Imagine if Yale had to show just how much damage they were doing to a young person’s earning potential by keeping him or her in a theater program?

[See IRS Publication 15-B and the “General valuation rule” should be applicable: “The fair market value (FMV) of a fringe benefit is the amount an employee would have to pay a third party in an arm’s-length transaction to buy or lease the benefit. Determine this amount on the basis of all the facts and circumstances. Neither the amount the employee considers to be the value of the fringe benefit nor the cost you incur to provide the benefit determines its FMV.” Nobody can argue that a typical physics grad student would pay $250,000 in tuition to get a Ph.D. So the fair market value, and therefore the IRS fringe benefit value, will be some lower (potentially negative) number.]

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7 Comments »

  1. superMike

    November 13, 2017 @ 2:19 pm

    1

    Isn’t the “rack rate” a way to fleece all the foreign grad students? Is this an “Americans First” initiative in disguise? (They lower the grad student tuition to $5000 a year, and pay T.A.s some kind of reasonable wage instead of the stipend, it becomes unprofitable to take in second-tier Chinese and Middle Eastern grad students, so they stop coming, freeing up spots for American students)

  2. TimB

    November 13, 2017 @ 2:50 pm

    2

    Not a defense of the Repub. tax plan – but I will say that there is a huge swath of expensive graduate education that has trumpeted ROI as a marketing tool for years. Forcing them to quantify that would be useful regardless of tax implications.

  3. mishka

    November 13, 2017 @ 3:13 pm

    3

    superMike: Foreign TAs generally do not pay taxes b/c of tax treaties.

  4. Neal

    November 13, 2017 @ 3:45 pm

    4

    Under current and proposed law, do the schools get to deduct the value the waived tuition, or just the costs of providing the services which the “tuition” purchases?

  5. ChrisC

    November 13, 2017 @ 4:19 pm

    5

    What you are missing–those fictitious tuitions do get paid. Each grad student is assigned to a grant, and the funding agency pays the student’s tuition as part of the “overhead”. So if the school were to reduce tuition they’d decrease how much money they have to cover their expenses. Setting these tuition numbers is part of the complicated dance between universities and funding agencies. (Which are mostly branches of the US government, so the money just goes around in circles.)

  6. GermanL

    November 13, 2017 @ 5:39 pm

    6

    Back in 2000-2007 I had a stipend from 18.5k gradually raised to 24k before taxes during my PhD. I worked typically 50-60 hours per week in the lab. The minimum wage at the time in the state I lived in was between 5-6 dollars and hour. So $6/hour * 60 hours per week * 52 weeks per year = $18720/year. So basically I was working a McDonald’s wage to do science. Note I did not pay into FICA tax with my stipend, so I did not collect any social security/medicare credits during that time. My wife earned a free bachelor’s in IT during night school in only 2 years while working as department purchases secretary at my university, with matching 401k savings plan. I got a Roth IRA with no matched savings. When I started my first postdoc in Europe, her entry-level IT company salary and my academic salary were nearly the same. Her 401k is still double mine even after the ‘recovery’. I read Phil’s Women-In-Science article, and decided to jump ship into industry after finishing my first second postdoc (which luckily for me was a mixed industry/academia post-doc) before it was too late.

    If this tax plan becomes true there’s more reason to say: Don’t become a scientist!

  7. Paomi

    November 15, 2017 @ 3:08 pm

    7

    Perhaps universities in the USA could emulate universities in Germany, where all students (even foreign nationals) pay no or very little (e.g., perhaps 500 Euros per semester) tuition. The government basically pays (via collected taxes) most of whatever the universities need to operate.

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