'Free' tuition is an investment, not a giveaway
I keep hoping the presidential candidates discuss economic proposals, but until they do, I guess it is up to business columnists to provide some substance to the debate.
I keep hoping the presidential candidates discuss economic proposals, but until they do, I guess it is up to business columnists to provide some substance to the debate.
One of the more interesting and misunderstood proposals in this election cycle is the one to make tuition at public universities free. Suggested by Bernie Sanders, the ideas has been embraced by Hillary Clinton.
The basis for this proposal is that the high cost of tuition reduces a person's ability to attend college and burdens students with huge debt. Free tuition would lower those barriers and the resultant student debt load.
College would not be free. It still would require a financial investment by students and their families for other costs, such as room and board. And the student still would have to put in the time and effort to graduate.
The concept of free college tuition has been blasted by some as being too expensive and by others as a giveaway to people who simply wanted things for free. It even has been suggested that if the government paid the tuition, it would set the curriculum.
These criticisms miss the key concept behind the proposal: Paying for college education is an investment in human capital that is no different from supporting business investment in machinery, equipment, and structures. Higher education raises worker productivity and increases the growth potential of the nation, and it should be evaluated accordingly.
What might free tuition cost? Clinton's plan slowly raises the income cutoff from $85,000 to $125,000. Ultimately, about 83 percent of the nation's families would qualify. Starting at an initial cost of $40 billion for 2017 (the assumed first year of tuition program under a new president), adding in the cost from raising income limits and a 4 percent tuition inflation rate (twice the Fed's target rate), I estimate the cost to be roughly $510 billion for the period 2017 through 2025.
Is this way too expensive? It depends upon how a college education is valued. If you look at it as a good that a student consumes, then this is just a big, expensive present.
But a college education is not something that is consumed. It is an investment. If you accept the reality that college education is critical to the nation's competitiveness, then you have to compare the cost of the tuition proposal with the cost of investing in other productivity-raising endeavors, such as corporate tax incentives for capital spending.
When the government gives businesses tax breaks, it is actually spending potential tax revenue on those endeavors. Economists call these tax deals "tax expenditures." And they are huge.
The U.S. Treasury produces an annual accounting of the tax expenditures. Consider the costs of just a few of the major business-related ones:
Accelerated depreciation of machinery and equipment deduction: This is projected to cost the Treasury $12.2 billion in 2017 and from 2017 to 2025, the tax loss totals $365 billion.
Expensing of research and experimentation expenditures: $5.8 billion in 2017 and $67 billion through 2025.
Deduction for domestic production: $16.4 billion in 2017 and $177 billion over the nine years.
Deferring gains by exchanging properties: $7.7 billion in 2017 and $85 billion through 2025.
For those four programs alone, the total tax expenditures through 2025 is $694 billion. And there are many others.
While those subsidies sound sensible, most of the tax expenditures are wasted. Why? Because eligibility is not based on added spending created by the tax incentive. Any investment that qualifies receives the tax break, even if it would have been made anyway. I call that a "tax break for breathing."
Comparing the tax expenditures with the free tuition plan, the tuition proposal would cost less than what the government spends on just a few of the business development tax breaks.
Free tuition is no more a giveaway than the tax breaks that reward businesses for doing what they would do anyway. And the reduced debt level would allow graduates to consume goods and services instead of making loan payments.
As for the government setting the curriculum, it already subsidizes public higher education extensively without telling professors what to teach. Why should that change? More important, the government doesn't tell businesses what physical capital they can buy, so why would it tell students what intellectual capital they can buy?
If the U.S. economy is to grow and compete in the global economy, we must invest in both physical and human capital. We need a modern, productive business sector and well-trained productive workers. If the tuition program gets us closer to that ideal, it might be worth the investment. And, given the sad state of productivity in a nation that spends so much on business tax incentives, what is there to lose?