Let's Not Tax Colleges To Pay For College Tuition

Let's Not Tax Colleges To Pay For College Tuition
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Imagine this: free college tuition for everyone, and all we have to do is impose a tiny tax on big-money financial institutions when they buy and sell shares of stock. Maybe that sounds good on the surface, but it doesn’t pass a freshman economics class.

U.S. Senator Bernie Sanders (I-VT) is one politician who disagrees. He continues to call for what is known as a financial transaction tax (FTT) on investors in order to fund tuition-free higher education. But what Senator Sanders fails to recognize is that this tax would hurt every investor in America – including the hard-working people and savers he has spent his life advocating for.

In the words of Burton Malkiel, professor of economics at Princeton University, “Wall Street would not foot the bill for the presumed $150 billion tax. In fact, the tax would simply be added to the cost of doing business, burdening all investors, including 401(k) plans, IRAs and mutual funds.”

Unfortunately, Senator Sanders appears to be ignoring the warning of a wise market thinker. He is trying to provide middle-class and lower-income families with access to free college by taxing households with retirement investments and universities managing endowment funds.

University endowments are a collection of donations that are utilized to help fund financial aid, research and capital-intensive projects across campuses. By investing endowment funds across asset classes and markets, universities hope to realize returns that can be put toward assisting lower-income students, paying educators and supporting research.

It is no secret that these endowments have been struggling with revenue performance for several years, and the last thing they need is an additional financial burden.

According to The Inclusive Prosperity Act of 2015, an earlier version of the legislation, the tax rates for each asset class would be as follows: a 0.5% rate for equities; a 0.1% rate for debt; and a 0.005% rate for derivatives.

For an institutional investor, such as a university endowment or pension fund, trading such large volumes of securities each day, these numbers add up quickly – and the result would be devastating.

University endowments, which are generally much smaller than this particular pension fund, would be even more heavily affected by this tax.

The cost of higher education is on the rise, with average out-of-state tuitions and fees and public universities having risen 200 percent in the past 20 years, and average in-state tuition and fees having risen 243 percent. With these astronomical numbers, it is no surprise that in 2014-2015, approximately two-thirds of full-time college students sought help from financial aid in the form of grants and scholarships.

It is indisputable that all of society would benefit from a highly educated population. However, the grim reality is that with the mounting cost of higher education, the possibilities for students from lower-income families become smaller. These students heavily depend on financial aid from universities to be able to receive their education.

The FTT would greatly reduce a university’s ability to provide this aid to students by withering away the investment gains they receive from their endowment funds, which have severely struggled in recent years. This is just more evidence of the tax’s corrosive impact.

With all this context in mind, society must deal with the rising cost of higher education before it saddles a generation of Americans with unmanageable student debt. It is understandable that policymakers want to pursue solutions, but the FTT is a simple fix to a complicated problem. Taxing households and universities to pay for free colleges is simply another form of excessive tuition.

Kirsten Wegner is CEO of the Modern Markets Initiative (MMI).

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