The first of five daily installations.
Our last six major candidates for President of the United States are all graduates of prosperous and prestigious private preparatory schools - Obama (Punahou School'79, HI), Romney (Cranbrook Schools '65, MI), McCain (Episcopal High School '54, VA), Bush (Phillips Andover Academy '64, MA), Kerry (St. Paul's School '62, NH), and Gore (St. Alban's School '65, DC). The schools reported endowments averaging over $300 million on their IRS Forms 990 in SY (school year) 2012. So much for the old "log cabin" image presidential candidates once liked to project.
While both were worth millions, Obama and Romney reportedly paid personal income tax in 2011 at effective rates (tax paid as a percentage of AGI, adjusted gross income) "lower than Warren Buffett's personal assistant's" - 14.1% for Romney and 20.5% for Obama. How could that be possible, indeed legal, in a so-called progressive tax system, with a top marginal rate - tax on the last dollar earned - of 35%? (The top rate increased to 39.6% in 2013.)
The Occupy Wall Street movement began the same year, embarrassing a few of "the 1%", the super-rich, by calling public attention to such inequities in our tax system. In 2014, Thomas Piketty mapped the widening income gap between rich and poor over time in his best-seller, Capital in the Twenty-First Century, and extended the study to include the wealth gap as well. Robert Putnam's more recent Our Kids goes a step further, showing how mightily both gaps contribute to the immorality of the opportunity gap poor kids in the United States face today.
The final 38 years of my 44-year career in secondary education were spent at Mercersburg Academy in Pennsylvania, a private boarding school whose endowment now resembles the ones cited above. In the sixties, wanting a more egalitarian image, private schools shed the word "private" and replaced it with "independent". Independent of what? Well, of government, of course - both the funding and the regulation government applies to public schools.
Photo Courtesy of Linda Hill
Yet nearly thirty years as Mercersburg's chief development officer taught me that, while private schools may receive no direct funding from government, they do receive significant indirect support from Washington and from their states and municipalities in the form of tax loopholes, deductions, and exemptions - tax expenditures in the nomenclature of the IRS.
The low effective tax rates of Romney and Obama, so far beneath the top marginal rate, arise from tax policies that favor those with high income and high net worth. Realizing how much they favor the rich caused me to wonder if the same policies might also explain the widening income and wealth gaps between our richest and poorest private schools.
To explore that possibility I set out to quantify the total tax expenditure (indirect support from governments at all levels) Mercersburg received in SY2012. While well aware of each type of tax expenditure, their individual and collective scales surprised me. In fact, the wealthier independent schools might legitimately be called dependent.
The Charitable Deduction
Taxpayers are most familiar with this tax expenditure. Mercersburg's IRS Forms 990 show it received gifts averaging $11.7 million per year for the five years ended June 30, 2012. If the distribution of incomes among its donors was the same as in the general public, the average annual tax savings for Mercersburg donors would have been at least $2.5 million (Appendix A.)
The incomes of private school donors are skewed more highly, of course, than those of the general public. An old axiom of fundraising is that the top 10% of donors do 90% of the giving. Let's assume the 90% rule holds, and that the top 10% of Mercersburg donors were all actually in the top 5% of incomes - about $167,000 or more in 2012. The tax expenditure could then have been as much as $3.3 million per year (Appendix A.)
Splitting the difference, the average tax savings the IRS passed along to Mercersburg donors would be $2.9 million per year for SY2008 through SY2012. The charitable deduction is typically the largest of many government subsidies wealthy non-profits receive.
At 40% - even higher than the top marginal rate - the new federal estate tax rate sounds formidable. But it is not applied until the size of the estate is reduced by certain charitable provisions ... and reduced, yet again, by a further $5.25 million. As a result, most estates - over 99.8% of them in 2013 - paid no federal tax at all. Federal estate tax revenue, which averaged $22.5 billion for the years 2001 to 2009, plummeted to $5.0 billion in 2013.
America's most prosperous baby-boomers have long sat atop the largest rich to poor income gap since the Census Bureau began tracking such data. Those whose parents died before the virtual elimination of the estate tax in 2010, had already received part of the biggest intergenerational transfer of wealth in U.S. history. The others did or eventually will do even better under the new estate tax. And all of them now have free rein to enshrine in their progeny, at their deaths, the American plutocracy - rule of the rich - the estate tax was originally designed to curb. Score another one for inherited (not merited) wealth!
Tomorrow, the second blog in this five-part series demonstrates the magnitude of the subsidies non-profits receive from favorable (a) investment income tax treatment, (b) sales and property tax treatments.