Dependent Schools - How the Public Pays More to Educate Students in Wealthy Private Schools Than Those in Public Schools

A Changing Student Demographic

Many boarding schools have found it difficult to consistently maintain full enrollments. Mercersburg was founded as a boys' school in 1893; it added girls in 1969 to counter a shrinking male applicant pool. When the coeducational pool also began to dwindle in the nineties, globalization came to the rescue. The number of international students increased from a handful in the early nineties to 100 in SY2012 - 27% of the boarding enrollment - a significant number, but still below the 34% national average reported by TABS (The Association of Boarding Schools.).

The schools all sing from the same hymnal on how much they believe international students enrich the educational experience of their American counterparts. And there is much truth in the lyrics. But the paltry rate at which financial aid is offered to international students raises serious doubts about the depth of that belief. The economic diversity schools claim to desire in their student bodies seems to extend through financial aid only as far as the U.S. border. At a number of boarding schools, it is what the almost exclusively full-paying international students add to the bottom line that matters most. The very survival of some schools depends upon them.

And, remember that $13,194 per student subsidy to Mercersburg in 2012 ... from American governments? Well, each of the school's 100 non-American students received the same stipend from the same source. Taxpayers might be surprised to learn that so much of the generous subsidy they provide wealthy schools is used to underwrite rich international students.

There is nothing underhanded about the tax benefits wealthy non-profits receive. It was my experience that Mercersburg's governing board was keenly aware of its legal boundaries and stayed comfortably within them. I have no doubt that other wealthy institutions act similarly. If there is anything wrong with what you have read thus far, it is to be found in U.S. tax policy.

How to Make Things Right

Despite the fact that over 99% of Americans now have incomes closer to zero than to the top income, neither the public nor its elected representatives can seem to agree that anything should be done about it. The economic inequality created among non-profits by bad tax policy is not well known or understood and unlikely to raise the public eyebrow.

But some good thinking has been done on this matter. Former Secretary of Labor Robert Reich has proposed a second tier of charitable deduction - only 50% - for gifts to "wealthy" charities. The definition of "wealthy" would vary according to the category of the charity. ("Wealthy charity" was once, of course, an oxymoron.)

The Massachusetts legislature in 2008 considered taxing colleges 2.5% annually on all endowment funds in excess of one billion dollars (Harvard's tab would have been about $800 million.) The Great Recession put a quick end to that talk.

There was more recently a proposal in Congress to impose a 25% tax on non-profits themselves for all pay in excess of $1 million per year per employee. This idea has some appeal, but why limit the fun to non-profits? Wouldn't the Fortune 500 companies want equal treatment of their CEO's?

To address charges of "hoarding" by colleges that spend too frugally from their endowments, Senator Charles Grassley of Iowa proposed a minimum endowment spending rate of 5% a year, the same rate as for foundations. A recent New York Times piece suggests 8%.

Tax-free investment income for wealthy non-profits makes as much sense to me as taxing investment income to individuals at a lower rate than ordinary income. Non-profits have long been taxed on earned income from operations unrelated to their purposes (such as the sale of sweatshirts.) Why not apply the same principle to non-profit investment income, which is just as surely unrelated to their purposes?

Why not a progressive tax, based on the value of a non-profit's assets - real estate, collections, endowment (per student), etc.? Generous tax reductions could be given to those that find creative ways to afford significant access to the poor or middle class.

And what is the minimum number of international students needed in a school to assure all students an optimal learning experience? Is it reasonable for the United States to subsidize the education of any more than that number?

Wealthy schools and colleges can certainly withstand reduced tax advantages without harm to their people, plants, or programs. Sadly, while comprehensive tax reform is so clearly needed, Congress has no stomach for tampering with a tax system its wealthy backers have come to know and love.

In Closing

Having benefitted personally from the aforementioned inequities before raising this red flag, I also plead guilty of something we all dislike - suggesting how others could pay more tax, even a place that enriched my life in ways more important than money.

It is not surprising to me that our last six presidential candidates are private school products. Nearly four decades of interaction with Mercersburg students and alumni left me with great pride in the character, sense of civic responsibility, and world views our graduates develop.

I know of no more ideal environment for teaching or learning than Mercersburg's. There is indeed much at Mercersburg and at the Harvards of the world that is worth modeling. But big tax advantages over less well-off institutions are not among them.

Men are mortal (women, too!) And one reason the estate tax was created was to make it harder - or at least not easy - for the wealth we accumulate to survive on its own into succeeding generations. Back then, we believed that our children should make their own marks on society. That notion still resonates with me.

Schools and colleges, by contrast, are not necessarily mortal. They can live forever, and the richest may keep getting richer ... but it is my firm belief that, absent meaningful competition, they will not get better.

Our failure to rein in the accelerating accumulation of wealth, ad infinitum, by the richest schools and colleges, does not bode well for the future of U.S. education. It does not bode well, either, for the public's perception of wealthy institutions. People might become disappointed and upset, as I was, to realize just how much of that wealth comes from them.

And the Occupy Wall Street movement may find a fresh outlet on the campuses of the nation's most affluent schools and colleges.