Should tuition waivers be taxed?

My overall opinion here is the same as with taxes on private university endowments: no.  The federal government needs to stick to a budget, and broadening the tax base in this way would only postpone that needed development.  At some margins, “starving the beast” is a good idea, even if it doesn’t always work.

That said, some tuition waivers should be taxed, in particular those that accrue to faculty members when their children attend the same college or university.  That is simply a benefit to the well-off and well-educated, and it would not seem to fit the canons of optimal tax theory.  If you wish, let the government make it easier to borrow money to go to school.  In the meantime, treat this as in-kind pay to faculty and tax it.

What about tuition waivers that universities offer independently to deserving students, often graduate students?  Even apart from the public choice considerations, I don’t see why the efficiency case for taxing these is so strong.

Let’s say I can either self-educate at great effort (but perhaps little upfront expense), or I can invest a lot of resources convincing someone I am worth taking under their wing and tutoring, for free.  I will reflect glory on my tutor for many years to come.  In equilibrium, the rates of return to these two strategies should roughly equilibrate.

Now, if I self-educate, few would say I should be taxed on the benefit I give to myself from all the reading and learning.  It would be odd, to say the least, to call it “self in-kind compensation.”  (On top of that, it would bankrupt me in particular.)  Similarly, if I persuade someone to stuff book knowledge into my ears for free, why should I then be taxed?  Haven’t I done more or less the same thing, just using an intermediary and applying the effort at a slightly different stage of the education process?  Unlike the faculty member enrolling his or her children, it is not a surreptitious way of delivering in-kind income to somebody.  Rather, the tuition waiver is helping someone make an investment more cheaply.  What if I sit down and patiently explain to you why “buy and hold low cost diversified funds” are a better investment option?  Should you be taxed on receiving that wisdom?  Again, I say no, noting that you will be taxed on any later financial payoff from that wisdom.  We needn’t count the input as a taxable form of income.

Similarly, when it comes to education, if the tuition waiver helps you earn more, you will be taxed on that income later on too.

Alternatively, you might think there are too many graduate students in the system, a kind of Malthusian crowding when it comes to queuing for jobs.  That might describe the world even for a lot of STEM jobs (NYT).  Nonetheless, even if a legal/tax solution is required (debatable), taxing tuition waivers as in-kind income seems like the wrong approach.  That change falls most heavily on the graduate students judged by the school to be most qualified.  Those are also the people most likely to be future innovators.  Instead, a paring back of more general tuition and tax subsidies would fall on the graduate students more evenly and I suspect more efficiently.

Maybe I’ll write a separate post on the most likely incidence of taxing tuition waivers as in-kind income — it’s a tricky problem, a good test of your micro mettle.


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