Category: Uncategorized

Here is some basic info, in 2011-2012 145,000 graduate students received tuition waivers.  Monday I suggested such a tax is a bad idea, but who would bear the burden?  Let’s say there are three parties, the universities, the graduate students, and third-party funders who support research and graduate students.  Those third parties may be for instance Harvard donors or the National Science Foundation.

The short-run, first-order effect is that the grad students pay tax on their waivers and fewer of them pursue postgraduate studies.  And if grad students are dead set on attending no matter what, they bear a relatively high burden of the tax.

That said, there is more to the story.  Universities seek to attract graduate students for multiple reasons, with two possible options being “to enhance their prestige” or “to boost revenue,” or some mix of the two.  It will matter.

To make up for (some of) the tax, and maintain the flow of students, universities will opt for some mix of lowering their tuition and increasing stipends and increasing non-taxed forms of aid, such as quality of office space or teaching opportunities for grad students.  If universities seek to boost their prestige, they will be quite keen to keep up their “Q,” and not eager to lower Q, even with higher P as recompense on the revenue side.  In that case a relatively high share of the burden will fall on universities.

In contrast, if universities pursue revenue, they are more willing to live with a lower Q if accompanied by a higher P.  More of the burden will fall on students, because the accompanying enrollment-maintaining compensations from the universities will be accordingly lower.

I don’t know of a paper estimating the effects of taxing student fellowships, an innovation from the Reagan tax reforms of 1986.  Can any of you lend a hand here?  It didn’t seem to much slow the growth of graduate education as far as I can tell, so perhaps the burden there was born by universities.

Now enter the third parties.  Donors might give more funds to universities to help make up for taxed tuition waivers.  If you are a Harvard alum, for instance, you might wish to see Harvard carry on its great traditions with yet another generation of Ph.d economists who initially received tuition waivers.  In other words, you want prestige as an alum and that requires keeping up the flow of Q, number of quality students, through the program.  Donors will give more resources to the universities, or to the students (through other vehicles), to help make up for the new tax.  In words, to the extent the donors covet prestige, more of the tax will fall on them.  This is a tax on prestige-seeking!

My intuition is that the schools with a strong donor base will put in much more effort to raise money for graduate students, and they will meet with a fair degree of success.  (Note that Harvard’s now-bigger fundraising campaign will to some extent distract the attention of the president and other senior leaders from other programmatic activities at Harvard; in the longer run that could harm Harvard stakeholders.)  But schools below the top tier don’t so much have this option, so they will decline in resources and status relative to the very top schools.  This is p classic case of how imposing new burdens leads to higher market concentration and cementing in the status of the elites, in this case the educational elites.

Throughout, I am assuming the universities cannot evade the tax outright, for instance by relabeling the categories of tuition and tuition waiver to avoid the bite altogether.  But that is another possible equilibrium, if the details of the law so allow.