A tax on the American Dream
Equipped with de-identified tax records, economist Raj Chetty and his team at the Equality of Opportunity Project have provided the hard numbers to confirm what many have long feared: Upward income mobility in America is on a steady downward trajectory. Whereas 95 percent of sons born in the United States in 1940 made more money than their fathers, this was true for only 41 percent of sons born in 1984. These data points seem profoundly important for anyone hoping to interpret the current state of our politics and national dialogue. But they also merit the close attention of both our university leaders and legislators working on the tax code. In a country of declining intergenerational mobility, the proposed endowment tax is seriously misguided.
Educational institutions should be important actors in reversing the American Dream’s decline. A new paper released by Chetty’s team this year has helped to affirm the potential for higher education to foster more broadly shared opportunity. The research, published alongside a set of mobility report cards for all 2,199 US colleges and universities, shines a light on the relative success (or lack thereof) of American institutions in creating pathways to economic success for low-income students.
What one might call the “manifest inadequacy of . . . higher education’s contribution to equality of opportunity” is unfortunately not a new phenomenon. Over a decade ago at Harvard, we were similarly troubled by the striking underrepresentation of the bottom half of the income distribution. During the Summers presidency in 2004, Harvard initiated the most ambitious expansion to date of financial aid, specifically targeting families of low and moderate incomes. Along with eliminating parental contributions for parents earning under $40,000 (since increased to $65,000), the college made changes to applicant review and launched new outreach and recruiting efforts across the country. The idea was that the most talented students should know that Harvard was an option for them, no matter their economic background.
No doubt, this has been a persistently stubborn problem to address. And yet, data show that efforts at Harvard, unlike other elite institutions, appear to have borne some fruit. Harvard’s mobility report card shows noticeable upticks in the mid-2000s share of students from the bottom 60th and 20th percentiles of the US income distribution, beginning with the class of 2009, right after the new policy was announced. These gains occurred even as real incomes of these families were declining over the same period due to widening inequality.
Notably, Harvard has outperformed other Ivies and top-tier peers, who did not experience similar increases in the fraction of low- or middle-income students. And here in Boston, data for Boston University, Boston College, and Northeastern actually all show declines in proportions of low- or moderate-income students over the same period, with especially visible drops during the Great Recession.
This contrast with other Boston private universities helps illuminate why Harvard is able to continue admitting and supporting more low-income students, irrespective of economic conditions or parents’ ability to pay. Harvard’s financial aid budget, totaling $414 million university-wide this year (including $175 million in need-based undergraduate aid) is directly supported and enabled by the returns of the university’s endowment. As its largest source of revenue financing operations, Harvard’s endowment is precisely the reason the school can strive toward more economic diversity. Today, 90 percent of American families would pay the same or less to send their children to Harvard as a state school — this would be impossible without these funds.
It is especially troubling, then, that the Republican tax plan seeks to compensate for lost corporate tax revenue by penalizing a select group of educational institutions. The $43 million annual hit on Harvard would directly impact the college’s efforts to further expand financial aid for low-income families. It is hard to take Republicans’ claims of economic fairness seriously when other nonprofits, like exclusive prep schools and opera companies, are ignored. It seems especially preposterous in a piece of legislation that simultaneously repeals the estate tax, which benefits only the wealthiest 0.2 percent of Americans. Instead, this all smells of a certain kind of politics — where rather than careful welfare analysis, tax policy instead is a political weapon used to reward supporters and penalize perceived opponents. Coupled with the House bill’s proposed elimination of the student loan interest deduction and repeal of the tuition tax waiver, the tax plan will make pursuing higher education more difficult for anyone not at the top of the income distribution. Those who would suffer disproportionately are the young adults whose lives could be most transformed by a place like Harvard — students from the bottom 20 percent families who rise to the top 1 percent as adults. Harvard ranks in the 99th percentile nationally on this metric.
Of course, this is no warrant for complacency. Harvard’s top-heavy skew in the admitted class limits mobility potential, as does its still small bottom-quintile share (Berkeley has almost double Harvard’s percentage). We know that there are a lot of low-income high-achievers who aren’t applying or making it to the Ivy League. Economic diversity has often not received the same intensity of attention rightfully paid to racial diversity. But the Chetty data show earnings outcomes at elite institutions for students from modest economic backgrounds look almost identical to higher-income peers. It would be an unfortunate irony if “need-blind” admission policies, intended to protect low-income applicants, had the effect of preventing institutions from giving preference to these applicants, who succeed when given the chance. Universities should be more ambitious in recruiting low-income students, expanding their classes to provide more access, and admitting more transfer students from public institutions.
Whatever your political persuasion, equality of opportunity should be a major concern. If America is going to make the progress we all want to see, its private universities need to take on an increasingly active role. The federal government is right to call on them to step up. But Congress and the president are gravely wrong to levy punitive taxes on engines of opportunity at a time when they need to be enabled to do more, not forced to do less.
Lawrence H. Summers is president emeritus of Harvard University and former secretary of the US Treasury. Rachel Lipson is a joint master’s degree student at Harvard.