Minding the Campus recently published my response to an idea proposed by Kevin Carey to subject vocationally-oriented master's degree programs at non-profit colleges. I argue that the policy would be easily avoidable and likely generate unintended consequences. I propose an alternative two-tiered reform: (1) subject all colleges, regardless of profit status, to the same rules; and (2) tax all college enterprises that are regularly taxed in the private sector.
I try to respect Jeffery Sachs' academic work, but his populist arguments in favor of a wealth tax are very weak and misguided.
First, Sachs suggests that there is no economic rationale for a low tax rate on capital returns. First of all, capital returns are heterogeneous and volatile, and when positive, they are often only realized after long periods of risky investment. Many mainstream macro models such as the Ramsey model suggest that a null capital tax rate is optimal.
Second, Sachs does not seem to understand the economic benefits of capital mobility and intergovernmental competition for taxpayer domain. If taxpayers, including firms, are restricted from moving between tax jurisdictions, then yes we can squeeze them for all they are worth. Not only is this is analogous to killing the goose that lays the golden egg, it also does not promote efficient use of public sector resources.
Next, Sachs seems to misunderstand transfer pricing regulations. It may have been at one time feasible to setup a P.O. box in a foreign tax-friendly domain and reap tax savings, but firms must now demonstrate significant physical presence in the host country to avoid severe penalties. This means that historically underdeveloped countries can now compete for foreign investment by MNC's with more tax and regulatory friendly policies, creating a path out of poverty for growth-oriented countries. As someone who shares Sach's compassion for alleviating extreme poverty, I would argue that the social benefit of U.S. taxpayers moving capital and operations to less developed reform countries is much greater than soaking these taxpayers domestically and using the proceeds our dysfunctional Leviathan government.
Lastly, Sachs argues does not offer a solid argument in favor of why the additional tax revenues that would be generated are needed. The only hint that I hear is a false claim that we are unable to provide basic services such as primary education. News flash: the U.S. spends more in real terms per capita or student than any other country in the world, by a considerable amount. If educational outcomes are substandard, it is not because of a scarcity of public funding but rather the misuse of funds.
To give him some credit, Sachs does suggest that growing cronyism and special interest politics have contributed to rising inequality of both income and opportunity. But like Piketty and Stiglitz: correct diagnosis, wrong prescription. Raising more revenues via taxation on capital will not reduce rent-seeking, but likely increase it along with the size and scope of government. It seems to me that rent-seeking is a positive function of government size, at least over a fairly broad range. Thus decreasing government size would seem to be the correct policy to reduce the affect that crony rent-seeking exerts on inequality.
Assistant Professor of Economics at Patrick Henry College.