Illustration by Wesley Bedrosian
Turn Underwater Homes Into College Diplomas: William D. Cohan
Both in the real world and in the corridors of power, the consensus is that the congressional supercommittee will fail to compromise this week on how to close the country’s multi-trillion-dollar federal budget deficit and, as a result, a series of cuts, totaling $1.2 trillion, will automatically kick in.
Many people believe this failure to act will short-circuit what little hope exists for an economic recovery. And it will be yet another demonstration of the inability of our political parties to work together to fix our long-term problems.
Are there any grounds for compromise on taxes and spending? I have a suggestion that could appeal across the board: Why not eliminate the tax deduction for interest paid on home mortgages and replace it with a tax deduction for college tuition payments made by those parents who are neither wealthy nor qualify for financial aid?
If you think about it, the tax code is akin to a laboratory experiment designed to get Americans to behave in a way that supposedly will create the greatest social, political and economic good for the commonweal.
When homeownership became a tenet of the American Dream after World War II, the tax code was ready to be of service because interest -- in all forms -- had been deductible since the income tax came into being in 1913. Yet by the mid-1980s, when credit-card interest payments and the like had lost their preferred tax status, the mortgage-interest deduction survived. Why? Not because the government didn’t need the revenue. But because politicians thought it more important to encourage Americans to buy homes using debt, and they were willing subsidize it.
Only in recent years -- when mortgage-backed securities ran amok -- have we come to understand how severe the unintended consequences of a supposed tax benefit can become. The financial crisis brought on by Wall Street’s obsessive packaging up and selling off of bum mortgages in the form of securities is probably why any number of politicians -- including those on the Bowles-Simpson budget commission -- have called for the end of the mortgage-interest deduction. Why forgo much-needed tax revenue -- estimated at being about $1 trillion over the next decade -- when the financial consequences of people buying homes they cannot afford has proved so dire?
On the other hand, if indeed the tax code can be used as a social petri dish, can’t we all agree that there is little foreseeable downside in encouraging as many people as possible to go to college, if they are of a mind to do so? And to also make higher education more affordable? Won’t the U.S. be more competitive in the global economy with a better-educated population?
We know that our 9 percent unemployment rate falls disproportionately on those without a college education. And one of the discernible tenets of the Occupy Wall Street movement seems to be how unfair it is for so many recent college graduates to be burdened with thousands of dollars in student loans.
Yet, with the cost of college tuition rising exponentially, the financial burden for paying those increasing bills will fall squarely on the middle class Americans who can no longer really afford them. The very rich, of course, find tuition payments just another expense, while those making less than, say $50,000 a year will probably qualify for the large amounts of financial aid that our well-endowed, “needs-blind” universities make available, much to their credit.
At the typical Ivy League college, tuition and room and board together are about $52,000 a year, a figure that seven years ago was $40,000, a 30 percent increase. Add in $3,000 more a year for the cost of books, computers and walking-around money, and the annual tab comes to something like $55,000 per year.
Because these fees are paid mostly with after-tax dollars, people like me and my wife -- we have two high-schoolers and live in a high-tax state -- would have to earn nearly double that, or more than $100,000 per year, just to afford to send each child to college. This on top of every other cost of living from clothes to gasoline to Internet access to food.
No, not every student needs to go to Harvard. But the average private school tuition is more than $35,000, and many state universities cost that much as well. Indeed, paying for a child’s college tuition is by far the largest bill that many families will face in a given year. Few can afford it, so hordes of students graduate every year saddled with huge loans that, as President Barack Obama explained recently, are “harmful to the recovery” because they reduce consumer spending.
As for the cost of a tuition tax deduction, a real accounting is best left to the bright minds at the Congressional Budget Office. However, given that Americans spend about $200 billion a year on higher education out-of-pocket and pay an average of about 20 percent of income on federal taxes, it seems likely that it would cost the Treasury less than the annual $100 billion in tax expenditures on the mortgage-interest deduction.
Returning America to the days when the gross domestic product grew at a respectable annual rate of 3 percent to 4 percent -- at which level the demand for goods and services is considered sufficiently high to chip away at our stubborn unemployment rate -- will require a bouillabaisse of initiatives. Some were outlined by Obama in the now-moribund American Jobs Act; others will have to originate with Federal Reserve Chairman Ben S. Bernanke.
Given the increasing financial burden that most Americans face in sending their children to college, whether public or private, people are left with little ability to spend on other things. By making tuition payments tax deductible, we would not only be creating a better-educated workforce -- a national goal, right? -- but we would also be putting more money in people’s pockets. Sounds like a win-win to me.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
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