Do Graduate Degrees Produce Value?

It really depends

Image Credits: Wiki.

One of the more contentious aspects of the tax reform bill currently going through Congress is a proposal to treat the value of graduate-student tuition waivers as taxable income.

In the US most PhD programs charge tuition, like undergraduate programs, but PhD students are typically granted a waiver of tuition along with a modest stipend to cover living expenses. In the early versions of the tax bill, the value of this waiver — which could be $50,000 to $60,000 at a private university — would be classified as taxable income. University officials, graduate student associations, academics, and most journalists have condemned this aspect of the tax plan. As a university professor I have received multiple communications urging me to write my Congressional representatives, speak out publicly, and otherwise fight to defeat this legislation.

As of this writing, it appears the tuition-waiver piece will not be in the final bill, so university officials, the AAUP, the grad student unions, and other graduate-education supporters can rest easy. Maybe all that lobbying paid off.

While I don’t support tax increases as a matter of principle, the arguments I heard for defeating the proposal were not very convincing. Most advocates for increased public funding of science, technology, graduate programs, and higher education more generally simply assert that their favorite projects are vital to the well-being of humanity. I saw multiple social media posts and similar items explaining that a PhD student on, say, a $20,000 annual stipend cannot possibly afford the taxes on the value of a $50,000 tuition waiver. “I would never have completed my degree!” say the professors. “I would have to drop out!” say current PhD students. OK, but how is that an argument against the tax bill?

Note that the US tax rules on gifts are complicated. Inheritances are obviously taxable, as are most tangible gifts. For example, if a person earning $20,000 goes on a TV game show and wins a car or a vacation worth $50,000, the prize value is considered taxable income, just like cash. If the winner complains, “But I can’t afford the taxes,” many people would reply, “then you shouldn’t have gone on the show!” Likewise, one might tell a PhD student, if you can’t pay the taxes on your tuition waiver, and can’t borrow against your future earnings to pay it, then maybe you should consider another career path. Most likely, if tuition waivers become taxable, schools will simply increase the value of scholarships and stipends, taxable or not, to cover the difference, at least for their more promising candidates, so maybe the effects will be small.

My main interest is not these technical details, however, but the general case for promoting graduate education. As noted above, most of the arguments I’ve seen simply take it as self-evident that academic research is valuable and that public policy should promote it. But do graduate programs really produce value? How can we tell?

The more thoughtful responses try to apply some economic theory. Some economists say that government should not tax investment, only consumption, to encourage growth. Expenditures on graduate education (and education more generally) are investments in human capital, so they should not be taxed. Leaving aside my general reservations about the human capital concept, this argument has many problems. First, why should government promote economic growth? As Murray Rothbard pointed out, there is no “optimal” rate of growth beyond that emerging from the voluntarily decisions of individuals to consume or save. Second, in what sense do we classify expenditures on education as investment? Perhaps education is a sort of consumer durable good like a house, refrigerator, or weight-loss program that provides the user with benefits now as well as in the future; if so, then at least part of this spending should be classified as consumption. Moreover, even if we agreed that years and dollars devoted to advanced study in biology, medicine, astrophysics, engineering, and perhaps law or business, result in some long-term societal benefit, what about a PhD in Gender Studies? Or Keynesian macroeconomics? Or Marxist political theory? I say society would be better off with fewer of these.

Another related argument, which was offered by many of my academic friends and colleagues, goes like this: science is a public good, and public goods should be subsidized by the state. I have criticized this kind of argument many times; Bill Butos gave an excellent presentation on this at Mises University and has written widely on the topic. Terence Kealey’s work should also not be missed. We all argue that both theory and evidence argue against the public-goods nature of science. However, even if the public-goods argument were correct, it would hardly jusify subsidies or incentives for graduate degrees per se. Again, think about the kind of work highlighted at New Real Peer Review. If anything, these dissertations and research papers generate negative externalities, not positive ones. I personally think the case for government support for STEM degrees is weak, but at least we can have a reasonable conversation about it. Higher education per se? Not even close.

In the end, I’m glad if the federal government has less tax revenue to spend. But the case for not taxing tuition waivers is the same as the case for not taxing anything else. There’s nothing magical about graduate degrees.