I like using the metaphor of indentured servitude as a way of thinking about how student debt works, an approach best argued by Jeffrey Williams at Dissent. But I just saw another way of thinking about it – a tax on faculty.
Reihan Salam refers to an argument proposed by the sociologist Gabriel Rossman that “student loan debt can be understood as a kind of ‘unimproved land tax’ on human capital.” Reihan refers to an unimproved land tax as a kind of tax where, “if you choose not to use your human capital to maximize your income, you will nevertheless be saddled with a non-trivial debt burden. This might incline you to gravitate towards more lucrative career options, regardless of your underlying preferences.”
I want to bring up one of my favorite economists to read, the 19th century’s very own Francis Amasa Walker (pictured above). He was a prominent economist and the first President of the American Economics Association. Last time we talked about Walker we pointed out how he was worried about paper money and inflation because it would undermine the power of patriarchy. “The social effects of a paper-money inflation are so fresh in the mind…the creation of a countless host of artificial necessities in the family beyond the power of the husband and father to supply…the loss of that fit and natural leadership of taste and fashion which is the best protection society can have against sordid material aims, and manners at once gross and effeminate,” and so forth.
But he wrote about many things. One essay he wrote, collected and available at google books in his Discussions in Economics and Statistics series, was the 1888 “The Bases of Taxation.” What should constitute the tax base? Walker surveys the economic debates and looks at the three leading contenders for the tax base: “(1) property or capital or realized wealth; (2) revenue or income; (3) consumption or expenditure.”
But he notes that there’s another contender: “faculty, or native or acquired power of production.” Not what you make but how much you could make. He believes that a faculty tax is the most equitable form of taxation, especially compared to a revenue tax. Why is this? A revenue tax “works injustice” because:
…between two men of equal natural powers, the revenue tax lays the heavier burden upon him who most fully and diligently uses his abilities and opportunities. It even accepts indolence, shiftlessness, and worthlessness as a sufficient ground for excuse from public contribution.
Here are two men of equal natural powers. One is active, energetic, industrious. Toiling early and late, he realizes a considerable revenue….The other lets his powers run to waste; trifles with life, shirks duty; wrongs his family and the community by living squalidly and meanly. Producing no more than is necessary to subsistence, he would, under a pure revenue tax, escape contribution altogether….His social and industrial delinquency, so far from excusing him from any portion of his obligation, would, the rather, justify heavier burdens being laid upon him, in compensation for the injury which his ill example and evil behavior have inflicted upon the community…
…to tax revenue instead of faculty is to put a premium upon self-indulgence in the form of indolence, the waste of opportunities, the abuse of natural powers; and that a faculty tax constitutes the only theoretically just form of taxation, men being required to serve the state in the degree in which they have the ability to serve themselves.
I love when economics is so squarely focused on the problem that a poor person might get away with something. To clarify, if two people are identical, but one is a teacher and the other works for Wall Street, they should pay the same taxes – specifically the teacher should pay the high rates that the Wall Street person does. Why? Because, the teacher is capable of making Wall Street money but chooses not to work on Wall Street, instead choosing less remunerative work. His or her “social and industrial delinquency” (a phrase I promise to use more) is an “evil behavior” that punishes the whole of society by preventing productive work from being done, and it shouldn’t be rewarded by the tax code.
It was probably even anachronistic in the 19th century to think that taxing the ability of human capital to produce, something that would work best with something like land, was practically feasible. It’s even harder now. But, for a variety of reasons ranging from moral to economic efficiency, this concept holds a lot of weight for economics.
Enter student loans. On the theory side, we know from the corporate finance theory literature that higher debt burdens for firms “incentivizes the company’s executives. Manager must contemplate their future obligation to repay creditors on time…this threat of illiquidity has a positive disciplining effect on management.” And on the empirical side, we know that, from Jesse Rothstein’s work, “that an extra $10,000 in student debt reduces the likelihood that an individual will take a job in nonprofits, government, or education by about 5 to 6 percentage points.” Both effects push people to max out earnings above, like a faculty tax would. Fascinating.
There are so many objections. The debt doesn’t go to the right people for the disciplinary system to work. According to the latest research, people who attend for-profit schools have significantly higher debt burdens than similar people that attend non-profit schools, but the first group have less earnings capability as a result than if they had attended non-profits. It isn’t clear, especially given the blockbuster salaries involved with moving around rents in the financial and patent-related industries, that “maximizing salaries” is a good overall strategy for the economy. Debt, from corporate finance theory, disciplines in part by preventing managers from taking on excessively big risks – which is often what we want our individual entrepreneurs doing. And, of course, it reduces the value of things like “autonomy” to subordinate roles against vague references to economic keywords like “efficiency.”
But what a fascinating metaphor. I wonder how many elites like this idea and, in quiet rooms, cheerlead the run-up in tuition as a result?