When private-school tuition is tax-deductible

Scott Asen, a former trustee and head of the development committee at Groton, a posh private school, has a revealing op-ed in the NYT. He explains that at such schools, the tuition fees, high as they are, fall well short of covering the annual costs that the schools incur; the difference is made up by donations and, where it exists, by using the school’s endowment. What’s more, that fact is explicitly communicated to parents. “Virtually every private-school parent has heard about ‘the gap'”, he says, and, as a parent, once you know about it, it’s clear what you should do:

To the extent that any family with the wherewithal is paying less than the full cost of the product it is buying through combined tuition payments and donations, that family is effectively being subsidized by other current and past donors. Not only is this ethically unsupportable, but ultimately, it is also financially unworkable.

Asen proposes that all parents who can afford to do so, or who fail to provide financial disclosures proving that they can’t afford to do so, should be “expected” to “fill the gap” with a donation. “Given the strength of the educational product offered by these prestigious schools,” he writes, “I think that for every affluent family scared off by the new policy, there would be another of equivalent means — with an equally desirable child in tow — willing to pay full cost.”

Many parents are following these guidelines already, thanks to pressure from people like Asen. “It’s sort of understood that if your children attend these schools and you can afford it, you will pay all or some of that shortfall,” one father told Jenny Anderson.

The operative word here is “pay”. These payments are just that: money spent to cover the costs of educating Junior. As Asen’s headline puts it, right now private schools are “not expensive enough” — they should cost more. And while the extra money might be couched as a donation for tax purposes, both the school and the parents understand that if you’re merely “filling the gap”, rather than, say, donating a couple of million dollars towards a new gym, then you’re really just covering the annual cost of your kid’s tuition.

Such expenses are not, and should not be, tax-deductible. What Asen is proposing comes very close to tax fraud: he’s clearly saying that if you’re the kid of parents of means, and your parents refuse to fill the gap, then you would no longer be welcome at school. For rich parents, this is to all intents and purposes a tuition hike. But it’s sweetened, a little bit, with the fact that the hike is fully tax-deductible.

Tuition hikes at private schools have never been tax-deductible in the past, and they shouldn’t be tax-deductible now. If Asen wants to suggest that private schools should just raise their rack rate to an amount that covers the cost of tuition, and then use some of the extra revenue to help defray the cost for children of parents outside the 1%, then that I think would be perfectly reasonable.

There’s a curious tension among the kinds of people who send their kids to private school: on the one hand, they do so in large part precisely because these are the schools attended by the kids of the money-is-no-object types. But on the other hand, they like to think that the schools are attended by a diverse group of the best and the brightest, rather than just the richest. And so they support the idea that some carefully hand-picked kids from less flush families should also be able to attend. If Asen’s proposal was a simple tuition hike with some kind of concomitant increase in financial aid, then, it would just represent an institutionalization, within the tuition structure, of diversity principles which are already espoused by most private schools.

But Asen doesn’t go that far. Instead, he takes to its logical conclusion the woeful trend of the transactionalization of philanthropy: the idea that it is entirely normal and expected for every tax-deductible philanthropic donation to be tied to the charity in question providing something of value in return. It starts with the tote bags given out during public-radio pledge drives, and ends with the very institution changing its own name to yours: the Peter G Peterson Institute for International Economics, the Booth School of Business.

In general, where something of real value is given back, only the difference is tax-deductible. If I buy $350 tickets to a charity dinner, and the dinner costs $150, then only $200 can be written off against taxes. And if I get a discounted ticket to the dinner, paying only $100, then none of my payment is tax-deductible. That’s essentially the situation that private-school parents are in right now: they’re buying discounted tickets to an extremely expensive education. If they end up forking over a bit more, but still less than the education costs, then nothing changes, and the extra amount they pay should still come out of post-tax income.

All of which helps to explain why private schools charge less for tuition then they spend on providing it. Within days of their kid being accepted at a private school, parents are informed about the famous gap, and pressured to fill that gap with a donation. In the school’s ideal world, all parents would then fill that gap to the limit of their ability to pay — and rich parents would give even more. The parents, of course, will always be happier paying low tuition and topping it up with a tax-deductible donation than they would be simply paying higher tuition.

But donations have to be voluntary, and no matter how good a school is, there are always worthier charities out there. After all, the US already has universal education: the charitable purpose of the private school is just a marginal increase in the quality of some children’s education — complete with deleterious effects on everybody else. (Just imagine how much better Manhattan’s public schools would be, if all of the island’s super-rich had to send their kids to those public schools.) If I have $10,000 to give to charity, it’s really hard to believe that the first best recipient of that money would be some private school, rather than, say, Doctors Without Borders.

So if schools want parents to donate money, they have to offer something extra in return: they have to offer to educate the parents’ kids. That’s why tuition is set below the cost of education: it forces the parents, in aggregate, to donate the difference, for fear that otherwise the kids’ education might suffer. And it also helps to lay the groundwork for deals like the notorious one between Sandy Weill and the 92nd Street Y: Sandy donated $1 million of Citigroup’s money to the school, and his star analyst managed to get his twin daughters into the pre-school there.

That deal was particularly obnoxious, but it’s entirely commonplace for very rich parents to drop very large hints, along with their private-school applications, that if their kids get in, substantial donations will accompany them. Naturally, the schools are predisposed to accept precisely those kids. Given that those donations appear if and only if the kids attend the school in question, there’s a case to be made that all such donations, even if they’re much larger than the gap, are in effect payment for tuition, and should not be tax-deductible.

I’m no fan of the tax-deductibility of charitable donations in the first place — it’s an enormous tax expenditure which results in a relatively modest amount of extra charitable giving. (Ed Dolan has a good two–part overview of why the deduction is a bad idea.) But let’s put that debate to one side for the time being, and make the reasonable assumption that the deduction is here to stay. Let’s also make the equally reasonable assumption that Asen’s proposal won’t get adopted by any private schools, for the very good reason that it would never pass muster with the IRS.

Then what we’re left with is an admirably clever op-ed by Asen, which sends one message while purporting to say something else entirely. His op-ed is nominally directed at schools, saying that they should change their tuition structure. But the real target is not schools but parents. He’s telling them that private-school cost inflation is enormous, and that they have an ethical obligation to fill the gap, every year, if they can possibly afford to do so. Stripped down, the message is this: “give more, or you won’t like the consequences”.

Development officers sharing Asen’s op-ed with parents will surely be very quick to point out that you can’t make tuition a tax-deductible expense, and that if schools were going to raise their tuition rates, none of that raise would be tax-deductible. As a result, they’ll say, it’s much better for all concerned if the present situation stays in place, and parents top up their tuition fees with tax-deductible donations.

Asen’s op-ed, then, is at heart a fundraising drive aimed at the status quo, rather than a real attempt to change that status quo. As you would expect from someone who spent many years raising funds for a private school. I wonder if the NYT realized that, when they printed it.