It’s hard to appease the “pro-science” crowd. Moves to rein in wasteful and unnecessary spending are automatically branded as antithetical to scientific progress, with fiscal conservatives labeled horse-and-buggy luddites.
These charges have resurfaced in the recent debate over tax reform, amid proposed changes to the tax treatment of tuition waivers. Claims that ending the tax break on tuition waivers would harm scientific research are unfounded and ignore the benefits to research that would come with a comprehensive overhaul of the tax code.
The Tax Cut and Jobs Act, slated for action on the Senate floor, eliminates a plethora of narrow breaks and deductions that contribute to the unbearable complexity of the code. One such gimmick exempts tuition waivers as taxable income, despite typical benefits totaling over $20,000 a year.
These waivers disproportionately benefit doctoral students, who usually receive a reprieve from tuition expenses in exchange for conducting research or serving as a teaching assistant. Naturally, then, this group has been loud about the “dire” consequences of treating tuition waivers as ordinary income. John Timmer, Ars Technica's science editor, citing estimates that around 145,000 graduate students would be affected, calls the proposed changes “crippling for research in the U.S.”
But buried in this doomsday prognosis lies a big “if.” Graduate students will only be affected if universities are unable to respond by varying tuition from department to department. If research institutions had enough tuition flexibility, rates could be minimized or eliminated for doctoral students, and tuition waivers would become unnecessary.
This move, Timmer argues, would be difficult to implement for many universities, since it would require a rewrite of rules for many institutions. But given a not insignificant percentage of colleges have already begun to charge different tuition rates according to majors and time-to-completion, the hurdles are likely not as great as he suggests. At any rate, “nudging” colleges to allow differential tuition would enable greater experiment and more efficiency. Some majors, like engineering and nursing, are inherently more expensive because of the smaller class sizes needed for effective instruction.
But even assuming that most colleges would not be able to make these changes, revenue raised from waiver reclassifications will pay for broad rate reductions that will encourage research activity. Under the bill voted forward by the Senate Finance Committee on November 16, the top marginal tax rate would be reduced from 39.6 percent to 38.5 percent.
Moreover, average tax rate reductions will be substantial for top earners, since each bracket’s rate stands to be lowered. And, according to the latest research, “star scientists” — defined as scientists in the 95th percentile in patent filings — respond in big ways to even small tax changes. Berkeley Professor Enrico Moretti and Federal Reserve research adviser Daniel Wilson analyzed state-level tax changes and found that a 1 percent increase in after-tax income in a state raises the number of star scientists in that state by .4 percent. Productive patent filers migrate to lower tax states, contributing to innovation and industry growth in their new locations. While the results of the study are not directly applicable to the national level, it does imply that top innovators readily alter behaviors in response to tax policy changes.
If scientists are prepared to move in response to a tax hike, they’re also likely to change their patent filing activities in response to rate changes. The researchers also found that corporations are sensitive to tax changes in deciding whether or not to hire star scientists. Slashing the corporate rate from 35 percent to 20 percent, then, will likely lead to more hiring demand for these star scientists.
Obviously, tax changes are only one part of the grand equation of innovative scientific research. A more stringent intellectual property regime is key to incentivizing research; the U.S. has slipped in global IP rankings over the past few years. But broad-based rate reductions and IP safeguards are far more important to scientific discovery than narrow tax perks and poorly targeted public R&D spending. Instead of despairing over the simplification of the tax code, the pro-science lobby should be pushing hard for the rate reductions currently under consideration.
Ross Marchand is a policy analyst with the Taxpayers Protection Alliance.
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