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Much has been written about who the likely “winners” and “losers” are if the Republican-controlled Congress is able to pass a version of its tax bill. The middle class: losers; the wealthy, who own nearly all of the stock in U.S. corporations that isn’t owned by foreigners: winners. Those whose income comes from wage earnings: losers; those whose income comes from “passive” ownership of businesses: winners.
The GOP tax bill is not pro-growth, but it is definitely pro-Trump.
It has even been suggested that several geographic distinctions in the legislation may be “payback” for how California, New York, and other coastal blue states voted in the 2016 election. Taxpayers in high local and property tax states such as California and New York, for example, are losers in the GOP plans while Texans and others in low-tax “Red” states are winners.
If that seems like an overly sensitive reading, consider this: under the GOP plans, the ability to deduct personal casualty losses from wildfires and earthquakes would be phased out. The deduction for damage from hurricanes and floods, however, would be kept. As California State Senator Mike McGuire, a Democrat whose district includes areas ravaged by wildfires, told the New York Times, “. . .it’s hard not to think that Congress has their sights set on the Golden State.”
But the aims of this legislation are more politically ambitious than mere retribution, and nowhere is this more evident than in the House bill’s assault on higher education. If enacted, three provisions promise to have a devastating effect on college students, graduate students, and higher-education institutions. First, the House bill eliminates the deductibility of interest payments on student loans—a deduction that more than 12 million people used in 2015, according to the New York Times. Next, it taxes the tuition grants given to graduate students, grants that enable them to forego entering the workforce and instead pursue a Masters degree or PhD. As a result, a typical graduate student on a $20,000 stipend and a tuition waiver could end up owing nearly $10,000 in additional tax. And finally, it taxes the endowment investment income of roughly seventy universities and liberal arts colleges, reducing the funds available for undergraduate and graduate scholarships.
As any economist will tell you, demand curves slope down: raise the price of higher education and fewer young adults will pursue it.
While these changes will help offset the massive tax reductions for the rich, they are a pretty small drop in the bucket towards that goal. And it is strange that pro-growth and pro-investment Republicans would sign off on something that so harms those who want to invest in human capital. So why then did the House pass this bill? The answer can be found by looking at the 2016 election results.
Exit polls after the election showed that the share voting for Hillary Clinton was 8 percentage points higher among college graduates than among those without a college degree. Among whites, the difference was even larger: Clinton’s share was 16 percentage points higher among white college graduates than among whites without a college degree. It is tempting to think that these differences reflect a typical Democratic/Republican split based on education, but that is not the case.
In both the 2008 and 2012 presidential elections there was almost no difference between the Republican share of college graduates vs. those without a college degree. In fact, in 2008 there was literally no difference, as 53 percent of both groups voted for Obama over McCain. In the 2012 election, 50 percent of college graduates voted for Obama while 51 percent of those without a college degree did.
The 2016 election was unique: those with more education are apparently less likely to be taken in by the divisive rhetoric and outright lies of Trumpian politics. Surely this difference was not lost on the writers of the House tax bill. While one interpretation of their response is simply to call it retribution, another comes from realizing that the investment we make in young adults today determines the electorate we have in the future.
This is more than retribution. The investment we make in young adults today determines the electorate we have in the future.
It is often said that demographic trends in the electorate are moving against the Republicans. As a response, Republicans have turned to gerrymandering, vote suppression, and control of the courts in their efforts to hold onto power. The assault on higher education in the current tax bill will also shift votes. Eliminating interest deductibility on student loans, taxing student tuition waivers, and reducing student scholarships all raise the effective price of higher education. And, as any economist will tell you, demand curves slope down; raise the price of higher education and fewer young adults will pursue it, likely making the future electorate more receptive to Trumpian politics. As Trump gloated after winning the Nevada Republican primary, “I love the poorly educated.”
The assault on higher education will change who will be voting in the future. It is not pro-growth, but it is definitely pro-Trump.
Michael D. Whinston is the Sloan Fellows Professor of Management in the Applied Economics Group at MIT Sloan and Professor of Economics in the Economics Department.
Whinston was the Robert E. and Emily H. King Professor of Business Instutions in the Department of Economics, Northwestern University from 1998-2013. Previously, he was a Professor of Economics at Harvard University.
He is an elected Fellow of the American Academy of Arts and Sciences, and a Fellow of the Econometric Society. He was also a Fellow at the Center for Advanced Studies in the Behavioral Sciences, and an Alfred P. Sloan Research Fellow from 1990-1992. Whinston was awarded the Compass Lexicon Prize in 2008.
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