Contributor Post Created with Sketch. Why Not Tax Tenure?

 

Over at Bloomberg Views, Megan McArdle writes a provocative reflection on the nature of wealth. An excerpt: “I’ve been reading Thomas Piketty’s Capital in the Twenty-First Century. You’ll have to wait on my thoughts on the book until they’re a bit more fully formed. As I’ve been reading, though, I keep returning to a question I heard at an economics conference a couple of months back: If we did implement a wealth tax, should it tax tenure?”

Professorial tenure is, after all, a valuable asset. As long as you show up and teach your classes, and you don’t make passes at your students or steal from the department’s petty cash drawer, you can draw a paycheck for the rest of your working life. And since the abolition of mandatory retirement ages, that working life can be as long as you like.

Ah, you will say, there are risks: Your school could go out of business, or you might get ill and be unable to work, or inflation could eat away at the value of that paycheck. Just so. All assets are risky. That doesn’t make them worthless; it just means that the price has to take the potential downsides into account….

A tax on tenure will never be enacted, of course. But we can dream.

There are 26 comments.

  1. AIG Inactive
    AIG

    But you’re already taxing their income. Plus, if you don’t do anything more than teach classes and show up, you’ll never get a raise, and you’ll only get paid for the classes you teach (which depending on the particular field, might not be much in some). Hence, “complacency” is already imposing a cost on you. 

    This is reflected in the pay differentials between those tenured professors who do “nothing”, and those tenured or un-tenured professors who do a lot of research (it’s not unusual to have assistant professors being paid more than some tenured professors in the same department).

    The practical implications of tenure are that it promotes…extra…hard work in research productivity in the first 7-10 years of the career (after 5-7 years of getting a PhD) to get to the point of tenure. Extra hard work which might not have been created if not for the “reward” of tenure at the end.

    • #1
    • May 28, 2014, at 4:35 PM PDT
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  2. AIG Inactive
    AIG

    There is a strong economic argument to be made about tenure. This argument applies both in industry or academia: specialization. The more specialized you are, the less applicable are your skills to a different firm or a different setting. Hence, in all industries, if you want to promote high levels of specialization (in the firm’s case, firm-specific, or in academia’s case, topic-specific), you have to provide ex-post guarantees and protection for your employees so that they know that ex-post they are not going to be thrown out in the street, unable to apply these specialized skills elsewhere. 

    Firms do this through lots of similar mechanisms, profit sharing, severance packages, or explicit/implicit guarantees of no-layoffs. 

    The same economic rationale applies to academia. If you’re going to spend 5, 7 or 10 years getting a PhD in a very narrow topic, at starvation wages for that period of time, you need protection mechanisms.

    So it’s a pretty straight forward economic rationale that applies to everything: the more specific specialization you make, the more reward and protection you require. Otherwise, it doesn’t happen.

    • #2
    • May 28, 2014, at 4:47 PM PDT
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  3. Arahant Member

    AIG, there is a strong economic argument for other types of wealth and growth of wealth through investment, but that doesn’t mean it isn’t being taxed. Why should your wealth be tax-free while people’s bank accounts in Cyprus are being raided? It’s just a matter of defining the value of the asset so that professors can be penalized for good behavior like the rest of us.

    • #3
    • May 28, 2014, at 5:03 PM PDT
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  4. Palaeologus Inactive

    As long as we’re dreaming (and seemingly attempting to give Prof. Rahe an aneurysm) Peter, we should impose a “Sabbatical Tax” at a 100% rate every seven years.

    Pay for your own vacations hotshots!

    To be fair, AIG makes some excellent points in his second comment.

    • #4
    • May 28, 2014, at 5:13 PM PDT
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  5. John Walker Contributor

    Prof. Epstein’s May 15th Libertarian podcast is highly relevant to this issue. He observes that Piketty confuses financial capital with human capital, and this distorts his analysis. For example, a partner in a prestigious law firm or medical practice has a valuable asset, but that asset is based upon his or her contribution to the partnership and is largely illiquid. A levy on capital, as Piketty advocates, would require dissolving the partnership to pay the taxes, which would destroy its value.

    In academia it is much the same: tenure is earned and is an asset which benefits both the professor and the university. Taxing it is a capital levy which neither the professor nor the university can pay from current income.

    I used to be, and largely remain, opposed to tenure at all levels. But when, in the 1990s, I participated in an evaluation of the computer science departments of the two Swiss federal universities (EPFL and ETHZ), which do not offer tenure, I discovered that getting rid of it is difficult at an institutional level. At EPFL in particular, I heard department heads complain that their best professors were poached by other institutions which could offer them tenure.

    • #5
    • May 28, 2014, at 5:14 PM PDT
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  6. AIG Inactive
    AIG

    Arahant:

    It’s just a matter of defining the value of the asset so that professors can be penalized for good behavior like the rest of us.

     I don’t see how their “wealth” is tax free. They are being taxed on income. The point being that if tenure guarantees you a paycheck, it only does so up to the amount of work you’re willing to put in. If you don’t put in extra effort, you don’t get raises, which leads to many full profs being paid less then assistant professors in the same department. 

    Hence, if complacency is the issue, they are already being rewarded less in exchange for their protection. 

    But the problem in academia is that you have to spend 15-20 years of time to get to that point, all the while foregoing lots of wealth while also limiting your ability to be hired elsewhere at the same time. But that is what is needed to create new knowledge. 

    As for the “rest of us”, having worked in industry and now in academia, seems to me it’s a heck of a lot easier to get away with doing nothing in industry, especially at large firms, than in academia.

    • #6
    • May 28, 2014, at 5:33 PM PDT
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  7. Shane McGuire Member

    When I first read the title of this post I read it as “Tax-tenure,” as though we could pay so much in taxes and then have some sort of tenure for the taxpayer. I don’t know what that would look like , but I was intrigued.

    Taxing tenure is intriguing, too, mind you.

    • #7
    • May 28, 2014, at 5:41 PM PDT
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  8. Steve Manacek Contributor

    Why stop at tenure? There are all kinds of assets. Why not “good looks”? For a lot of men, looking like George Clooney would be worth a lot more than a measly couple million bucks. How about “celebrity”? Opens a lot of doors, provides a lot of opportunities above and beyond pure (taxable) “cash value.” Or how about “access”? Does anyone seriously think being a “Friend of Bill” back in the 90s wasn’t a huge asset? Or being a “Friend of Barack” (if he has any, beyond Valerie Jarrett) today? There are intriguing possibilities here….

    • #8
    • May 28, 2014, at 5:50 PM PDT
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  9. John Walker Contributor

    Shane McGuire: When I first read the title of this post I read it as “Tax-tenure,” as though we could pay so much in taxes and then have some sort of tenure for the taxpayer. I don’t know what that would look like , but I was intrigued.

    This is something I suggested in the 1980s. Take the national debt (however defined) and divide it by the population. This is your share of the national debt. According to the U.S. National Debt Clock, using the outstanding public debt, this is US$ 54,970. Now, here’s the deal: suppose you’ve sold a house at a profit or cashed out of a start-up company and are feeling flush with cash. You make a payment to the treasury to pay off your share of the national debt. This would mean that, for the rest of your life, your federal taxes would be reduced by the fraction of federal expenditures devoted to debt service, even if interest rates increased or profligate politicians increased the debt.

    This ability to opt out would make it difficult for politicians to increase the debt or renege upon the deal, as there would be wealthy people who had taken the buy-out ready to oppose them.

    This would ideally be implemented after passing a balanced budget amendment, but even if adopted before might motivate the ratification of one.

    Update: Note that this accomplishes the same goal (reduction of the public debt) as Piketty’s proposed one-time capital levy, is non-coercive, and will be funded disproportionately by the wealthy, as they have the funds to pay down their future tax liability.

    • #9
    • May 28, 2014, at 6:07 PM PDT
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  10. Arahant Member

    AIG,

    I think you’re missing the point. It’s not about real value. It’s about taxable value. When it comes to stealing . . . Excuse me, I meant taxing. When it comes to taxing, it’s the fictional government accounting that matters.

    • #10
    • May 28, 2014, at 6:19 PM PDT
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  11. AIG Inactive
    AIG

    Arahant: AIG, I think you’re missing the point. It’s not about real value. It’s about taxable value. 

     That’s my point too. When it comes to tenure, the extra protection usually comes at the expense of extra taxable income. 

    • #11
    • May 28, 2014, at 6:22 PM PDT
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  12. Peter Robinson Founder
    Peter Robinson

    AIG:

    If you’re going to spend 5, 7 or 10 years getting a PhD in a very narrow topic, at starvation wages for that period of time, you need protection mechanisms.

    Yet tenure as practiced today is substantially a post-World War II development. Do you mean to suggest that scholarship today is better than it was during the first half of the twentieth century? That universities in America have become more intellectually serious?

    • #12
    • May 28, 2014, at 8:42 PM PDT
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  13. AIG Inactive
    AIG

    Peter Robinson: Do you mean to suggest that scholarship today is better than it was during the first half of the twentieth century? That universities in America have become more intellectually serious?

     As with everything related to academia, it depends on the field. I won’t pretend to speak for the liberal arts, but I would say it is certainly so for the hard and most of the social sciences. 

    In the hard and social sciences today you need to become much more specialized than before, given the much greater breadth and depth of knowledge created over the last 50 years. Much higher degrees of specialization in much more narrow topics.

    The outcome of this isn’t necessarily measured in “intellectual seriousness”, since we can’t measure that nor does it have much meaning in the sciences. But we can measure the economic benefits they have generated. I’d say the answer is self-evident on that front. 

    But the logic behind tenure isn’t that it makes things more “intellectually serious”. Simply that it allows for greater degrees of specialization, given the inability to transfer your knowledge to other fields. But this is a phenomenon of the entire economy. 

    • #13
    • May 28, 2014, at 8:57 PM PDT
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  14. Franco Member
    Franco Joined in the first year of Ricochet Ricochet Charter Member

    I think it’s counterproductive to engage in this kind of tit–for-tat argument. Taxes are too high, the governemnt is too big and spends too much money. Suggesting that your ideological opponents should be made to suffer what we suffer just brings everyone down and gives the government more money to control us all with, and has the added problem of making tax increases look like reasonable and valid solutions.

    • #14
    • May 29, 2014, at 5:32 AM PDT
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  15. Old Bathos Moderator

    This approach misses the point of the Piketty Movement. Begin with the maximum income for a tenured Prof at a prestigious school who has some modestly successful book income and some outside fees. Assume the professor’s spouse has comparable income from an administrative position in government or a non-profit. Call this combined income the Acceptable Maximum. Everybody above that is supposed to be punitively taxed. What is the point of having a cottage on Cape Cod or the Vineyard if some plumbing supply baron can have a mansion nearby? What is the joy in in a 25-foot sailboat stocked with quality wines if a multi-site car dealer has a 50-foot yacht with champagne? 
    The Piketty fan club is really the Salieri of market outcomes — how can those less worthy than I command such wealth? Redistribution is just eyewash and political cover. The real goal is to slap down those above the Acceptable Maximum, especially if earned in unacceptable (i.e., private market sector) endeavors.
    Tax tenure? That is the modern equivalent of taxing the clergy and misses what the enlightened really mean by “inequality.”

    • #15
    • May 29, 2014, at 9:09 AM PDT
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  16. James Of England Moderator
    James Of England Joined in the first year of Ricochet Ricochet Charter Member

    AIG:

    I don’t see how their “wealth” is tax free. They are being taxed on income. 
    AIG:

    That’s my point too. When it comes to tenure, the extra protection usually comes at the expense of extra taxable income.

     Do you see how these arguments contradict each other? Wealth is not only income, but also income security. This is partly why riskier investments yield more return. 
    If the economically rational professor trades extra income for extra income security, he is being paid the same (or more), but taxed less, which would be inequitable. 

    AIG: But the logic behind tenure isn’t that it makes things more “intellectually serious”. Simply that it allows for greater degrees of specialization, given the inability to transfer your knowledge to other fields. But this is a phenomenon of the entire economy. 

     I thought that it was about protecting communists, academic freedom, and such. I don’t recall the big controversies of the 1940s and 1950s being particularly focused on highly specialized fields; a lot of those guys were liberal arts folks. 

    • #16
    • May 30, 2014, at 3:01 AM PDT
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  17. James Of England Moderator
    James Of England Joined in the first year of Ricochet Ricochet Charter Member

    AIG: The same economic rationale applies to academia. If you’re going to spend 5, 7 or 10 years getting a PhD in a very narrow topic, at starvation wages for that period of time, you need protection mechanisms.

     Tenure isn’t a protection mechanism for the post-grad student; it is awarded only to some of those. Instead, it’s like becoming a partner in a big law firm. You agree to work much harder than you might otherwise have done for less reward for many years, and but later in your life you get a tremendous payoff. In a progressive tax system, we tax the guys who are working in the salt mines a little, and tax the guys for whom the investment has paid off a lot. We also do this with essentially every other form of investment. 

    I agree that there’s an economic logic to handsomely rewarding those who succeed in academia. I don’t see how this implies that academics should be treated differently to other handsomely rewarded people. 

    • #17
    • May 30, 2014, at 3:08 AM PDT
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  18. AIG Inactive
    AIG

    James Of England:

     he is being paid the same (or more), but taxed less, which would be inequitable.

     He is being taxed the same too. It’s just shifting the earnings over time. 

    You agree to work much harder than you might otherwise have done for less reward for many years, and but later in your life you get a tremendous payoff. 

    That is in essence the same thing.

    I agree that there’s an economic logic to handsomely rewarding those who succeed in academia. I don’t see how this implies that academics should be treated differently 

    Mine is not an argument for either treating them differently, or rewarding them more. It’s an argument that in the absence of protection mechanism, highly specialized human capital investments don’t happen as efficiently. 

    The same applies to many industries other than academia. Most…large…companies have explicit or implicit guarantees that their people who make heavy firm-specific investments will not be laid off, or will be the last considered for it, or will be provided with heavy long-term incentives (such as stock options). There is no efficient way of taxing these protection mechanism in firms either. Nor should we want to.

    • #18
    • May 30, 2014, at 3:37 PM PDT
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  19. AIG Inactive
    AIG

    James Of England: I thought that it was about protecting communists, academic freedom, and such.

     Yes you are right that there is an alternate argument for tenure: allowing for more academic freedom. 

     But the “academic freedom” argument is not separate from the one I just made. Forget communists etc.: if you’re in a hard or social science field and you want to make a challenging theoretical contribution to the field, either challenging, expanding or contrasting existing theories…it usually requires a LOT longer time period than making incremental contributions to the field.

    So young assistant professors, post-grads and PhD students will make small contributions because they are looking to publish papers ASAP. They are not likely to spend 5 years trying to challenge an established “dogma” in a field. Not because of “freedom of speech” issues, but simply because if you’re challenging well-established theories, it is a lot harder to make convincing arguments.

    So you need someone who will be willing to invest 5 years on publishing…1…paper. As a result, in most fields, the really deeply theoretically challenging papers are written by highly experienced tenured professors, not new blood. Not only because they have experience; i.e. made a lot of specific investment, but because they have the career freedom to not be constrained by short-term goals of publishing x number of papers in x number of years. 

    It’s a real issue, which has nothing to do with politics of “liberals” or “conservatives”, which is often the case in the “liberal arts”. But, most “liberal arts” don’t produce economically viable products anyway. 

    • #19
    • May 30, 2014, at 3:46 PM PDT
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  20. James Of England Moderator
    James Of England Joined in the first year of Ricochet Ricochet Charter Member

    AIG:

    James Of England:

    he is being paid the same (or more), but taxed less, which would be inequitable.

    He is being taxed the same too. It’s just shifting the earnings over time.

     No. If Tom gets paid X in income for the first half of his life, and receives job security worth X, then gets paid 3X in income for the second half, while still having the same job security, he pays tax on 3X, for the latter part of his life, while enjoying the benefit of 4X of goods. 

    If Richard gets paid the same for the first half of his life, but gets paid 2X in income and receives 2X in job security during the second half of his life, he will pay tax on only 2X for the latter part of his life, while enjoying the same total pre-tax return. 

    Unless you tax tenure, or deny that it is a valuable part of the compensation package, it’s untaxed value. 

    • #20
    • May 30, 2014, at 4:34 PM PDT
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  21. James Of England Moderator
    James Of England Joined in the first year of Ricochet Ricochet Charter Member

    AIG:

    James Of England: I thought that it was about protecting communists, academic freedom, and such.

    Yes you are right that there is an alternate argument for tenure: allowing for more academic freedom.

    …….It’s a real issue, which has nothing to do with politics of “liberals” or “conservatives”, which is often the case in the “liberal arts”. But, most “liberal arts” don’t produce economically viable products anyway.

     Perhaps it’s just because the people I read history from are all historians, but I really get the impression that the debate was primarily over academic freedom, although I agree that tenure has benefits that are not limited to academic freedom. That’s why McArdle wasn’t calling for the abolition of tenure, merely its inclusion in tax assessment. As you note, career paths in other industries are “essentially the same thing”, but in other industries all the gains from promotions are taxable other than status and power, whereas in academia, only some of them are. That’s not because we fail to appreciate the value of paying people well, but because we try to avoid market distortions. 

    • #21
    • May 30, 2014, at 4:40 PM PDT
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  22. James Of England Moderator
    James Of England Joined in the first year of Ricochet Ricochet Charter Member

    AIG:

    James Of England:

    The same applies to many industries other than academia. Most…large…companies have explicit or implicit guarantees that their people who make heavy firm-specific investments will not be laid off, or will be the last considered for it, or will be provided with heavy long-term incentives (such as stock options). There is no efficient way of taxing these protection mechanism in firms either. Nor should we want to.

     There are protections, but they’re generally very weak indeed. You’re right that if most employees had the equivalent of tenure, taxing nominal tenure would make little sense, but the job for life was never that secure, and the concept is much weaker today than it was. I’m not sure how stock options offer protection to employees from being fired. 

    • #22
    • May 30, 2014, at 4:44 PM PDT
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  23. AIG Inactive
    AIG

    James Of England: while enjoying the benefit of 4X of goods. 

     That’s the key to the argument, and one that I can’t see. 

    but in other industries all the gains from promotions are taxable other than status and power, whereas in academia, only some of them are.

    But the key here is that “promotion” in academia isn’t always, or usually, associated with higher gains. It usually leads to flat rewards. Nor are all the explicit and implicit protection mechanisms in other industries (such as no-layoff policies) taxable.

     There are protections, but they’re generally very weak indeed. You’re right that if most employees had the equivalent of tenure, 

    Your ability to move from company to company is also much greater, whereas your ability to move from 1 specialized field to another is much more limited. 

    I’m not sure how stock options offer protection to employees from being fired. 

    Not from being fired, but it’s a long-term benefit aimed as a reward for making more firm-specific investment by increasing your ownership stake in the firm. It is also taxed differently than income ;) 

    But there’s severance packages too, which are akin to tenure since they are partially based on your tenure in the firm. They impose a cost on the firm for laying you off, as well as provide the employee with protection. 

    I’m not saying these things are good or bad, but that they may be necessary given certain human capital investments required within the firm, and are mostly not “taxable” either. They are only taxable when exercised, similar to the pay professors get through tenure.

    • #23
    • May 30, 2014, at 5:02 PM PDT
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  24. James Of England Moderator
    James Of England Joined in the first year of Ricochet Ricochet Charter Member

    AIG:

    James Of England: while enjoying the benefit of 4X of goods.

    That’s the key to the argument, and one that I can’t see.

    Is it that you don’t agree that tenure is worth something?


    AIG
    : But the key here is that “promotion” in academia isn’t always, or usually, associated with higher gains. It usually leads to flat rewards. Nor are all the explicit and implicit protection mechanisms in other industries (such as no-layoff policies) taxable.

    I agree that if one were to tax tenure, you’d probably also want to tax other tenure-like provisions. I really don’t think that there are many non-academic jobs with comparable protection, though.

    AIG: Your ability to move from company to company is also much greater, whereas your ability to move from 1 specialized field to another is much more limited. 

    Specialized field in companies compares to specialized field in academia; both are hard to shift (I imagine more so in science than in liberal arts). Moving from company to company compares to moving from school to school. 

    • #24
    • May 30, 2014, at 5:52 PM PDT
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  25. James Of England Moderator
    James Of England Joined in the first year of Ricochet Ricochet Charter Member

    AIG: Not from being fired, but it’s a long-term benefit aimed as a reward for making more firm-specific investment by increasing your ownership stake in the firm. It is also taxed differently than income ;) 

    Right. The restrictions are notionally a benefit to the firm, not to the employee. 

    AIG:
    But there’s severance packages too, which are akin to tenure since they are partially based on your tenure in the firm. They impose a cost on the firm for laying you off, as well as provide the employee with protection.

     Severance packages are taxable when paid out. If the severance package was so large as to essentially prohibit firing, then I’d agree that that would be like tenure, and should be taxable even if they are not paid out. I’ve not seen that in any of the executive contracts I’ve drawn up; is it a phenomenon that occurs in a particular sector? 

    • #25
    • May 30, 2014, at 5:58 PM PDT
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  26. AIG Inactive
    AIG

    James Of England: Specialized field in companies compares to specialized field in academia; both are hard to shift (I imagine more so in science than in liberal arts). Moving from company to company compares to moving from school to school. 

    Working at most companies usually requires far less of a firm-specific investment than working in academia. When it does, however, firm’s typically have two options: either adopt similar ex-post protection mechanisms…for the employee…or provide generous ex-ante protections such as stock options and other rewards.

    Moving from school to school isn’t as easy as imagined, if there are labs, research teams, grants etc involved. 

    If the severance package was so large as to essentially prohibit firing, then I’d agree that that would be like tenure

    They tend to be, with more tenure in the firm :) If the firm has to “buy you out” to get you to retire or be laid off, you can be sure they have made the cost-benefit calculations and only those that “pass” get made the offer.

    • #26
    • May 30, 2014, at 6:57 PM PDT
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