TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, September 10, 2013

Legacy College Admissions and Tax Policy

LegacySalon: The 1 Percent’s Ivy League Loophole:

Legacy preference in college admission, or the practice of selecting the offspring of alumni over other qualified candidates, was originally a strategy developed to grandfather Jewish applicants out of admission. Though the policy’s intention has changed, it remains the reality that as American students head back to campus this fall, 10 to 25 percent of them do not deserve their spots. They’re “legacy admits,” the kids who got a boost via birth.

Quite a boost, in fact. In their 2005 paper The Opportunity Cost of Admission Preferences at Elite Universities, Princeton scholars Thomas Espenshade and Chang Chung found that legacy status gives fortunate applicants the equivalent of an additional 160 points on the former 1,600 point SAT scale. One hundred sixty points is no small adjustment; on the contrary, it’s the sort of improvement hopeful high schoolers bury their noses in books for. Yet it comes gratis to a set of students already privileged enough to be born to graduates of prestigious institutions. ...

For those looking to pass power and wealth down, legacy admission practices are a handy tool. Universities, who periodically masquerade as engines of social mobility, claim that legacy admission is merely a good business practice, necessary to coax their alumni to generously donate to their alma maters.

But if this is true, then alumni donations are not donations at all. Rather, they’re implicit transactions: alumni pay universities and receive additional admissions consideration for their children in return. That is the quid pro quo of the donation-legacy arrangement.

Yet, curiously, the IRS does not treat alumni donations as transactional payments. Instead, it treats them as charitable giving. As a result, alumni that make such donations are entitled to deduct the amount of their donation from their income for tax purposes. In so doing, the richest alumni receive a tax subsidy of forty percent of the amount of their donation. That is, the public ultimately funds as much as forty percent of any given legacy admissions payment.

Under most understandings of charity, it is not clear why any donation, alumni or otherwise, to an elite educational institution should be considered charitable. Top tier universities like Harvard and Princeton, although non-profits, charge high tuitions and enroll nearly 25 rich students per each poor student. In any non-educational context, few would call an organization with similar characteristics a charity. But the case for alumni donations being charitable is even thinner. Because alumni donations purchase improved admissions chances, they violate the most fundamental rule of charity, namely that it not enrich the giver.

In addition to being poor public policy, these charitable tax subsidies generate a disgustingly unjust spectacle. The vast majority of parents do not have an educational background that enables them to benefit from the donation-legacy system. Yet these parents are forced, through the tax code, to help fund alumni donations that intentionally militate against their own children’s chances of admission to the elite institutions they may otherwise be well qualified for. Children of poor parents in particular already endure extraordinary burdens competing against children of rich parents from elite universities; publicly financing the rigging of college admissions systems against poor children is yet another thumb on the scales against their success.

(Hat Tip: Lawyers, Guns & Money.)

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Four possible solutions to the supposed problem.

(1) Deny the kid admission. Seems harsh to the kid.

(2) Revoke the college's tax exemption. Seems overbroad.

(3) Deny the family a deduction for the charitable donation to the college. Congress would have to amend the IRC to keep the statute of limitations open for the time period between the donation and the kid's admission.

(4) Ignore the atmospherics. Live and let live.

The fourth policy best fits liberty. Nuff said.

Posted by: Jake | Sep 10, 2013 1:12:07 PM

Deny the deduction to the family and penalize the institution with a non-deductible penalty two times the contribution.

Posted by: SW | Sep 11, 2013 5:40:57 AM

This ignores the advantage to other students of having alumni kids as their classmates. I was glad to have one of my 3 freshmen roommates at Yale be an alumni kid. Part of the value of a school like Yale is tradition and atmosphere. If preferential alumni admission were discontinued, the school would become less attractive to everyone else. As Groucho Marx did not say, "I would refuse to join any club that only admits people like me."

Posted by: Eric Rasmusen | Sep 11, 2013 9:39:28 AM

Not everything is a tax issue.

The fact is, we don't have nearly the kind of economic mobility we used to be famous for. Europe has more. The best thing for the fancy schools to do, from an economic standpoint of bolstering the old endowment, is to take the most privileged kids they can, who have enough preparation to complete the curriculum and make sure they have fond memories of the experience.

Fancy schools, like Wesleyan, that handed out too many scholarships to deserving poor boys lived to regret it. The poor boys turned into upper middle class but not wealthy alum who do very little for the college's long term finances.

Posted by: jimharper | Sep 11, 2013 6:42:29 PM