Hidden Taxation Math

Let’s say a university needs revenue of $25,000 per year per student.  What tuition should they charge?  Let’s assume there are three equal populations of students.  One third can afford to pay full tuition.  Another third can afford to pay 20% of full tuition.  The last third cannot afford to pay anything.  What should tuition be?

Some simple math.  25,000 N = T x .33 N + .2 x T x .33 N + 0 x T x .33 N, so .33 x T + .33 x .2 T = 25,000 or 1.2 x .33 T = 25,000.  T = $63,131.  The one-third of the students who can afford it, pay a $38,131 premium.  Shouldn’t these students families be able to deduct this as a charitable contribution.  In principle “yes,” but in practice “no.”

Hidden taxes like this are pervasive.  Consider employer provided health insurance. 

Medicare and Medicaid reimbursement rates do not cover the costs of healthcare.  So, providers charge more to patients that have employer-based insurance.  They do not admit this, but they have to find profits somewhere.

These increased charges increase the employers’ costs of employment and consequently depress wages while also increasing out of pocket costs for employees.  Shouldn’t people be able to deduct this as a charitable contribution.  In principle “yes,” but in practice “no.”

Professional programs in universities – business, engineering, law, medicine – often generate incomes far in excess of their costs.  These surpluses are typically used to subsidize arts, humanities and, of course, administration.  These subsidies likely make sense, but I have found they are seldom acknowledged.  Leaders do not want their universities labelled as socialists.

We often think of income redistribution in terms of progressive tax rates.  That is just one mechanism.  We tend to be very creative in terms of how we employ differential pricing to redistribute income without explicitly discussing and debating it.  This may be reasonable, but the people who are paying for everybody else deserve some credit.

I find it interesting that many politicians and their constituencies are adamantly opposed to any taxes increases.  However, tax increases are pervasive, as illustrated above.  What politicians really oppose is people being aware of hidden taxes.  What some simple math could easily expose, people do not tend to do, and the politicians that vehemently oppose new taxes can claim success.

What we really need is transparency.  That some people pay exorbitant prices to subsidize everyone else is not inherently wrong.  That might be the right value proposition.  However, hiding such mechanisms breeds cynicism, as well as tactics to avoid hidden taxes.  It becomes a game that we shouldn’t be playing.

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