Opinion

Felix Salmon

Are private schools charitable institutions?

By Felix Salmon
August 25, 2009

In the US, I’m still holding out hope that university endowments will be taxed unless they can demonstrate that they’re actually spending their money on the public good. Thanks to the philanthrocapitalism blog, I now discover that a similar move is now afoot in England, which has told two independent schools that they will lose their charitable status unless they start educating poorer kids as well as those of the rich. The whines from the head of the Independent Schools Council are not very moving:

Private schools were already providing a public benefit by educating children who would otherwise be in state schools paid for by taxpayers, he said…

Without private schools “the public would have to pay between £3bn and £4bn a year in extra taxes,” Lyscom said.

No one’s asking to abolish private schools, or even proposing that most of them lose their charitable status. They’re just asking that they do a bit more to earn it, which seems right to me. But as ever, there’s an endowment effect: it’s orders of magnitude harder to strip charitable status from an institution than it is to confer that status in the first place. So this is going to be a long, tough fight. But it’s one worth having.

Comments
22 comments so far | RSS Comments RSS

I agree, lets tax those endowments so we can build up the war in the middle east, pay for F-22s and start bombing Iran. If the government had more tax revenue we could send more charitable aid to Darfur and Pakistan.

Posted by dvictr | Report as abusive
 

some of those schools with big endowments (like Harvard) do educate poor students – if you get accepted and don’t make enough, it’s free. if you are fortunate enough to afford tuition, I guess it’s still subsidized, but it’s not far to say only the wealthy get to take advantage of the tax-free status.

I would be willing to trade the tax-free endowments (i.e., make them pay taxes) in exchange for taxing churches and religious schools. Make them all pay taxes.

Posted by KenG | Report as abusive
 

Aren’t the people who are sending their kids to private school still paying school taxes? And thus, aren’t they indirectly funding the education of poor kids while directly funding their own childrens education?

Posted by Nathan | Report as abusive
 

If the new nonprofit rule is to be that you don’t qualify if you only spend money on things for the middle or upper income strata… Well, there goes the Sierra Club. Nature Conservancy. Greenpeace. In fact, that would disqualify about 95% of the most famous nonprofits out there, and 100% of those sponsored by Hollywood stars.

Oh, sure, you can argue that the Sierra Club saves the wilderness for poor folks too, but we all know they just don’t care that much about that. It’s really for the white-collar urban professionals, to look at on their holidays.

Not that I think this will happen — it will only be those cases where enforcement is politically feasible, meaning the action serves a political purpose, where anything would ever occur.

Doesn’t it make you nervous to have the government decide which organizations are or are not serving the public good well enough? Certainly there need to be some rules about nonprofits, but this smacks more of using political power to enforce a political goal.

Posted by enoriverbend | Report as abusive
 

alright, i’ll admit that if it was up to me.. even the dispensaries in California would have have tax exempt charitable status, i’m pretty much against all taxes.

just seems to me that any potential tax revenue would better serve the public good sitting in an interest bearing account than in the hands of corrupt/inefficient politicians.

there is a long, tough fight worth having.

Posted by dvictr | Report as abusive
 

C’mon…

1) Private schools don’t need to educate the poor. That is the job and structure of a tax based society. Ergo, we are all and already paying to educate the poor.

2) This entire Salmon position and post are an unwashed attempt at class warfare. The rich send their kids to private school and somehow that’s evil. Never mind they also pay taxes into the public education system AND pay above and beyond for private school. Private school also employs many teacher and administrative positions — which go back into the tax base.

America is in great danger. More “opinions” like Salmon are feeding the “wealth is evil” movement. This is extremely dangerous because a.) it creates corrosion in the system and b.) It creates this false “culture” of haves and have nots. It encourages a position of not trying to excel so that you can live the American dream, but to be a shrill hater of people that do excel to live the American dream.

Please excuse my crass announcement. It is what it is though. I didn’t make it up.

There is a saying. In India, a poor person sees a rich persons beautiful home up on a hill. The Indian person says, “someday I will work hard and I too will be rich. Someday I will live on the hill in a home like that.

In Pakistan, the poor person that sees the same house up on the hill in Pakistan says, “Someday I will catch that rich man out of his house. I will beat him and then burn his house”

Articles like Salmon are another inch forward to the mentality of the man form Pakistan.

Posted by toaster | Report as abusive
 

An influx of “poor” students would inevitably result in an outflux of “rich” students and their tuition money, wiping out — and then some — any tax benefits earned by serving the “public good.” This is no doubt the hard realization behind what Felix calls the independent schools’ “whines”.

Posted by Mike | Report as abusive
 

I don’t think there is any reason why any donation or charity should be tax exempt.

Posted by IF | Report as abusive
 

I am with Toaster.
Felix – all you are saying is that you would like to tax “the rich” more.
If schools lose their charitable status, their fees will go up. Since the schools don’t make money and can’t make losses they will have to raise the fees to cover the new tax.
So fees go up. Now either volume drops since fewer parents can afford it – which means their kids go to the state schools and become a COST to the state, or volume remains the same (more likely) and parents just pay more.

If you want the rich to pay more taxes just say so – don’t dress it up in some “help the poor get educated” type bandwagon.

Posted by Tiny Tim | Report as abusive
 

9:42 pm GMT enoriverbend wrote:
“[permalink] If the new nonprofit rule is to be that you don’t qualify if you only spend money on things for the middle or upper income strata… Well, there goes the Sierra Club. Nature Conservancy. Greenpeace…. Oh, sure, you can argue that the Sierra Club saves the wilderness for poor folks too, but we all know they just don’t care that much about that. It’s really for the white-collar urban professionals, to look at on their holidays.”

Reply: I and many other Sierra Club activists believe that wilderness and the life that depends on it are inherently worth protecting — whether anyone visits or not. But you are flaty wrong about just “saving wilderness for white collar professionals.” From the Sierra Club policy on national parks:

(D) (5) Visitation is important, and park planning and management should facilitate visitation by all, including people with disabilities and those at all income levels and ages. Young people in particular need more exposure to nature. Management should seek to attract visitors who reflect the rich diversity of the U.S. and of the world: our parks should welcome visitors from other nations. However, protection of natural resources and wildlife must remain the Park Service’s primary goal.http://www.sierraclub.org/policy/co nservation/natparks.aspx

Posted by David Scott | Report as abusive
 

This proposal appears to be motivated by pure malice. Some people dislike elite schools and want to hurt them by any means available.

Posted by Max | Report as abusive
 

Felix has solid economic theory on his side here. Private schools don’t offer places to smart, poor kids because they’re acting ‘charitably’. They do it because they’re maximising profits.
It might sound insane to suggest that giving away free (expensive) places can be profitable, but there’s a classic AER paper by Dennis Epple and Richard Romano which explains how it works. The theory is heavy, but the intuition is simple:
Schools can charge higher fees to the parents of rich, dumb kids, if they offer free places to smart, poor kids.
Why? Because peer groups matter, and parents know it. Private schools admit smart poor kids for free, and then ‘charge’ richer, less-smart kids for the privelege of sitting next to them. Charity it ain’t.
Much more on my blog: http://www.hundredpockets.com/2009/08/fa ith-hope-and-private-schools/
Apologies for the shameless plug. And more power to Felix – it’s not class war to say that profit-maximisation isn’t charitable…

 

If it weren’t for endowments from former alumni, I wouldn’t have gotten enough aid to attend a private school. Most of my friends there wouldn’t have, either. So I think it was pretty charitable of them.

Is it less charitable that their donations help a few people a lot instead of a lot of people a little?

 

@pockets

Can this “theory” you discuss explains exactly how private schools accept “dumb rich kids” and then also excepts “smart poor kids”?

You’re insinuating that private schools purposely skew the entrance exams to favor “smart poor kids” That is a very large and scandalous accusation. You need to present documented proof of this and then reasonable academic extrapolation. Otherwise, Salmon does NOT have solid economic theory on his side. What he has is a poor attempt at correlating things that aren’t factual to a biased “theory” resulting in a conclusion that is wrong.

I haven’t read your posted literature. Your high level presentation and interpretation was enough to know better.

Posted by toaster | Report as abusive
 

Hi Toaster,
Sorry not to be clearer – I’m definitely not trying to make scandalous accusations. I’m not talking about entrance exams – even the very top UK private schools set the bar very low in terms of grades – I’m talking about scholarship exams. These are the special (extra hard) exams which UK private schools use to allocate their free and subsidised places.
So there’s no ‘skewing’ of the exams required. Poorer children simply cannot afford to attend these schools without a scholarship. So the smartest poor kids sail through the exams and get offered ‘scholar’ places. The less smart kids don’t pass the exams, don’t get offered a subsidy, and so don’t attend the school. Easy.
Obviously a school might worry that *rich* smart kids will snag all the scholarships – but they leave themselves a lot of wiggle room, saying that they award their scholarships ‘based on an assessment of academic merit and financial need’. This means they can offer a bigger scholarship to a poorer child, even if he was beaten in the exam by a child from a richer background. Why? Because the richer child will attend the school anyway (he can afford it), the poorer child won’t.
As for documentary evidence – can I submit myself? I won a scholarship to private school aged 13, and another to university to do my Masters, and I’m hugely grateful for the opportunity I was given. But the very economic theory I learnt in at those schools/unis tells me that they weren’t subsidising my place for ‘charitable’ reasons.
When the Ministry Of Sound (a London nightclub) pays gorgeous models hundreds of pounds to attend its club nights, is that charity? Of course not – it’s profit-maximisation. And the Ministry Of Sound pays tax on its profits. The economic theory is pretty similar in both cases (the seminal paper here is Buchanan’s ‘Economic Theory of Clubs’).
Hey, I’m an economist – I have no problem with profit maximisation. But our tax system doesn’t exempt profits from tax.

 

@ pockets

I’m a little confused by your first statement. You said the regular entrance exams are quite easy, then you said the scholarship exams are “extra hard”. If I’m not mistaken, that is a textbook example of skewing the entrance exams. The rich take the standard easy test and the poor must qualify through a much tougher process. Your system in the UK seems flawed. That isn’t how it works in the US. Not that we have a great system to be sure…

The simple vetting of students would recognize there isn’t an opportunity to provide scholarships to “rich smart kids” The family has the means, the kid is smart. They get in. Financial investigation of the family is part of the entrance procedure.

Look, I’m not able to participate in the argument that private schools let smart kids in so that they can charge more money to the rich kids family. At least not here in the US. I completely disagree with this thesis. Completely. I choose to believe that educators (have a few in my family) are genuinely interested in providing quality education to children. It isn’t really sophisticated. They attract rich families and their children on the overall basis and quality of the education which can’t be driven through the focus of how many smart poor kids they let in. Quality of education is measured upon exit from the school. That would include all students both rich and poor. It isn’t measured by how many poor kids they let in.

My larger concern is this, we around the world are now finding it fashionable to hate and despise the rich. It’s “the new black”. It is extremely dangerous at a cultural level. Parents are now painting — anyone — with even a modest amount of more money than them, as “bad and probably ripped somebody off” to get that money. Then they point to a news story for reinforcement. All because a few egregious individuals do really dumb things and the media loves to run the story. Nevermind, that through hard work, perseverance and intelligence THEY can also have the same things. It is now easier to just say “fcuk the rich, I’ll never have that and I can’t wait for it all to collapse” It is everywhere these days because as I’ve mentioned, it’s become fashionable”

This attempt to out schools as institutions that “maximize profit” on the back of the poor and should lose their tax status because they “don’t do enough to educate the poor” is outrageous. It is but another dangerous step towards societal collapse due to misplaced emotion and fact. Again, very dangerous especially when we start linking this type of thought and action to other initiatives of the same ilk.

What we should be doing is this. We should motivate all kids to be everything they can and nothing can get in their way. If they want a yacht — they can have it. If they want to make $50mm and give away $49mm to charity — they can do that. We should be motivating youth to excel instead of parading their hatred for achievers. This private school debate is an affront to optimism and a tool of the nihilist. We must stop it where it starts. I’m so enraged by this debate, that if it gains any traction here in the US, I will commit serious capital to shout them down, expose their funding and out the individuals involved. It will get very ugly.

Posted by toaster | Report as abusive
 

Pockets – I think your theory is wrong.
Firstly private schools don’t make much, if any, profit.
Of course they aim to maximise revenue but often the fees are set through the competitive pressure of what other schools charge rather than by the mystical quality of who the students might sit next to in class.

Generally there is far more demand than supply for places at “very top” UK private schools. The entrance exams are hard and plenty fail.
My old school no longer gives you any money when you win a scholarship. If you are top in the exam – you win a scholarship – no wiggling. It is merely a status symbol rather than cold hard cash.
If you win a place at the school (either through the entrance exam or the scholarship) you can claim for a hardship subsidy up to 100% of fees – that is means tested.

There is only a finite amount of cash available to subsidise the poorer applicants. Someone has to pay fees.
And clearly there is an equilibrium point at which the fee payers subsidise as many less well-off as possible.
That is the point the school aims for, given that they also need to remain competitively priced relative to other “very top” schools.

Posted by Tiny Tim | Report as abusive
 

@David Scott:

Don’t be too defensive, David. The point was that if we are to judge the Sierra Club by the same standard, then the Sierra Club accountants would have to prove that Sierra Club activities were *sufficiently* serving actual real live poor people, not just that your hearts were in the right place. It wouldn’t be enough that the wilderness was there for all to enjoy, but that proof exists that enough poor people actually took advantage of that availability. That plus any other requirement that politicians may invent.

Posted by enoriverbend | Report as abusive
 

Hi Tiny Tim,
You make very solid points. Though believe it or not, I don’t think you’re disagreeing with the economic theory – I think you’re describing it perfectly.
The system you describe – where first pupils take an entrance exam, then they apply for bursaries – is just another way to arrange ‘price discrimination’ in favour of smarter, poorer children. Only the smarter children pass the entrance exam, and only the poorer ones get bursaries. Job done.

Of course you’re right that the school needs to mix fee payers with the bursary children – not everyone can get in for free, someone has to pay. So the school mixes its bursaries and fee-payers to reach some ‘optimum’ point. Far from contradicting economic theory – that’s what it predicts!

If you want to see a cool picture of this (in an extraordinarily technical paper, but ignore that), check out Epple and Romano’s paper here:
http://faculty.smu.edu/millimet/classes/ eco7321/papers/epple%20romano.pdf
There’s a diagram on page 48 (‘Figure 1′) which illustrates exactly the system you just described. The graph has pupils’ ability on the x-axis, and their parents income on the y-axis. Lines going diagonally across that space show different schools, which have ‘sliced’ a group of pupils from this space. So the very top private school (School number 4, top right) simultaneously has the very richest kids, and some extremely smart poor kids (think of it as, say, Eton). The next private school down (school 3) has some slightly less rich kids, and some slightly less smart poor kids (call it, I don’t know, Winchester). Each school, in competition with the others, is creating an optimum ‘mix’ of smart and less-smart, rich and poor. Exactly what you describe in your comment!

This diagram pretty much perfectly describes the behaviour of competing UK private schools (Epple & Romano’s paper takes into account the fact that private schools have to compete for pupils). And the schools are purely profit-maximising. No charities here…

If you wanted to convince me of a private school which is acting charitably, not profit-maximising, then you’d have to describe a system where pupils take the entrance exam – and then the *low*-scoring poor children are offered bursaries. That’s a school which is gambling on its ability to raise standards among disadvantaged kids. But no private school does that, and with excellent reason: the cost could be lower league table results for the school – and as you say, private schools are in competition. GCSE and A-level league table results are critical for being able to set a high price.

I should emphasise that I’m not at all anti-private-school. UK private schools are among the best schools on the planet, and I was lucky enough to attend one. Saying that they maximise profits isn’t saying that they’re manipulative or evil or bad (I wonder if this is what’s annoying people?). They’re staffed with many lovely, caring individuals (like lots of other profit-maximising companies!), and through scholarships/bursaries they offer a great trade to smart poor kids – we’ll give you an amazing education, if you allow us to charge other kids to sit next to you.

There’s nothing wrong with that at all! Economists love trade. It just isn’t charity, that’s all. And Felix’s post is about whether private schools deserve charitable status. All I’m saying is: giving scholarships to poor kids is not charity for private schools. It’s a key part of their business model. So it probably does not warrant tax-exempt status.

And I’m certainly not convinced that the entrance exams are exacting for richer kids. Prince Harry went to Eton, the very top school in the country, and he gained exactly two A-levels – a B in Art, and a D in Geography. There are many things to admire about Harry (he not only fought in Afghanistan, but fought to be *allowed* to go to Afghanistan, for Pete’s sake) – but his intellect is not one of them. I know many poorer kids who got straight A’s in four or more A-levels. None of them were as rich as Prince Harry. None of them went to Eton…

 

enoriverbend is right on here. There are thousand of worthy causes that we collectively support (arts, knowledge advancement, historical preservation, liberty, etc.) and helping the poor is just one slice of the pie.

Posted by Dan | Report as abusive
 

This is an interesting discussion. I was born in the UK, libe in New York, where my children attend a public school. The public school that they attend has an entrance test (essentially an IQ test) and only children scoring above 99th percentile are offerred places.

Unsurprisingly, the population is ethnically diverse, largely middle class, and performance is off the charts.
Of the 70+ private schools there are perhaps two or three
that would offer an education that is equally stimulating,
though they are hampered by a student cohort that is less talented (though richer).

I’m familiar with the Dulwich effect, having lived in Peckham, Camberwell and East Dulwich, though I suspect that its overstated. I agree that private schools should be taxed, but I do not agree that they have a substantive effect on the performance of public schools.

Posted by Peter Booth | Report as abusive
 

I don’t disagree with the notion that smart-poor kids are given scholarships to boost a school’s ‘grade rating’ to help draw richer families to enroll with them. What I do disagree with is the taxation of ‘profit’. These schools make very little money, and any moeny they do make is re-invested back into the school. It’s not like the CEO of private school X is taking home an eight-figure payday.

Bottom-line: the best should be given the chance to do their best, and to fill the rest of the spots available – in this society – it makes sense that those should go to those that can pay the most.

Posted by the Shah | Report as abusive
 

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