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Posted at 01:49 PM ET, 06/24/2012

What U-Va needs after the Sullivan mess

This was written by David Shreve, former Professor of Economic History at the University of Virginia, and a specialist in tax policy, fiscal federalism, and U.S. political economy. He is the editor and co-editor of seven volumes in The Presidential Recordings series (Norton) and the author of the forthcoming book, American Promise: The Triumph and Eclipse of the Keynesian Revolution.

By David Shreve

“I think by far the most important bill in our whole code is that for the diffusion of knowledge among the people....the tax which will be paid for this purpose is not more than the thousandth part of what will be paid to kings, priests, and nobles who will rise up among us if we leave the people in ignorance.” Thomas Jefferson to George Wythe, 1786

“Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.” Jefferson to James Madison, 1785

Members of University of Virginia’s Board of Visitors based their call for “strategic dynamism” and their ouster of President Teresa Sullivan on seriously flawed ideas about tax policy, about what states can and cannot do in this realm, and about what this means for the financing of the nation’s great public universities.

The board’s thinking reflects the shortsightedness, timidity, and economic policy misunderstandings displayed by similar boards throughout the nation. Connected to this are related myths about the privatization of public services and the meaning of “business practices” as they might be applied in a public undertaking such as the University of Virginia, partially privatized or not.

The simplest and most critical misconception of all is the notion that state tax systems, including Virginia’s, cannot be expected to yield much more revenue than they presently generate without also imposing great costs upon the state’s economic vitality.

Indeed, if this were true, much of what U-Va Rector Helen Dragas noted in her latest “Message from the University Rector,” could not be dismissed without serious introspection on the part of all Virginians, to whom the university belongs and for whom it must be sustained and protected.

While this would still not make legitimate the firing, the secrecy in which it was carried out, or the board’s inept assessment of President Sullivan’s record, it would have to serve as a cause for serious deliberation and for the thoughtful re-examination of the university’s financial model.

But it warrants none of this, for Dragas’s defense and the “new model” it recommends in place of the old, is based upon a serious misconception, derived from faulty economic theory, an almost complete ignorance or misreading of economic history, and a shallow appraisal of the “virtues” allegedly carried by the “new model.”

Indeed, state tax systems can be changed dramatically, and since they are so uniformly upside-down (imposing higher overall rates on the poor compared to the wealthy, in all 50 states), there is abundant room for tax reform that simultaneously 1) raises substantial sums of new revenue; 2) provides greater support for critical public investments on which community vitality, business success, and capitalism in general always depend; and which 3) provides ample social, political, and marketplace rewards, especially for those compelled to pay higher rates.

It cannot be said clearly or loudly enough: An equitable and progressive tax system foundation is an essential part of overall economic success. You either lay such a foundation and help everybody, or you do not and you wind up harming or limiting the opportunities for everybody. Right-side-up, progressive tax policy, based on ability-to-pay and a gradual but very broad progressive rate schedule, creates widespread prosperity. Essentially not a zero-sum game, such policy does not take from the “haves” only to give to the “have-nots,” but represents, instead, the best way to pay for things that everyone needs and to do so also in a way that best supports ongoing business investment and economic activity.

In a June 17 Daily Progress op-ed, I suggested just how much new revenue this kind of tax reform might generate, basing the calculation on a paper I co-authored with Karen Kraut and Shannon Moriarty (of United for Fair Economy in Boston), which can be read here: Flip It to Fix It. At $7 billion per annum, it is no small number, sufficient to boost the annual appropriation to the University of Virginia (reckoning on the basis of U-Va’s recent share of the state’s general fund) by 167 percent.

And while it is based on the unrealistic assumption that Virginia legislators consider first what is best for the state, its institutions and its people, it is also based upon the credo John Maynard Keynes’s biographer, Robert Skidelsky, attributed to Keynes: ruthless truth-telling first; the compromise between truth and politics later.

The truth in this case? That there exists a proven, ready-made answer to what Helen Dragas termed U-Va’s “strategic challenge,” and that it comes in the form Dragas and her many allies consider a source with no prospects for change or improvement.

It is quite simply a boost in state general fund appropriations generated by economy-enhancing tax reform, a boost that would simultaneously enhance funding adequacy and stability, and which would also ensure that the university need not sell itself into risky “pay-to-play” schemes, into a tacit endorsement of “benefactors” whose fundamental practices benefit few or none, or into a deep financial dependence upon the kind of wealth that depends itself upon an ultimately self-defeating model that treats up as down, inequality as efficiency, and value extraction as value-added.

Without pondering why leaders such as Dragas cannot see this (Voo-doo economics, anyone?), the least we can do in these all-too-rare debates about how to finance important public structures is to take a good, hard look at the means of finance that are allegedly so resistant to change or improvement — not because our politicians have been trained to ignore the common good or because they have been thoroughly mis-educated in basic economics and economic history, but because we are told that potential reform is simply unwise, or inefficient, or counterproductive.

As I also noted in the Daily Progress op-ed, quoting Samuel Clemons, “It’s not what you don’t know that gets you into trouble, it’s what you know for sure that just ain’t so.”

In case after case, throughout our nation’s history, progressive tax reforms, small and large, have always moved us toward greater prosperity and economic stability, with surpassing benefits for the citizens who pay the highest rates. And regressive changes — often introduced in stealth, by passing the buck to a different level of government, by raising hidden fees and charges that do not appear to be taxes, and by making citizens pay privately what they used to finance together — always do the opposite. There is no compelling reason, therefore, not to restore the “appropriations model” simply by beginning to move in the direction of progressive tax reform.

As warranted, by emerging specialty, experimentation, or unique ties to closely related markets, entrepreneurial academic ventures could readily be placed atop such a structure, as they have been before. In such an arrangement — analogous to the mid-20th century oligopoly with the ability to engage in expansive R&D, to countenance experimental labor arrangements (like the recruitment of women and minorities, or the recognition of stakeholders outside of the corporate shareholder community), discovery and productivity have always flourished in far greater measure than within the more atomized, comically extractive model we’re told we now have to embrace.

Unable to recognize much of this, the U-Va Board of Visitors did not do “the right thing the wrong way,” as Dragas has asserted once again, but has, instead, simply presented the citizens of the Commonwealth with a Hobson’s choice, having pretended that we can ride any horse we want, but, if we are wise, it really has to be the one they’ve groomed and saddled for us. Just don’t plan on riding it very far, crossing any of the rocky creeks up ahead, or jumping any of the fences in the meadow.

They’ve even hinted, of course, that we may lack sufficient feed for this one, and that we should make plans to use a virtual horse as often as we can. Virginians should understand that this an untenable and wholly unnecessary choice; reinvigorated by tax reform that we need anyway, the allegedly outmoded appropriations model is perfectly well suited for the financing of any great public university, including Mr. Jefferson’s.

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