Tax Reform and Foreign Students

I have made frequent reference to a 1989 internal document at the National Science Foundation, our federal government’s primary science agency. The author pointed out that liberalization of immigration policy pending at the time (the bill, which among other things established the H-1B work visa, was enacted the following year) would, in essence, drive American students away from STEM graduate study, as the foreign influx would suppress wage growth for doctorate holders. This forecast proved to be correct.

I’ve also pointed out that the prevalence of international students would grow even further if “Staple a Green Card to Their Diplomas” legislation were to be enacted, under which all foreign graduate students in STEM would in essence receive automatic green cards.

The tax reform plan passed this week by the House would have the effect of making U.S. universities even more dependent on foreign students, because it would count as taxable income the tuition waivers given to most PhD students. How so? Well, a little known fact is that most nations that send large numbers of foreign students to the U.S. are covered by a tax treaty. For instance, students from China and India, the two nations with the largest foreign student populations in the U.S., are basically exempt from paying income tax.

In other words, some American students who would otherwise have pursued a PhD would now choose not to do so, while there would be no impact on the international students. Result: Universities would depend even more on foreign students than they do now.

I am neutral on the tax bill (though I oppose Staple and think the number of work visas sand employment-based green cards should be reduced), as I simply don’t know enough to have a truly informed opinion. But there would be an adverse effect on something on which I am quite well-informed, as explained above.

Update, November 22: As I mentioned above, the tax code is extremely complex. My analysis above is oversimplified. Apparently foreign students are not completely exempt from paying tax, though post docs apparently are. But clearly, the impact would be as I described, though possibly much smaller in general.

Also, the universities could react to this aspect of tax reform in various ways, such as declaring research assistantships as scholarships, which are not taxable. MozView points out that then the universities would not be able to require the students to do research, but that is not a problem; the students are doing the research for their PhD dissertations, so they have to do the work anyway.

Also, most universities have a status known under various names, e.g. Advancement to Candidacy, bestowed when a PhD student has completed coursework and is now just doing his/her research. Under that status, students pay greatly reduced tuition. My guess is that universities will simply relax the rules on that status.

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11 thoughts on “Tax Reform and Foreign Students

  1. Why are we just now hearing about the Indian and Chinese tax treaties????? I knew they were exempt from FICA while working on OPT and CPT. If they do not have to pay income taxes as well, our graduates don’t have a chance at getting a job.

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  2. How many of American students of all ethnic backgrounds are displaced from graduate programs because the large number of foreign born faculty choose their countrymen for openings. They are obviously displaced from postdoc and research positions because the foreign born faculty visit their home countries to recruit on university funded travel but do not do any recruiting in the US. (Yes I have proof of their travels charges to federal grants.)

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  3. 35 years ago when I went to college, both my undergrad scholarship and my graduate fellowship were tax-free. That included my monthly stipend that was over and above tuition and fees. Since then, the Feds have decided that this “income” (which, except for the stipend, the college moves from one pocket to the other, and is never actually in the students’ pockets) should be taxable. For example, a grad student assistanceship is often FULLY taxable. See this –

    In this case, the tax rules are different. That’s because scholarship or fellowship money that represents compensation is taxable ā€” regardless of how the money is used. So, even if a $20,000 teaching assistant fellowship went primarily to pay for tuition and books, that $20,000 would still be considered taxable income.Feb 25, 2015

    However, the situation is different for athletic scholarships — only the payments in excess of tuition is taxable!! So that means that athletes are given favorable tax treatment not available to academic scholars. For some reason, this discrepancy is never discussed in the public debates about “paying athletes”. See this –

    Only the tuition portion is tax-free. If the scholarship doesn’t designate a specific expense, it’s taxed or not taxed based on what the athlete does with the money. If the athlete uses all of a $15,000 scholarship for tuition, it’s all tax-free. However, if she used 5,000 for room and board, all $5,000 is taxable.

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  4. Wow! I thought a tuition waiver means that an out-of-state student is charged the in-state rate.

    Universities claim to like international students because they pay full-freight tuition. Then why are universities giving them tuition waivers?

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  5. > The tax reform plan passed this week by the House would have the effect of making U.S. universities even more dependent on foreign students, because it would count as taxable income the tuition waivers given to most PhD students.

    Fortunately, a story at http://www.washingtonexaminer.com/senate-tax-reform-markup-opts-to-keep-tax-exemption-for-graduate-students/article/2641440 states that “[t]he Senate tax plan keeps tuition waivers as a tax exemption – unlike the plan passed by the House last Thursday.” Of course, there’s no telling what will come out of conference between the House and Senate. What I’m bothered most by is how Congress is trying to push as tax bill through quickly, before anyone can take a close look at it. I’ve started following key articles and analyses of the plans and posting links to them at http://econdataus.com/taxbills17.htm . Personally, I’d prefer that they just change the corporate taxes in a revenue-neutral way and leave the individual taxes alone. At the very least, they should not be pushing through radical changes. If they insist on making major changes to individual taxes, it would seem wiser to discuss them more fully and/or phase them in to see their effect. The current approach seems very “nonconservative”.

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  6. Only students from China and India (and maybe a few other countries) can enjoy the benefits of tax treaty. Those from other countries will certainly be expelled because they cannot afford the tax.

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    • Are there other students besides those from China and India? šŸ™‚

      If the tuition rule is in the final bill, which I doubt, the universities will take their own measures to fix it, such as renaming research assistantships “scholarships,” which is what they are anyway.

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