Wednesday, November 11, 2009
Tax Prof Herwig J. Schlunk (Vanderbilt) has posted Mamas Don't Let Your Babies Grow Up To Be...Lawyers on SSRN. Here is the abstract:
This essay treats a legal education as an investment, and asks the question of whether, based on known costs and expected benefits, such investment should be undertaken. The inquiry will necessarily differ from one potential law student to another. But for three posited “typical students,” the investment is shown to be a bad one. ...
Based on 2009 tax rates, the following table presents the foregone after-all-tax income of each of my potential law school attendees during his first year of gainful employment.
... The table also presents the salary-level that would have been attained by the start of the fourth year, i.e., the year in which a law graduate enters the workforce.
I assume that each of my law school graduates has an expected 35-year legal career. I also assume that the incremental earnings from a law degree are earned as an annuity with a 3.5% annual growth factor reflecting increased productivity. The question is: what must be the initial payment of such annuity in order to justify the investment made in the law degree? The answers are surprisingly high, as can be seen in the following table:
What does this mean? Suppose we convince ourselves that 18% is the appropriate discount rate. Then Solid Performer would need to expect to earn, on average, $36,449 more in his first year of legal employment than he would have earned had he not gone to law school. Given that his hurdle compensation is $87,312, it follows that he must expect to earn $123,761 in his first year. Moreover, the $36,449 wage differential would need to be maintained, and indeed increased at a rate of 3% per annum, throughout the remainder of his career. The following table sets forth the result of this same calculation of the required expected first year compensation for each of my three hypothetical individuals:
The title, of course, brought to mind my article, Tax Myopia, or Mamas Don't Let Your Babies Grow Up to be Tax Lawyers, 13 Va. Tax Rev. 517 (1994).
Update: New York Times, Law School as an Investment.