Higher Tuition, More Grade Inflation
In many applications, small data sets make it challenging to precisely identify such a kink in the data. But with millions of observations at their disposal, the authors are able to conclusively reject any effect of the tax credits. In other words, there were no kinks in enrollment at the point that tax credits fade-out.
In another paper, Bulman and Hoxby use a regression-discontinuity design to estimate the effects of the tuition tax deduction for families around the maximum income cutoff for eligibility. 2 Again, they find no evidence that the deduction increases college enrollment. They also find no effect of the deduction on enrollment intensity, college choice, tuition paid, or student debt.?
Why no effect? Tax credits and deductions priilies, whose decision on whether to send their kids to college is unlikely to be affected by a tax benefit that is relatively small in relation to their income or the costs of college attendance.
One Percent for the Kids
Another possible explanation is that the credits are delivered too late to affect enrollment. Families get their tax refunds well after tuition is due; a family who pays tuition in September won’t get a tax credit http://getbadcreditloan.com/payday-loans-wv/fairmont until at least the following January. At that point the credit is a nice windfall but has arrived too late to help with paying the tuition bills.
The complexity of the tax benefits also likely undermines their effect. We discuss this in greater detail in a paper that provides a comprehensive overview of the tax benefits for education. 3
An alternative way of looking at tax benefits for education is that they are a transfer program for middle-income families, putting more money in their pockets for all manner of expenditures, not just the costs of college. But they are ill-designed for that purpose, since they impose extensive administrative burdens on households, colleges and government. Reducing the tax rates applied to these families would be a more transparent and less expensive approach to achieving this goal.
If the billions spent on the tax benefits are to have any effect on college attendance, they should be delivered when tuition bills are due. One proposal, suggested by Hoxby and Bulman, is to compute eligibility for the credits automatically, using income tax information when a dependent approaches college age. Families could then be proactively notified of their eligibility. The authors also suggest that colleges file to receive the benefits directly from the IRS, so that a student need only present evidence of eligibility in order to have their account credited immediately.
An even more comprehensive approach would be to consolidate the tax credits with the Pell Grant, creating a single grant program that pays college costs at the time of enrollment. Eligibility could automatically be calculated using tax data, with funds delivered by the Department of Education. Families could apply by checking off a box on their tax forms. This approach would cut back substantially on paperwork, a relief for the millions of students who complete both the 1040 and the Free Application for Federal Student Aid in order to get federal grants, loans and tax credits for college.
Streamlining the tax benefits for education could potentially enhance their efficiency. At a minimum, a simpler system of education tax benefits would decrease the administrative and time costs of transferring funds to households with postsecondary expenses. At best, simplification would clarify incentives and increase investments in human capital.
The authors did not receive any financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.