Nowadays there are many advocates for both individual and corporate tax reform. I have had several posts recently on this issue. A new report from the Tax Foundation “Is the Tax Code the Proper Tool for Making Higher Education More Affordable?” make a compelling argument that it is futile to try to do this.
- Education tax credits have grown from a $4.5 billion program for 4.7 million taxpayers in 1998 to a $17.4 billion program claimed by over 7 million taxpayers in 2011.
- Education tax credits are not well targeted toward low- and middle-income families; almost 50% of the benefits accrue to taxpayers earning more than $75,000, often much more. A much more sensible way to target low income students would be to increase Pell grants.
- The overuse of tax credits by the federal government has turned the IRS into a spending agency, with refundable tax credits projected to double to nearly $200 billion in the next five years.
- Trading the elimination of education tax credits for lower marginal tax rates would grow the economy by $19 billion per year and create 121,000 new jobs.
The authors go on to say: “It is likely that instead of helping, tax credits may be contributing to the rising cost of college education. Colleges are what economists call price discriminators because they can maximize the price that each student can pay. Because of the Free Application for Federal Student Aid (FAFSA), the college has intimate knowledge of each student’s (or family’s) income and if they are eligible for tax credits, loans, or other financial aid. This information allows the college to simply adjust its financial aid package in order to capture the maximum value of the tax credit. Instead of being a helping hand for students, tax credits have turned into a windfall for universities.”
There are many, many reasons to reform the tax code. The education tax credit is just one very good example!