One of America’s top think tanks has produced a new paper pushing for the elimination of tax credits targeted at education.
The Tax Foundation, which focuses on optimizing the country’s approach to taxation policy, argues that tax credits, which work by offering set deductions on owed taxes for people who meet certain requirements, are a particulalry poor way to promote college education, offering a “windfall” for universities while failing to help the most needy students.
Federal education tax credits are growing in popularity, with 7 million taxpayers claiming them as of 2011 to the tune of $17.4 billion a year, up from 4.7 million and $4.5 billion in 1998.
Despite the amount of money dispensed, though, it is failing to make college any more affordable, says Tax Foundation economist Kyle Pomerlau, who coauthored the work.
Thanks to their ability to charge a different price for every student and their detailed knowledge of students’ incomes based on financial aid applications, Pomerlau says that schools can engage in “perfect price discrimination,” tweaking their tuition amounts and financial aid packages to capture the value of tax credits for themselves.
Colleges collect more money, while students end up paying almost the exact same amount they would otherwise.
“This is more of a windfall for universities than for students,” Pomerlau told The Daily Caller News Foundation.
Pomerlau said another problem with using tax incentives is that they fail to reach the poorest individuals most in need of help. Many low-income individuals do not understand the intricacies of the tax code and fail to take advantage of benefits offered them, he said, while wealthier families, who are more likely to employ professional accountants, are more likely to take advantage of such opportunities.
“Individuals have to know the program exists…and low-income families are less likely to know the credits are available,” Pomerlau said.
As a result, about 30 percent of education tax credit benefits go to taxpayers earning over $100,000, and another 18 percent goes to those earning between $75,000 and $100,000. Less than half are for taxpayers earning less than $50,000. The division is stark enough that the Foundation suggests it amounts to “reverse redistribution up the income ladder.”
A better way to promote education, the Tax Foundation argues, would be to simply expand direct payment programs such as Pell Grants, which directly give money to students who qualify, rather than operating directly through the tax system.
Pomerlau said one advantage of direct payments is a pragmatic one, in that spending programs are more scrutinized for effectiveness by both the government and outside watchdogs, making them less vulnerable to wasting money. Furthermore, removing a source of complexity from the federal tax code would reduce the rate of erroneous or fraudulent deductions on IRS tax returns.
“The overuse of tax credits has turned the IRS into an extension of—or substitute for—other government agencies. The IRS is not equipped to be a social welfare agency,” the paper argues.
The Tax Foundation’s call fits within a wider drumbeat for tax reform in the United States, with many different interest groups promoting a major reduction in the number of tax credits and deductions, which could be offset by an overall cut in tax rates.
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