American Opportunity Tax Credit, Simulated Instrument
Introduction
Enacted in 2009 as part of the American Recovery and Reinvestment Act, the American Opportunity Tax Credit (AOTC) expanded the eligibility for tax credits on higher education tuition and fees for both high- and low-income families. The legislation provides tax credits equal to 100% of the first $2,000, plus 25% of the next $2,000 (for a maximum of $2,500), for qualifying postsecondary tuitions and fees for each of the first four years of postsecondary education.
The amount of AOTC depends on income in a piece-wise linear fashion. Bulman and Hoxby (2015) use kinks in the phase-out schedule of the AOTC as well as a simulated instruments design to estimate the impact of tax credits on college enrollment. This MVPF estimate uses the results from the simulated instrument design. Bulman and Hoxby (2015) instrument the use of tax credits with the eligibility for the credits before the enactment of the AOTC. Their simulated instrument predicts the households that would be eligible or ineligible for the AOTC before 2009, which allows for the implementation of differences-in-differences estimation.
In general, Bulman and Hoxby (2015) find that the AOTC did not have a statistically significant impact on college enrollment outcomes. That said, the effects can still be translated into their implied MVPFs with their implied confidence intervals. Hendren and Sprung-Keyser (2020) take the causal estimates from Bulman and Hoxby (2015) and project the impact of the AOTC on lifetime earnings and tax revenue. They utilize estimates from Zimmerman (2014) on the impact attendance of college on earnings and assume that the returns to college are constant in percentage terms over the lifecycle.
MVPF = 10.0
Net Cost
Bulman and Hoxby (2015) estimate that the first stage of their simulated instrument for eligibility is $0.38, which we take to be the programmatic cost associated with the policy. The second stage regression finds an increase in college attendance of 1.4 \cdot 10^{-5} percentage points. Hendren and Sprung-Keyser (2020) forecast this into its implications for lifetime tax revenue, suggesting an increase of $0.449. To arrive at cost, they also sum the increase in cost for government subsidies in college enrollment of $0.273, which on net implies a cost of $0.203.
Willingness to Pay
Hendren and Sprung-Keyser (2020) measure the willingness to pay for the credit using the impact of the credit on after-tax income. They incorporate the payment of tuition while in college, the foregone after-tax earnings while in college, and the increased after tax earnings after college. On net, they estimate an impact of $2.04.
MVPF Summary
The WTP of $2.04 and cost of $0.203 implies an MVPF of 10.05. The 95% confidence interval is [-18.36,\infty]. For context, if the AOTC had no effect on college attendance, we would expect the MVPF of this policy to be around 1 (the AOTC would simply be a tax cut that induced a muted behavioral response). As these calculations show, the observed causal effect of the AOTC policy is a sufficiently large MVPF estimate that deviates meaningfully from 1. That said, the confidence interval around the estimate is quite large and so we cannot rule out an infinite MVPF or an MVPF of 0. In other words, this means that one cannot statistically rule out that the AOTC either pays for itself or provides no benefit to the beneficiaries, and suggests the value of further work to increase the statistical precision of the impact of the AOTC.
References
Bulman, George B. and Caroline M. Hoxby (2015). “The Returns to the Federal Tax Credits for Higher Education.” Tax Policy and the Economy, 29(1), 13-88. DOI: https://doi.org/10.1086/683364
Hendren, Nathaniel and Ben Sprung-Keyser (2020). “A Unified Welfare Analysis of Government Policies.” The Quarterly Journal of Economics, 135(3): 1209–1318. DOI: https://doi.org/10.1093/qje/qjaa006
Zimmerman, Seth D. (2014). “The Returns to College Admission for Academically Marginal Students.” Journal of Labor Economics, 32(4), 711-754. DOI: https://doi.org/10.1086/676661
Policy Features
- Category
- Education
- Sub-Category
- College Adult
- Beneficiary Type(s)
- Adults, Children and Youth, College enrollees, Parents, Students
- Average Age
- 20
- Average Income
- 33234
- Country of Implementation
- United States
- Year of Implementation
- 2009
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- No
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614