American Opportunity Tax Credit, Single Filers at Phase End
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 considers the MVPF implied by the kink in the AOTC schedule faced by single filers at the end of their phase out region at $90,000. The phase out rate is linear around this income level, which allows Bulman and Hoxby (2015), to exploit the discontinuous change in the slope of the benefit schedule to study the impact of tax credits for households with income near these kinks for 2011 tax filers.
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.
Provides No Benefit on Average
Net Cost
Bulman and Hoxby (2015) find that at the $90,000 kink point, a dollar decrease in income leads to a $0.216 increase in credits claimed by the household. In addition, Hendren and Sprung-Keyser (2020) include the cost implications from increased college enrollment. This includes the cost to the government of paying for a portion of college tuition along with the net increase in future tax revenue from the increased earnings of those who go to college. On net, Hendren and Sprung-Keyser (2020) estimate a net cost of $0.242.
However, there is substantial statistical uncertainty in these cost estimates. When confidence intervals are considered, the $0.242 total cost of the program is not statistically distinguishable from the $0.216 up front cost of the program.
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 -$0.003, which is not statistically distinguishable from 0 or the mechanical cost of the policy of 0.216. .
MVPF Summary
The WTP of -$0.003 and cost of $0.242 implies a negative MVPF of -0.016, which suggests the AOTC delivers no benefit to single filers who earn near $90K. The 95% confidence interval is [-2.25,\infty], which includes 0 and \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
- 55
- Average Income
- $55480
- Country of Implementation
- United States
- Year of Implementation
- 2011
- Empirical Method
- Regression Discontinuity
- Research Type
- Secondary
- Peer Reviewed
- No
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614