Tax Deduction for Postsecondary Tuition, Joint Filers at Phase Start
Introduction
The tax deduction in tuition and fees (DTF) was implemented in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act. Under this program, households could deduct tuition and fees paid for undergraduate or graduate education from gross income without needing to itemize deductions. Households are eligible to use the DTF based on adjusted gross income (AGI) net of all other above-the-line deductions. Beginning in 2004, the maximum deductions followed a tier system in which joint (single) filers with eligible income of less than $130,000 ($65,000) were eligible for a $4,000 maximum deduction, while households with eligible incomes of $130,000-$160,000 ($65,000-$80,000) were eligible for a $2,000 maximum deduction. Households above $160,000 ($80,000) were ineligible for the deduction. The change in tax liability is based on whether the household claimed DTF scaled by the marginal tax rate at their income level.
Hoxby and Bulman (2016) exploit income eligibility thresholds to estimate the impact of the above-the-line deduction of tuition and fees on enrollment. They use a regression discontinuity design but leave out observations right around the threshold to account for the possibility of manipulation in the running variable. This MVPF estimate considers the MVPF implied by the discontinuity faced by joint filers with incomes near $130,000.
Hendren and Sprung-Keyser (2020) take the causal estimates from Hoxby and Bulman (2016) and project the impact of the tuition deduction 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
Hendren and Sprung-Keyser (2020) calculate net costs beginning with the direct cost of the tax deduction. This is estimated at $286, which is the average deduction claimed of $1,023 multiplied by the marginal tax rate of 28% at $130,000. They then include three additional fiscal costs. First, they estimate the cost of increased educational attainment, net of private tuition payments, using data from the Delta Cost Project in 2011. This yields an enrollment cost of $25. Second, they account for the changes in taxes paid and transfers received based on the earnings gain calculated in the willingness to pay section. This gives a $89 decrease in government revenue. Finally, they incorporate changes in government educational spending as the tax deduction induces individuals to attend more (or less) costly institutions. These are costs due to changes in the composition of colleges attended by those receiving the deduction. Hoxby and Bulman (2016) provide estimates of the change in core educational costs and the change in tuition paid by the students at the discontinuity. The difference between these two measures is the average change in government educational costs from compositional changes in schooling. Hendren and Sprung-Keyser (2020) calculate this cost to be to $44. Adding that value to the other costs components, the total net cost is $396.
Willingness to Pay
Hoxby and Bulman (2016) find that at the $130,000 discontinuity, households are estimated to claim $1023 less
in deductions. The second stage regression finds that, at the discontinuity, college attendance decreases by 0.003 percentage points amongst students that graduated high school in the previous year. To calculate the willingness to pay, Hendren and Sprung-Keyser (2020) transform the effect of college attendance into additional years of schooling by assuming that individuals who enroll complete two additional years of college education on average. They then use estimates from Zimmerman (2014) to estimate the impact on lifetime earnings, combined with an assumption of a constant earnings impact over the life cycle. They then calculate post-tax and post-transfer earnings by assuming a tax and transfer rate of 18.9% (based on estimates from the Congressional Budget Office). They then subtract out the individual contribution to tuition, which is estimated by the average tuition net of aid using data from the Delta Cost Project for 2006 (the midpoint between 2004-2008, the period studied). The projected earnings gains provide the willingness to pay for all individuals induced to change their behavior and receive more education as a result of the tax deduction. They calculate total willingness to pay by summing those earnings gains with the value of the transfer for the fraction of individuals not induced to change their behavior. The WTP is -$8, driven by a $385 decrease in post-tax earnings and $90 decrease in private tuition contributions, and a transfer value of $287.
MVPF Summary
Combining the net cost and willingness to pay estimates, the MVPF is -0.02, with a 95% confidence interval of [-2.50,5.52].
References
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
Hoxby, Caroline M. and George B. Bulman (2016). “The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid”, Economics of Education Review, 23-60.
https://www.sciencedirect.com/science/article/abs/pii/S0272775715001326
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
- 116423
- Country of Implementation
- United States
- Year of Implementation
- 2006
- Empirical Method
- Regression Discontinuity
- Research Type
- Secondary
- Peer Reviewed
- Yes
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614