Tax Deduction for Postsecondary Tuition, Single Filers at Phase End

Hendren and Sprung-Keyser (2020) calculate net costs beginning with the direct cost of the tax deduction. This is estimated at $146, which is the average deduction claimed of $524 multiplied by the marginal tax rate of 28% at $80,000. There is no need to adjust the calculation for changes in future government revenue. The second stage regression finds that, at the discontinuity, college attendance does not change amongst students that graduated high school in the previous year (i.e., the point estimate of the effect is 0). The lack of any enrollment changes means that the policy doesn’t impact incomes and doesn’t affect costs through changes in future tax revenue. There is, however, a decrease in government educational costs as individuals attend different schools in response to the policy. That yields a total net windfall to the government of $165.7.

The policy has a positive willingness to pay and a negative cost, meaning it has an infinite MVPF. But, it has a wide confidence interval of [-\infty,\infty]. For context, if the policy had no effect on college attendance or college costs, we would expect the MVPF of this policy to be around 1 (the policy would simply be a tax cut that induced a muted behavioral response). As these calculations show, the impact of the policy on schooling expenses is sufficiently large that the MVPF estimate 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 policy 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 policy.