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 single filers with incomes near $80,000.
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.
Pays for Itself
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 WTP is $146.72, driven entirely by the change in deductions claimed.
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.
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