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The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid

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  • Caroline M. Hoxby
  • George B. Bulman
Abstract
The federal tax deduction for tuition potentially increases investments in postsecondary education at minimal administrative cost. We assess whether it actually does this using regression discontinuity methods on the income cutoffs that govern eligibility for the deduction. Although many eligible households take nearly the maximum deduction allowed, we find no evidence that it affects attending college (at all), attending full- versus part-time, attending four- versus two-year college, the resources experienced in college, the amount paid for college, or student loans. Our analysis suggests that the deduction's inefficacy may be due to issues of salience, timing, and the method of receipt. We argue that the deduction might increase college-going if it were modified in simple ways that would not increase costs but would make it more likely to relax liquidity constraints and be perceived as a price change (which they is) as opposed to an income change. We outline how such modifications could be tested. This study has independent applied econometrics interest because households who would be just above a cut-off manage their incomes so that they fall slightly below it. This income management generates bias due to reverse causality, and we explore how to choose "doughnut-holes" that avoid bias without undue loss of statistical power.

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  • Caroline M. Hoxby & George B. Bulman, 2015. "The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid," Economics Working Papers 15114, Hoover Institution, Stanford University.
    • Handle: RePEc:hoo:wpaper:15114
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    References listed on IDEAS

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    Cited by:

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    2. Kristy Fan & Tyler J. Fisher & Andrew A. Samwick, 2021. "The Insurance Value of Financial Aid," NBER Working Papers 28669, National Bureau of Economic Research, Inc.
    3. Murat G. Kırdar & Meltem Dayıoğlu & İsmet Koç, 2018. "The Effects of Compulsory-Schooling Laws on Teenage Marriage and Births in Turkey," Journal of Human Capital, University of Chicago Press, vol. 12(4), pages 640-668.
    4. Miguel A. Ferreira & Marta C. Lopes & Francisco Queiro & Hugo Reis, 2022. "Which entrepreneurs are financially constrained?," Nova SBE Working Paper Series wp647, Universidade Nova de Lisboa, Nova School of Business and Economics.
    5. Wiljan van den Berge & Egbert Jongen & Karen van der Wiel, 2023. "The effects of a tax deduction for lifelong learning expenditures," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 729-756, June.
    6. Titus J. Galama & Robson Morgan & Juan E. Saavedra, 2017. "Wealthier, Happier and More Self-Sufficient: When Anti-Poverty Programs Improve Economic and Subjective Wellbeing at a Reduced Cost to Taxpayers," NBER Working Papers 24090, National Bureau of Economic Research, Inc.
    7. French, Robert & Oreopoulos, Philip, 2017. "Behavioral barriers transitioning to college," Labour Economics, Elsevier, vol. 47(C), pages 48-63.
    8. Brian Knight & Nathan Schiff, 2019. "The Out-of-State Tuition Distortion," American Economic Journal: Economic Policy, American Economic Association, vol. 11(1), pages 317-350, February.
    9. Iriti, Jennifer & Page, Lindsay C. & Bickel, William E., 2018. "Place-based scholarships: Catalysts for systems reform to improve postsecondary attainment," International Journal of Educational Development, Elsevier, vol. 58(C), pages 137-148.
    10. Lelys Dinarte-Diaz & Maria Marta Ferreyra & Tatiana Melguizo & Angelica Sanchez, 2023. "The Contribution of Short-Cycle Programs to Student Outcomes: Evidence from Colombia," CESifo Working Paper Series 10262, CESifo.
    11. Jeffrey T. Denning, 2019. "Born under a Lucky Star: Financial Aid, College Completion, Labor Supply, and Credit Constraints," Journal of Human Resources, University of Wisconsin Press, vol. 54(3), pages 760-784.
    12. Day Manoli & Nicholas Turner, 2018. "Cash-on-Hand and College Enrollment: Evidence from Population Tax Data and the Earned Income Tax Credit," American Economic Journal: Economic Policy, American Economic Association, vol. 10(2), pages 242-271, May.
    13. Caroline M. Hoxby, 2018. "Online Postsecondary Education and the Higher Education Tax Benefits: An Analysis with Implications for Tax Administration," Tax Policy and the Economy, University of Chicago Press, vol. 32(1), pages 45-106.
    14. Dinarte Diaz,Lelys Ileana & Ferreyra,Maria Marta & Urzua,Sergio & Bassi,Marina, 2021. "What Makes a Program Good ? Evidence from Short-Cycle Higher Education Programs in LatinAmerica and the Caribbean," Policy Research Working Paper Series 9722, The World Bank.
    15. José García-Montalvo, 2018. "The Impact of Progressive Tuition Fees on Dropping Out of Higher Education: A Regression Discontinuity Design," Working Papers 1017, Barcelona School of Economics.
    16. Wiljan van den Berge & Egbert Jongen & Karen van der Wiel, 2017. "Using Tax Deductions to Promote Lifelong Learning: Real and Shifting Responses," CPB Discussion Paper 353, CPB Netherlands Bureau for Economic Policy Analysis.
    17. Ferreyra,Maria Marta & Franco Hernandez,Andrea & Melguizo,Tatiana & Sanchez Diaz,Angelica Maria, 2020. "Estimating the Contribution of Short-Cycle Programs to Student Outcomes in Colombia," Policy Research Working Paper Series 9424, The World Bank.
    18. Anna P. Kireenko & Tatyana Y. Krasikova, 2023. "Personal Income Tax Deductions and Demand for Education: Case of Russia," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 9(2), pages 145-160.
    19. Manuel S. González Canché, 2022. "Post-purchase Federal Financial Aid: How (in)Effective is the IRS’s Student Loan Interest Deduction (SLID) in Reaching Lower-Income Taxpayers and Students?," Research in Higher Education, Springer;Association for Institutional Research, vol. 63(6), pages 933-986, September.
    20. Bergman, Peter & Denning, Jeffrey T. & Manoli, Dayanand, 2017. "Broken Tax Breaks? Evidence from a Tax Credit Information Experiment with 1,000,000 Students," IZA Discussion Papers 10997, Institute of Labor Economics (IZA).
    21. Susan Dynarski & Judith Scott-Clayton, 2016. "Tax Benefits for College Attendance," NBER Working Papers 22127, National Bureau of Economic Research, Inc.
    22. Van den Berge, Wiljan & Jongen, Egbert L. W. & van der Wiel, Karen, 2017. "Using Tax Deductions to Promote Lifelong Learning: Real and Shifting Responses," IZA Discussion Papers 10885, Institute of Labor Economics (IZA).
    23. Jakob B. Madsen & Antonio Minniti & Francesco Venturini, 2023. "The long‐run investment effect of taxation in OECD countries," Economica, London School of Economics and Political Science, vol. 90(358), pages 584-611, April.
    24. José Garcia Montalvo, 2018. "The impact of progressive tuition fees on dropping out of higher education: a regression discontinuity design," Economics Working Papers 1597, Department of Economics and Business, Universitat Pompeu Fabra.

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    More about this item

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education

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