NCPA - National Center for Policy Analysis

Are Tax Credits the Proper Tool for Making Higher Education More Affordable?

August 6, 2012

Inequality is on the minds of many these days and it is commonly thought that the Bush-era tax rates are a principle cause. The reality is very different, however. One of the biggest contributors to rising inequality in America today is the growing earnings gulf between workers with college degrees and those without, says Scott A. Hodge, president of the Tax Foundation.

  • The median income for a worker with a 4-year college degree was $75,568 in 2010.
  • By contrast, the median income for a worker with only a high school diploma was nearly half as much -- $38,976.
  • There is even greater income disparity between those with high school diplomas and those with advanced degrees.

Considering the financial benefits of getting a college degree, higher education policy has shifted in recent years away from traditional loan and direct subsidy programs (such as Pell Grants) toward the use of various tax credits and deductions. This shift in policy has a number of distinct disadvantages that make it counterproductive and damaging to the functioning of the government's budget.

First, tax credits and subsidies undermine market forces and can actually cause price inflation for the very thing they are intended to make more affordable. It is clear that higher education is headed down the same path as health care and housing for the same reasons.

Second, the proliferation of tax credits threatens to result in social ills when it eliminates workers' tax burden altogether.

  • The extensive use of tax credits has already knocked a record 58 million Americans off the tax rolls -- 41 percent of all filers have no income tax liability after taking their credits and deductions.
  • Research from the Tax Foundation suggests that the 20 year growth in non-payers is associated with more than $200 billion in higher transfer spending this year.
  • There is also a strong correlation, they found, between the growth in non-payers and increases in the national debt.

Finally, and crucially, education tax credits and deductions tend to benefit high-income taxpayers much more than low-income families: about one-third of the benefits of these credits accrue to families earning over $100,000.

Source: Scott A. Hodge, "Are Tax Credits the Proper Tool for Making Higher Education More Affordable?" Tax Foundation, July 25, 2012.

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