Wisconsin Republicans Push Tax Subsidies for Higher Education

 
 
May 16, 2007

Tax credits for education as opposed to direct spending such as grants have become popular in recent years because they allow politicians to be called "tax cutters" as opposed to "big spenders" when in reality the two policies are the same. Some Republicans in Wisconsin are continuing that theme. From the Green Bay Press-Gazette:

Three Republican legislators from Northeastern Wisconsin unveiled a plan today to provide tax credits for educational expenses at public and private schools, as well as incentives for businesses who donate to school scholarship funds.

Reps. Phil Montgomery (R-Ashwaubenon), Karl Van Roy (R-Howard), and John Nygren (R-Marinette) unveiled their Invest in Wisconsin Kids plan this morning at St. Thomas More School on Green Bay's east side. Mayor Jim Schmidt, Green Bay Bishop David Zubik, and former Assembly Speaker John Gard were in attendance.

"We're introducing a proposal that will truly put families first," said Montgomery. "Wisconsin has an opportunity to continue its leadership role in bringing affordable education to all families."

The proposal will provide tax credits for families' educational expenses, including those who pay tuition at independent schools.

The question one should ask first is: to what extent is it the role of government (and other taxpayers) to fund higher education? Most agree that government should fund K-12 education for two reasons: (1) paternalism (and opportunity regardless of family support) and (2) the public good component of education. However, with regard to grades 13 and onward, we are providing subsidies for adults that in reality provide little additional public good value, and thereby essentially 100 percent of the benefit flows to those students who will tend to have higher-than-average incomes over a lifetime. Why should a middle-income plumber straight out of high school be forced to subsidize a currently cash-strapped law school student who will make ten times more than the plumber over a lifetime?

Stories are told all the time of people supposedly not being able to go to college because they could not afford it at the time. However, by that same logic, how many people can pay cash for a home? Not many, yet we still have many homeowners in America. Just as a home is an investment in capital (physical) that provides future dividend streams, obtaining a college education does the same for that individual over his/her lifetime with human capital. Why should borrowing for one be recognized and borrowing for another be frowned upon?

Government should become involved in either one of these markets only when a market failure exists. That is, a market failure exists when the private market would either overproduce or underproduce the good. With regard to education, there are three possible types of market failure that we see might justify government intervention.

The first scenario is when students make systematically irrational decisions and choose not to go to school when they should. (There is also the possibility for the opposite to occur.)  We use paternalism as the justification for this when people are not adults. That is, we force children under 18 to go to school because few of them would want to go if they were given a choice. But should government be involved in that decision when people are adults and encourage one choice over another?

Second, because, as Stiglitz and Weiss have pointed out in their seminal piece, credit markets are imperfect and because young people are liquidity constrained, government action may be necessary to fill a credit market failure. The solution to this is in the form of government-backed student loans.

A third possible market failure in education is the public good component. How large are the positive externalities to society from higher education? The answer is likely to be very small relative to elementary and secondary education. Furthermore, some have argued that because education is mostly signaling, society could actually be overproducing education.

Overall, one can make a legitimate argument that the government resources that flow to education would be better spent on higher quality elementary and secondary education where a larger public good lies and where young people's future decisions are shaped rather than on higher education expenses which are used almost solely for personal career enhancement.

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