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President Obama Proposes More Tax Credits for Higher Education

2 min readBy: Gerald Prante

So President Obama came out today pushing for an extension of his American Opportunity (TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ) Credit for higher education, which was a provision in the stimulus bill that expanded the Hope Credit enacted in 1997 under Pres. Clinton. The AOC, which is set to expire on December 31, expanded Hope and made it refundable. Now Pres. Obama is not only looking at extending AOC, but also expanding it even further.

Even ignoring the possible issue of economic incidence and whether or not this credit would mostly lead to higher tuition instead of lowering the net price faced by students, one of the problems with this credit is the downside of tax credits known as “buying out the base.” The credit will indeed entice some additional amount of people at the margin to go to college. However, it will mostly give a huge windfall to those who were going to go to college in the first place. If more people in college is truly what you want, there are likely better ways to do it than via a refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). that doesn’t target those at the margin.

Ask yourself: Who is most likely on the margin of going to school versus not going to school? Is it random, or are there characteristics that are identifiable that could allow government to better target efficiency gains? For example, while the president has already expanded Pell Grants, that may be a better use of tax dollars than expanding a refundable tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , assuming more people in college is a worthwhile government objective.

That being said, what the true public benefit of having these additional students in college is may not be as great as the president envisions. In my opinion, instead of focusing on more people completing college, governments in the U.S. should generally be shifting resources away from higher education and into elementary education. The bang for the buck, in my opinion, is greater from a public good perspective by investing more in pre-K or K-4 than having slightly more people complete a bachelor’s degree. Furthermore, if I was a governor seeking spending cuts, one of first things to go would be the huge subsidy given for in-state tuition for professional degree programs that have virtually no public good and really only benefit the student (e.g., MBA programs and law schools). Med schools and other graduate programs that truly do research (such as hardcore sciences) at least have some public good. And you can possibly make a paternalistic case that if there weren’t as large as in-state subsidies for undergraduates as there are, young people would irrationally not attend college for cash flow reasons, despite whatever student loans were available and even assuming the student loan program was perfectly efficient. But I don’t know a worthy defense of sending millions of dollars in subsidies to wanna-be lawyers and business executives, which is what many state governments do everyday.