How much of college tuition is tax deductible
Rand: "Let's make college tuition entirely deductible"
— Zeke Miller (@ZekeJMiller) April 10, 2015
Tax-deductible tuition is a good applause line, but it wouldn't do much to make college more affordable — and would do essentially nothing for genuinely poor families. Meanwhile, it would make the tax code, as well as federal aid for higher education, even more complicated.
The idea got a prominent airing in the fourth season of The West Wing. As Democratic President Jed Bartlet's reelection campaign begins, his communications director, Toby Ziegler, gets stuck in Indiana, where he has a conversation at a hotel bar with a man whose family makes $80,000 per year (that's about $104,000 in 2015 dollars) and is struggling to figure out how to afford Notre Dame:
Bartlet ends up proposing to make college tuition entirely tax-deductible, as Paul suggested, to help hardworking families making the equivalent of a six-figure income afford an expensive private college for their children.
And that's exactly why this isn't a great idea. In the higher education policy universe, making it easier for students to afford a college of their choice takes second place to helping students who can't be able to afford college at all.
That's why higher education benefits are mostly progressive, with Pell Grants and subsidized loans available for students from the bottom half of the income distribution, and unsubsidized federal loans for everyone else. Even the main higher education tax credit, the American Opportunity Tax Credit. has a substantial share of beneficiaries from families making less than $50,000 per year.
The exception to that progressive structure is tax-deductible tuition. It already exists, although it's capped at $4,000 and only applies to families making less than $160,000 per year in taxable income. Even with those
limits, the biggest benefits accrue to the wealthy. In 2012, tax-deductible tuition cost the government $512 million, with more than half of that money going to families making more than $100,000 per year.
The tax code isn't a good policy lever in higher education. Even the American Opportunity Tax Credit, which benefits low-income students and families more than the tuition and fees deduction, has had little effect on college attendance. Making tuition fully tax-deductible and removing the income limits would generate a windfall for families from the top income quartile, who pay, on average, more than $42,000 to attend private colleges.
It was jarring when the generally liberal, fictional Bartlet administration proposed such a regressive tax cut, even if they planned to pay for it by raising taxes on even wealthier Americans. (Like many things on The West Wing. it was originally a Clinton administration proposal .)
But it's an even odder fit for Paul, who favors the elimination of most tax deductions, and he argues that government subsidies for higher education lead to higher tuition. He's proposed getting rid of the Education Department and cutting funding for Pell Grants for low-income students.
Paul's embrace of tax-deductible tuition shows how the perception of government benefits changes when those benefits are delivered through the tax code. A tax break for college tuition is as much a form of federal financial aid as a Pell Grant. But like tax benefits for college savings accounts, it's a government subsidy that doesn't look like a subsidy to most of its recipients. And once those benefits are given out, they're often politically inviolable — meaning tax-deductible college tuition would benefit the wealthy and complicate the tax code for the long haul.
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