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What You Don't Know Can't Help You: Lessons of Behavioural Economics for Tax-Based Student Aid

  • Christine Neill

    (Wilfrid Laurier University)

Canada’s federal and provincial governments spend a lot of money subsidizing postsecondary students. Tuition and education/textbook tax credits, in particular, cost the federal government around $1.6 billion in 2012 – a sum much greater than the net cost of the Canada Student Loan Program. These credits lower dramatically the cost of attending postsecondary education. Unlike other programs that support postsecondary education, there has not been a formal evaluation of the effectiveness of these tax measures, but there is good reason to conclude that they are poor policy. The immediate benefits of the credits go disproportionately to students from relatively well-off families, who are not relatively sensitive to the costs of postsecondary education, with students from lower-income families benefiting from them only after they have finished their education and have enough taxable income to claim the credit. Lessons from economics and from more recent innovations in behavioural economics emphasize that flaws in the design of postsecondary tax credits mean that they are unlikely to have any effect on youths’ decisions to undertake or cope with the costs of postsecondary education. A simple change to the tax credits – making them refundable instead of non-refundable – would go a long way to making them more efficient and equitable. Whereas a non-refundable tax credit can’t reduce the amount of tax owed to less than zero, a refundable tax credit can reduce your tax below zero and provide a refund. This change would provide a more immediate benefit to students from low-income families who need it most.

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Article provided by C.D. Howe Institute in its journal C.D. Howe Institute Commentary.

Volume (Year): (2013)
Issue (Month): 393 (November)
Pages:

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Handle: RePEc:cdh:commen:393
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  1. Philip Oreopoulos & Ryan Dunn, 2012. "Information and College Access: Evidence from a Randomized Field Experiment," NBER Working Papers 18551, National Bureau of Economic Research, Inc.
  2. Duflo, Esther & Gale, William & Liebman, Jeff & Orszag, Peter & Saez, Emmanuel, 2005. "Saving Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block," CEPR Discussion Papers 5332, C.E.P.R. Discussion Papers.
  3. Susan Dynarski & Judith Scott-Clayton & Mark Wiederspan, 2013. "Simplifying Tax Incentives and Aid for College: Progress and Prospects," NBER Chapters, in: Tax Policy and the Economy, Volume 27, pages 161-201 National Bureau of Economic Research, Inc.
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  6. Neill, Christine, 2009. "Tuition fees and the demand for university places," Economics of Education Review, Elsevier, vol. 28(5), pages 561-570, October.
  7. Susan Dynarski, 2000. "Hope for Whom? Financial Aid for the Middle Class and Its Impact on College Attendance," NBER Working Papers 7756, National Bureau of Economic Research, Inc.
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