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The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid

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  • Caroline M. Hoxby
  • George B. Bulman

Abstract

The federal tax deduction for tuition potentially increases investments in postsecondary education at minimal administrative cost. We assess whether it actually does this using regression discontinuity methods on the income cutoffs that govern eligibility for the deduction. Although many eligible households take nearly the maximum deduction allowed, we find no evidence that it affects attending college (at all), attending full- versus part-time, attending four- versus two-year college, the resources experienced in college, the amount paid for college, or student loans. Our analysis suggests that the deduction's inefficacy may be due to issues of salience, timing, and the method of receipt. We argue that the deduction might increase college-going if it were modified in simple ways that would not increase costs but would make it more likely to relax liquidity constraints and be perceived as a price change (which they is) as opposed to an income change. We outline how such modifications could be tested. This study has independent applied econometrics interest because households who would be just above a cut-off manage their incomes so that they fall slightly below it. This income management generates bias due to reverse causality, and we explore how to choose "doughnut-holes" that avoid bias without undue loss of statistical power.

Suggested Citation

  • Caroline M. Hoxby & George B. Bulman, 2015. "The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid," NBER Working Papers 21554, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21554
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    References listed on IDEAS

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    1. David Deming & Susan Dynarski, 2008. "The Lengthening of Childhood," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 71-92, Summer.
    2. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    3. George B. Bulman & Caroline M. Hoxby, 2015. "The Returns to the Federal Tax Credits for Higher Education," NBER Chapters,in: Tax Policy and the Economy, Volume 29, pages 13-88 National Bureau of Economic Research, Inc.
    4. Turner, Nicholas, 2011. "The Effect of Tax-Based Federal Student Aid on College Enrollment," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(3), pages 839-861, September.
    5. Davis, Albert J., 2002. "Choice Complexity in Tax Benefits for Higher Education," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(3), pages 509-538, September.
    6. Bridget Terry Long, 2003. "The Impact of Federal Tax Credits for Higher Education Expenses," NBER Working Papers 9553, National Bureau of Economic Research, Inc.
    7. Bridget T. Long, 2004. "The Impact of Federal Tax Credits for Higher Education Expenses," NBER Chapters,in: College Choices: The Economics of Where to Go, When to Go, and How to Pay For It, pages 101-168 National Bureau of Economic Research, Inc.
    8. Guido Imbens & Karthik Kalyanaraman, 2012. "Optimal Bandwidth Choice for the Regression Discontinuity Estimator," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 933-959.
    9. Caroline M. Hoxby, 1998. "Tax Incentives for Higher Education," NBER Chapters,in: Tax Policy and the Economy, Volume 12, pages 49-82 National Bureau of Economic Research, Inc.
    10. David C. Wyld, 2010. "ASecond Life for organizations?: managing in the new, virtual world," Management Research Review, Emerald Group Publishing, vol. 33(6), pages 529-562, May.
    11. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-209, January.
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    Cited by:

    1. repec:aea:aejpol:v:10:y:2018:i:2:p:242-71 is not listed on IDEAS
    2. repec:nbr:nberch:14004 is not listed on IDEAS
    3. Titus Galama & Robson Morgan & Juan E. Saavedra, 2017. "Wealthier, Happier and More Self-Sufficient: When Anti-Poverty Programs Improve Economic and Subjective Wellbeing at a Reduced Cost to Taxpayers," Working Papers 2017-090, Human Capital and Economic Opportunity Working Group.
    4. José García-Montalvo, 2018. "The Impact of Progressive Tuition Fees on Dropping Out of Higher Education: A Regression Discontinuity Design," Working Papers 1017, Barcelona Graduate School of Economics.
    5. Wiljan van den Berge & Egbert Jongen & Karen van der Wiel, 2017. "Using Tax Deductions to Promote Lifelong Learning: Real and Shifting Responses," CPB Discussion Paper 353, CPB Netherlands Bureau for Economic Policy Analysis.
    6. repec:eee:labeco:v:47:y:2017:i:c:p:48-63 is not listed on IDEAS
    7. Brian G. Knight & Nathan M. Schiff, 2016. "The Out-of-State Tuition Distortion," NBER Working Papers 22996, National Bureau of Economic Research, Inc.
    8. repec:ucp:tpolec:doi:10.1086/697138 is not listed on IDEAS
    9. repec:eee:injoed:v:58:y:2018:i:c:p:137-148 is not listed on IDEAS
    10. Jeffrey T. Denning, 2017. "Born Under a Lucky Star: Financial Aid, College Completion, Labor Supply, and Credit Constraints," Upjohn Working Papers and Journal Articles 17-267, W.E. Upjohn Institute for Employment Research.
    11. Bergman, Peter & Denning, Jeffrey T. & Manoli, Dayanand, 2017. "Broken Tax Breaks? Evidence from a Tax Credit Information Experiment with 1,000,000 Students," IZA Discussion Papers 10997, Institute for the Study of Labor (IZA).
    12. Susan Dynarski & Judith Scott-Clayton, 2016. "Tax Benefits for College Attendance," NBER Working Papers 22127, National Bureau of Economic Research, Inc.
    13. José Garcia Montalvo, 2018. "The impact of progressive tuition fees on dropping out of higher education: a regression discontinuity design," Economics Working Papers 1597, Department of Economics and Business, Universitat Pompeu Fabra.

    More about this item

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education

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