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vestment. It would then seem appropriate to allow students or their families to capitalize the investment component of their education expenditures for amortization purposes, as with any other investment. The consumption component should not be capitalized and amortized.

Another version of this same "market model" for the allocation of resources in education would be to provide an equal grant in cash to every eighteen-year-old person in the country. This cash grant could then be invested by him in education, if he chose to do so; if not, he could spend or waste the money, or invest it in income-producing assets or save the money in a bank, The purpose would be to provide even the poor and underprivileged potential student with the cash means to "bid" for a place in institutions of higher education at prices accordingly determined by the bidding process.

III

REASONS FOR FEDERAL AID

Of remaining concern is whether the federal government rather than state or local governments should provide desired educational assistance, either through a direct subsidy or a tax allowance. Apart from the financial difficulties in which many state and local governments find themselves, several reasons suggest the desirability of a federal approach to the problem. First, underinvestment in education, if shown, would appear to be a national problem, even though it may congeal in particular localities. Problems of inadequate access to higher education and vocational training are closely related to problems of crime and unemployment, both of which are increasingly regarded as national problems. Our labor force is in many ways a national one and depends on education for its maintenance. Our national army, the migration that takes place from area to area and various nationwide economic and social phenomena associated with insufficient education, all suggest a national approach to the problem of subsidizing higher education.

A somewhat more technical reason for urging a national approach involves the geographical spillovers education creates. Some state and local governments, for example, may underinvest in public education, because many students educated there tend to leave the area. This enables other states to reap the benefits of part of the education subsidy provided by the home state. Or, the opposite may be true. There may be underinvestment in higher education in areas to which people tend to come because highly trained people can be obtained from the pool of graduates that develops by virtue of subsidies in other states. In any event, the migration of people before, during and after education, coupled with the potential magnitude of the aid that may appear desirable and a need for uniformity and integrated policy, suggest that the approach should be national.

Even apart from migration, people's productivity and employment prospects are affected by the level of productivity of persons educated elsewhere. Tax burdens are affected by the level of welfare payments to, and tax payments by, persons educated elsewhere. The fiscal and welfare interdependence of states and localities with or without migration indicates that education subsidies should be, at least in large part, provided by the federal government. Hopefully, federal aid can be provided in a manner that will not encourage states and private sources to reduce their support.

IV

A TAX ALLOWANCE COMPARED TO A DIRECT GOVERNMENT EXPENDITURE

It has become nearly an article of faith in some circles that a tax allowance should not be used in lieu of a direct government expenditure in order to subsidize activities or stimulate taxpayer behavior. Prior work surely has served to place a burden on anyone seeking to enact a new tax incentive to demonstrate why a direct government expenditure would not be better.

This "comprehensive tax base" position recommends the elimination of tax allowances, tax preferences, tax loopholes, tax incentives and other tax provisions not required to reduce gross receipts or gross income to taxable or net income more or less as outlined by the Haig-Simons definition of income. Another point of view evaluates each tax allowance separately, without an absolute predisposition against the incentives or subsidies, to test its efficiency, advantages, and disadvantages in comparison with direct expenditures and other forms.

One objection to casting subsidies or incentives in the form of tax allowances has been that such tax allowances are not subjected to the kind of annual review

applied to the regular expenditure budget of the federal government. Although this argument is well founded up to a point, it would lose much of its force if the Treasury Department and the Congress truly relied on the Tax Expenditure Budget to identify and quantify the revenue losses or "tax expenditures" created by allowances used for subsidies or incentives. There may even be some merit in embedding an education subsidy in a tax law so that it is less likely than are outright grants or ordinary budget expenditures to be varied from year to year. Tax allowances as subsidies or incentives have also been criticized because the amount provided depends on private decision-making and therefore remains hard to predict. Private decision-making, sometimes argued as a meritorious aspect of tax incentives, also affects and is affected by distortions introduced into the market and by unneutralities in the allocation of resources. Not only is private decision-making affected by many factors unrelated to the purpose of the subsidy, but it will not be altered at all to the extent a tax relief provides a windfall to a taxpayer who would have behaved the same without the subsidy or incentive or for those "outside the tax system." Again, these objections are well taken to some extent but should not be exaggerated. The amount of revenue lost through some allowances can be estimated by cumulating the appropriate explicit deductions or credits shown on each tax return. The amount of a tax subsidy or incentive is less certain when it does not require specification on the return. For example, the loss of revenue due to the failure to tax the imputed rental value of owner occupied homes can be estimated in only a very rough way. Unfortunately, the best of such "tax expenditure" estimates do not afford truly accurate gauges of the amount of revenue that would be raised if the tax allowance were repealed. For, the repeal itself would change taxpayer behavior; the amount of the revenue lost would be affected by repealing the tax incentive to engage in tax reducing behavior.

Another forceful objection to embedding incentives or subsidies in the tax system is that those incentives or subsidies often do not reach people who are not in the tax system; they provide no benefit to a taxpayer who has no taxable income, apart from the deduction. Personal allowances afford no aid to a taxpayer who elects the standard deduction. Or tax subsidies may be judged to be inequitable if income-variant. However, a federal tax allowance for education could be designed to benefit even those taxpayers without tax liability. A tax credit with a refund provision, for example, could enable low-income persons to obtain a check from the government by filling out a tax return and showing a credit with no offsetting, or only partially offsetting, tax liability. The use of computers and simplified forms and widespread taxpayer advice would assist in making these tax benefits or allowances available to those not otherwise involved in the tax system.

Such a proposal, however, may fail to take due note of the difficulty of alerting and relying on millions of taxpayers, some of them poor, and many unsophisticated in tax matters, to understand, comply with, and react to complicated tax laws. Many may fail fully to take into account such matters as a tax allowance and a possible refund in the future when making plans in the present. In partic ular, it may prove unlikely or difficult for a poor and underprivileged child in a rural area or in the urban ghetto to make plans to go to college on the recognition that he or his family may enjoy reduced tax liability or an outright refund payment from the government some months hence. At the very least, it might become necessary to arrange some form of advance payment of such refunds so that students and their families would have cash on hand to meet their education costs.

In addition, to place the education subsidy-incentive in the tax law arguably will damage the tax system, divide and complicate the consideration and administration of government programs, keep tax rates high by constricting the base and thus reduce revenues, and may take a toll in terms of waste, inefficiency, and inequity if not carefully protected. Careful protections in turn involve administrative and compliance costs just as they would in a direct subsidy program.

Of course there may be some advantages to using a federal income tax allowance rather than a direct government expenditure. Some believe, for instance, that a tax allowance would circumvent the constitutional barriers to direct government aid to schools and religious institutions. But the validity of this position remains uncertain at best. A second supposed advantage of the tax form of allowance is that it would avoid establishing a new government agency for granting scholarships. It must be remembered, however, that additional bureaucracy or administrative and compliance costs would also be sustained if an educational tax allowance were installed. A separate scholarship office also may better be

able to adjust grants to need, academic qualifications and other education-related considerations.

Even if a subsidy-incentive is decided upon, therefore the case for casting it in the form of a tax allowance remains unproven. As distinguished from an allowance in the tax law to perfect its definition of taxable income or otherwise to improve the tax law itself, a subsidy-incentive should probably be granted in some form other than a federal income tax allowance-at least at this stage in the evaluation. Even though a form of tax allowance can be constructed to accomplish many of the incentive-subsidy goals and to avoid some of the inequities or inefficiencies of a plain deduction, a direct grant or other non-tax form probably would turn out to be equal or superior.

V

FURTHER QUESTIONS ABOUT A TAX ALLOWANCE FOR EDUCATION

of final importance is to ascertain the actual incidence and real impact of federal aid to higher education whether in the form of personal tax allowances or a direct government payment to students, their families, and institutions, or in voucher form. In each instance, the question is who will actually capture how much of the economic benefit of such government allowances or payments.

By placing additional funds and spending power in the hands of students and their families and thereby reducing the effective price of the eligible activity, education, the government will indirectly lead the providers of education and education-related commodities and services to raise their prices and also to expand their provision of the eligible activity. A new price and a new level of supply will be reached. Whether the subsidy takes the form of a direct grant, tax allowance, or education voucher, the students and their families will be better able to pay the tuition and other educational costs, and some of their other funds will be released for non-education consumption, savings, or investment. However, education prices will rise, to some extent, so educational institutions will benefit.

To the extent that the economic benefits of an education allowance are captured by educational institutions, the result may accord with one important purpose of government assistance to education: to give additional aid to educational institutions. Some critics have argued, however, that, to the extent government assistance is advocated in order to provide additional help to students and their families, that aim will not be achieved by the dollars that find their way into the hands of the educational institutions. On the other hand, if the aim is to help the educational institutions it will not be satisfied to the extent students and their families capture the benefits. But, of course, there is nothing incoherent about a tax allowance which has as its aim helping students, their families, the educational institutions, and even the purveyors of other goods and services consumed by students, their families, educational institutions, and their staffs.

The problem of subsidy and access to education actually presents several different dimensions for someone designing a direct subsidy or tax allowance. To deal with students who drop out or do not attend higher education for financial reasons, it would be important to give a definite and immediate cash benefit sufficient to meet their need, but no more. To influence other students to attend college, when they are doubtful whether it pays to do so, an amortization of expenses over the lifetime of the income earner, to increase the private return to investment in education, would be suitable. To aid private or public institutions of higher learning, a program that subsidizes students in order to increase their demand for education or to enable more of them to go is inefficient in the fiscal sense because such an incentive-subsidy depends on the private decisionmaker capturing some of the benefits in order to accomplish its purpose. Also, it may be important to examine whether institutions of higher learning do behave like profit-maximizers in the market. One difference, at least, may be that. they limit access to their commodity by entrance requirements as well as by price and perhaps also by traditional notions of appropriate size, student body mix in terms of sex or geographical origin, and other considerations. In any event, the proponents of a tax allowance should be expected to acknowledge who its beneficiaries will be, to what extent and why. The problem of incidence is in no way escaped by making the subsidy a direct expenditure rather than a tax allowance, or vice-versa.

A related but probably tougher problem is to ascertain who actually pays for a government expenditure program, whether it be an outright expenditure or a

tax expenditure by way of a tax allowance. Some recent work has turned up alarming evidence that free or low-cost public education may actually operate to distribute income from poorer to richer families, rather than the reverse, because of the manner in which it is financed. The overall evaluation depends on knowing what tax sources, by income level of taxpayers, by geographical location, or by some other gauge, pay for a particular expenditure or tax allowance program and how the distribution of benefits of a government expenditure, or tax allowance, program compares with the distribution of taxes that pay for these benefits. Is there an equi-proportional tax allocation of the burden of a tax-expenditure program? If so, then if a government's tax structure is progressive, the distribution of tax burdens for a new tax-expenditure program will also be progressive, and vice versa. However, there is little or no reason to believe that things work this way. The equi-proportional allocation is largely an assumption. In marginal terms, the determinative question is: if federal government expenditures on education are increased, by a tax allowance or otherwise, and if everything else remains the same, which taxes, falling on which taxpayers will be raised, or what other expenditure (or tax allowance) program, benefitting which persons, would be reduced? Economic studies do not answer this question for an education tax allowance, nor does intuition help. A change in an expenditure or tax allowance may lead to compensating adjustments in the tax structure or in the expenditure structure, or both. No simple basis for allocating tax burdens for a tax allowance, assuming revenues are to remain constant or abandoning that assumption, seems reliable. The equiproportionl assumption has been well challenged and the marginal approach has presented a need for data that, at least so far, has not been met.

In the absence of reliable conclusions about who would gain the benefits of a federal income tax allowance for personal costs of higher education and who would pay the costs of that tax allowance (in increased taxes or foregone benefits) either in the short run or when the dust has settled, a policymaker is left somewhere between extreme caution and despair. Not only the incentive-subsidy arguments for a tax allowance are undercut, but also the "tax equity" and even the "perfecting the definition of income" arguments are left almost hopelessly incomplete.

OVERVIEW AND CONCLUSION

A principal difficulty in evaluating and constructing a good tax subsidy, or a direct expenditure subsidy, for higher education is determining the real rate of return on education. The data and the techniques so far in use seem inadequate to the task. To put a reliable dollar figure on the benefits that are received from education and thus to determine the rate of return on investment in education seems unlikely in the immediate future.

An important related difficulty is that of separating the consumer benefit from the income-producing investment made by a student or family bearing the costs of higher education. It does not seem likely that a reliable method of separating the consumption and invesment components and of quantifying each will become available in the near future.

Another loose end is the unresolved problem of how to treat foregone income and whether to regard it as in any sense or any part a cost of higher education. One technique is to treat all, or part of it, as a cost and to allow it to be capitalized just as out of pocket expenditures would be. Another approach is to regard the foregone income simply as a failure to receive income that is not taxed and not as a cost allowable as a deduction or credit. Another possibility is to treat foregone income and the imputed value of low-cost education as income, tax it, and then capitalize some portion of it, to be amortized over the life of the education obtained. Still another possibility is to accept the fact that foregone income is not a cost in the sense that most costs of producing income are defined for tax purposes, but also to realize that it is a real economic barrier to education and therefore something that should be the focus of a subsidy or some form of relief in order to afford access to education for low-income students and families.

When the question is asked why higher education should be publicly financed or subsidized, the two answers most common'y given are those having to do with efficiency and equity. The usual efficiency argument is that external benefits produced by individuals who obtain higher education make the social rate of return higher than the private rate of return to education. Therefore, without a public subsidy, a less than optimal quality of education will be purchased and therefore society as a whole will suffer. The subsidy reduces private costs and thus raises the marginal private rate of return, ideally to the level of the social

rate of return. Of course, to determine the subsidy level, the value of the external benefits must first be determined.

The equity justification insists that many qualified students cannot afford to pay the costs of higher education so that public subsidies should be provided to assist them. In the absence of such subsidies, the argument runs, access to higher education depends upon unequally distributed parental income and wealth rather than on the students' own ability to benefit from college. With an appropriate range of subsidies, the effects of differential economic position can be onset. This may be viewed as the question of vertical equity. This equity argument does not call for equal subsidy to all students but rather for a subsidy that will not provide any windfall to those people who are willing and able to pay an unsubsidized cost but will provide a sufficient subsidy so that those who are unwilling or unable to pay the unsubsidized cost will be willing to pay the lower, subsidized cost and will therefore obtain higher education. The objective of promoting greater equity may well come in conflict with the objective of obtaining economic efficiency. The vertical equity argument calls for a larger subsidy for poorer students or their families than for wealthier students, or at least for larger tax revenues from wealthier students and their families. The differential subsidy or increase in tax revenue might in turn reduce the amount of work effort supplied in the market or reduce the extent to which wealthier students attend college and university. However, if market imperfections are causing both inequity and inefficiency, a subsidy or other remedy for the market defect will meet both problems and the tension between them will never materialize.

Perhaps the equity and ability-to-pay arguments, alone or combined with the perfection of taxable income or the incentive-subsidy, will be enough to persuade some legislators to enact a tax allowance or further direct subsidy. After all, information and analysis of other personal or mixed tax allowances or outright subsidies fall short of the demands impliedly made here for an education allowance. Nevertheless, in a policy climate of protecting or improving the integrity of the tax base, the use of a tax allowance for other than tax reasons should not be easily accepted.

Measured against the criteria and conclusions of this Article, federal tax credit legislation does not recommend itself, though it may be politically more saleable than and theoretically preferable to some other proposals. The preceding analysis tends to show that a strong conceptual argument can be made for a tax allowance for education costs to perfect the definition of taxable income. Such an allowance should take the form of capitalization and amortization of all outright expenditures on education that are ordinary and necessary costs of producing income by the student. The equity argument, though appealing in some ways, does not carry the burden and an education subsidy or redistribution or reallocation program would better be handled outside the income tax system.

The tax credit legislation that so nearly has become law in the last decade will not substantially improve the definition of taxable income, because the tax allowance is often given to someone other than the income recipient, given at a time long before the income is earned, given in a form (a tax credit) that does not suit the purpose and is hedged about with restrictions (a $325 ceiling and an income phase-out) that do not belong in a trade or business or cost of producing income allowance. The tax credit legislation must stand or fall as a subsidy or redistributor, or as a blunt move to readjust the tax burdens of middle-class families with children in post-secondary education. Unfortunately the need for and proper size of such a subsidy have not been demonstrated. If the tax credit were to lack a refund feature, as earlier bills did, it would be seriously deficient, almost indefensible, as a subsidy or incentive. It would poorly serve its equity goals. Even with a refund feature, the subsidy-incentive finds its way into the tax system by brute force, rather than an open embrace. Better to perfect the tax base by an appropriate amortization scheme and then to provide desired subsidies or incentives in separate, explicit programs with outright payments (or vouchers) given on the basis of need and merit as defined appropriately for the subsidy program-not as distorted or confined by an income tax context. Congressional dissatisfaction with the tax credit proposals and refusal to enact them, even in the face of strong and growing political pressures, may have followed from a sense of the deficiencies of these proposals.

In general, a tax apparatus can be designed to do almost anything that can be done with a direct government outlay, by way of recognizing or subsidizing the personal costs of higher education. For some few purposes, such as tax equity

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