Don’t Make the Tax Credit Permanent

by Andrew Gillen

Kelly Field reports on plans to make the American Opportunity Tax Credit, a stimulus program, permanent. This is a bad idea.

Financial aid programs like this are sold as a way to make college more affordable. The only problem is that they don’t accomplish that. Instead, they result in higher tuition. As I noted a while back

tax credits have a similar effect as loans (they shift the demand curve out) but because they primarily benefit upper and middle income families, who are most likely to be above C*, they are probably largely ineffective in reducing the financial burden of college. They effectively take money that would have been paid in taxes, and transfer it to colleges. In this respect, the expanded tuition tax credits in the 2009 stimulus bill are probably a step backward with respect to reforming the system…

Giving money to middle class students won’t help make college more affordable, as schools will just raise tuition. If you want to make college more affordable, we’ve got to change the incentives of colleges. Right now, they compete based on reputation, which means they compete to spend the most money, which in turn means they will raise tuition whenever they can. If they competed based on value (price adjusted quality) instead, then higher spending would not be automatically rewarded, as it is now. It would not always be in the interests of colleges to raise tuition, and only then would things like tax credits succeed in making college more affordable. Until then, any money seeking to make college affordable should be devoted to the Pell grant program since this will not lead to tuition increases.*

*Read the full report for all the details.