The Returns to the Federal Tax Credits for Higher Education

70 Pages Posted: 12 Jan 2015

See all articles by George Bulman

George Bulman

University of California, Santa Cruz - Department of Economics

Caroline M. Hoxby

Stanford University; National Bureau of Economic Research (NBER); Hoover Institution; Stanford University

Date Written: January 2015

Abstract

Three tax credits benefit households who pay tuition and fees for higher education. The credits have been justified as an investment: generating more educated people and thus more earnings and externalities associated with education. The credits have also been justified purely as tax cuts to benefit the middle class. In 2009, the generosity of and eligibility for the tax credits expanded enormously so that their 2011 cost was $25 billion. Using selected, de-identified data from the population of potential filers, we show how the credits are distributed across households with different incomes. We estimate the causal effects of the federal tax credits using two empirical strategies (regression kink and simulated instruments) which we show to be strong and very credibly valid for this application. The latter strategy exploits the massive expansion of the credits in 2009. We present causal estimates of the credits' effects on postsecondary attendance, the type of college attended, the resources experienced in college, tuition paid, and financial aid received. We discuss the implications of our findings for society's return on investment and for the tax credits' budget neutrality over the long term (whether higher lifetime earnings generate sufficient taxes to recoup the tax expenditures). We assess several explanations why the credits appear to have negligible causal effects.

Suggested Citation

Bulman, George and Hoxby, Caroline M., The Returns to the Federal Tax Credits for Higher Education (January 2015). NBER Working Paper No. w20833. Available at SSRN: https://ssrn.com/abstract=2548352

George Bulman (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States

Caroline M. Hoxby

Stanford University ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

Stanford University ( email )

Department of Economics
Stanford University
Stanford, CA 94305
United States
650-725-8719 (Phone)
650-725-5702 (Fax)

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