Topic: Education and Child Policy

Of Tax Credits and Government Subsidies

Previously on Cato-at-Liberty, Michael Cannon (post 1, post 2) and Andrew Coulson (post 1, post 2) argued with Jason Furman (on health care) and Sara Mead (on education) about the nature of tax credits and tax breaks.

Furman and Mead claim that tax credits and breaks, because they represent forgone tax revenue, are little different than government subsidies (with a raft of implications). Cannon and Coulson (for various reasons) disagree.

The great “a-ha” moment of the discussion came when Mead pointed to Cato scholars’ criticism of ethanol tax credits as subsidies or “tax expenditures.” Even other Cato scholars agree that ‘tax credit’ equals ‘government subsidy,’ she says.

Surprisingly, up to this point, the argument has largely ignored the use of the credited money/forgone government revenue. I would argue the use of the credited money is fundamental to determining if the credit/tax break is a subsidy.

In the case of an education credit, it is true that government would lose revenue because of the credit. But government has also assumed the obligation to educate the nation’s children, and government would be released from that obligation in the case of the child whose schooling is funded by the credited money. Is the credit, thus, a subsidy?

Consider: If Joe owes his bank a $10 fee for its services and, instead of sending Joe a bill, the bank simply deducts that amount from his account, we wouldn’t describe Joe as subsidizing the bank (or the bank as subsidizing Joe). Likewise, if government has assumed the obligation to educate little Johnny, but instead Joe pays Johnny’s tuition and receives a government tax credit as a result, it seems incorrect to say that Joe has received a subsidy. Instead, just as with the bank and Joe, the education credit represents a net adjustment of Joe’s obligation to government and government’s obligation to little Johnny.

Now, there may be reasons why government should not make this adjustment, but those reasons would not include that the adjustment is a subsidy to Joe. The only subsidy in this system is government’s taking on the obligation to provide little Johnny with schooling — a subsidy that I assume Mead finds acceptable.

Parenthetical #1: I suppose there is one condition under which Joe’s education tax credit should be considered a subsidy: if government education expenditures aren’t about educating Johnny, but about providing jobs for unionized public school workers. Thus, Joe’s paying for Johnny’s tuition at a private school wouldn’t be fulfilling government’s intended obligation. But surely, no one thinks that government education policy is about benefiting unions and bureaucrats instead of educating kids, right?

Health care tax benefits (e.g., HSAs, tax deductions for medical expenses, the tax-free status of employer-provided medical coverage) are a murkier subject. There is no explicit government financial obligation to provide the entire nation with health care (though supporters of socialized medicine claim there should be such an obligation — and, I assume, they are intellectually consistent and support tax breaks and credits for the private provision of health care).

There are, however, legally established government obligations to provide health coverage to the poor (Medicaid, SCHIP, et al.), the elderly (Medicare, Medicaid, et al.) and to guarantee everyone access to care. It may be that the various medical tax credits and insurance tax breaks help government to fulfill those obligations at lower cost than other policies. If that is the case, then tax breaks and credits may be part of the optimal policy for fulfilling that obligation (and Furman would be arguing for a policy change detrimental to welfare).

Parenthetical #2: Full disclosure here — I’m of the camp that health care expenditures should be treated no differently, tax-wise, than other expenditures, and that government has no special a priori obligation to provide health care or health coverage.

Now, juxtapose the above two situations with ethanol tax credits and the other sorts of tax breaks that Cato scholars regularly decry. While there are legally established government obligations to provide schooling for children and health benefits to certain sub-groups of the population, there is (that I’m aware) no government obligation to provide American citizens with corn-based energy for transportation.

Parenthetical #3: I ignore the wacky claim that the U.S. government has an obligation to provide ”energy security” so the nation is protected from evil Canadian and Mexican oil sheiks.

This means that there is no government obligation that ethanol producers can fulfill privately, and thus receive a tax credit or tax break. The ethanol industry’s tax breaks and benefits are not simply “squaring accounts” in the manner as Joe, little Johnny, and the government. The ethanol tax benefits seem to be clear cases of government subsidy, and they should be criticized as such.

Where does this reasoning leave the discussion between Cannon and Coulson on the one hand, and Furman and Mead on the other? At the very least, it seems Coulson’s position is fully consistent with Cato’s general critique of subsidies. Further, given the premise that government has some special obligation to provide health care, Cannon’s position also seems consistent with Cato’s general critique of subsidies.

I am curious, though, whether the Left’s sudden concern over subsidies is consistent with positions they take on health care, education, and other policy areas….

A Bit of Education Accounting

The U.S. Census Bureau just released Public Education Finances, 2005, and news stories are focusing on a national per-pupil expenditure average of $8,701, as well as state highs of $14,119 in New York and $13,800 in New Jersey.

Unfortunately, some major items such as capital costs are left out of these expenditure figures, so they understate pretty significantly total amounts spent on public education. Thankfully, the census folks also offer per-pupil “finance amounts” (they’re on table 11 of the report for those playing along at home) that are much more inclusive than the constrained “current spending” figures (table 8 ) cited in the media.

Using these more comprehensive stats, we see that in the 2004-05 academic year public school systems nationwide had average per-pupil revenue of $10,159, and the top spenders shifted a bit. Washington, D.C., took the first place position with a per-pupil haul of $17,809, New Jersey came in second at $16,213, and New York dropped all the way to third place at $15,791.

Poor New York. How can they possibly expect to educate anyone on that kind of money?

New Study: School Districts Spend As Much as They Can

The Mackinac Center for Public Policy has just released a study I conducted for them on the relationship between school district size and spending. But a funny thing happened on the way to the findings – I discovered something vastly more intriguing than what I set out to investigate.

When trying to statistically isolate the effects of district size on per-pupil spending, you have to control for other factors that might affect expenditures. One thing that economists like to control for is the public’s demand for educational services. If local residents expect more (or less), then district officials may choose to spend more (or less) to meet their demands. This is the traditional “selfless public servant” view of bureaucratic behavior.

But there is an alternative theory of bureaucratic behavior, called “public choice.” Public choice theory says that everyone, including bureaucrats, voters, and elected public officials, is motivated significantly by self-interest. We try to do what is best for ourselves and our families. According to this view, public officials generally endeavor to spend as much as they can, because that is the route to professional growth in the public sector.

As a “Pepsi Challenge” of economic theory, I included control variables for both views of bureaucratic behavior in my model. The result? Public choice theory explains about 15 times as much of the variation in spending between districts as does the selfless public official theory. In other words, public school districts spend as much as they can, regardless of local public demand for their services.

That means the incentive structure of our state-run school monopolies is broken. It encourages profligacy. Is it any wonder that real public school per pupil spending has doubled in the past 30 odd years, without any commensurate improvement in the skills of high-school seniors?

State legislatures wanting to rein in spending thus have only one real hope: introduce new incentives for educators to maximize quality while controlling costs. How do you do that? Competition, parental choice, private ownership of schools, deregulation, and, as much as possible, direct parental funding of schools. The same market structure that has driven rising quality and efficiency in almost every other field for centuries. Throw in a good education tax credit policy and you’ve got universal access to a free education marketplace.

Let Parents Choose

One of the most frequent objections I hear to market education reforms is that poor and minimally educated parents won’t be able to choose wisely; that they would be bad education consumers.

There is overwhelming evidence that even the world’s poorest, least educated families make better educational choices for their own children than “expert” bureaucrats make on their behalf.

I once offered this evidence to a Democratic state legislator who shocked me with the racism of his response. He basically said that such successes in the slums of, among other places, Africa, were not relevant to the U.S. context. “Our poor blacks” he told me, are less well equiped to choose their children’s schools than Africa’s poor blacks. This particular state legislator is, by the way, African American.

To him and those who share his pernicious misconception, there is now yet more evidence that families of all races, at all income levels, at all education levels, can choose wisely for their children — even if they are American. A newly released study by Georgetown University scholars finds that families (overwhelmingly low-income and African-American) participating in D.C.’s school voucher program are making rational, informed choices and are becoming more astute consumers the longer they participate in the program.

What most opponents of market education fail to grasp is that the reason so many parents are so detached from their children’s education in the current monopoly school system is that the system itself has marginalized them. Most parents have virtually no direct say in any important aspect of their children’s public schooling. There is thus no point for them to become informed and active. When given a choice and a chance, they know what they want and they learn to be savvier consumers the more they exercise that choice.

The Washington Post vs. Milton Friedman

Actually, it’s the Post’s education columnist Jay Mathews vs. the Milton and Rose Friedman Foundation’s executive director, Robert Enlow, in a school choice debate being held at Robert gets the best of this exchange.

Jay is generally a reasonable guy, and so, naturally, supports school choice programs that allow families to easily choose the public or private school that best serves their kids. His two failings in this debate are: not grasping the transformative nature of a large scale market reform, and allowing his own sense of futility about the prospects for change to color the school choice movement’s real potential.

As do most journalists, Mathews confuses the existing niche of non-profit private schools, and existing tiny voucher programs, with the kind of vibrant, large-scale, significantly for-profit market that could arise under a well-designed statewide school choice program. I explained the difference in this blog post.

It’s also easy to sympathize with how tired Mathews sounds when talking about the futility of real reform in k-12 government schooling. He’s been writing this beat for a long time, and change has been miniscule thus far. But what Mathews seems not to have noticed is that the school choice movement has been steadily growing, and steadily introducing and passing more programs over the past twenty years. For every battle-hardened veteran of the movement that is beginning to tire, there are several sharp new researchers, analysts, and campaigners coming forward to carry on the standard. Not just in the United States, but everywhere from England to India.

Utah may be the first U.S. state to implement a universal school choice program, but even if its program is reversed, another will follow. It’s inevitable. The status quo system will continue to consume more and more money without showing improvement, as it has done for generations now, and eventually people in one of our fifty states will decide they’ve had enough. Once one state tastes educational freedom, and reaps its benefits, the others will fall like dominos to the exigencies of economic and demographic competition.

Perhaps not tomorrow, or next year, but probably within the next ten or twenty, chunks of government school district headquarters will be sold for their historical value on eBay – like relics of the Berlin Wall. And public education will finally be delivered through a market system that can live up to its ideals, rather than by the moribund monopoly we’ve been saddled with for the last century-and-a-half.

No Matter What, NCLB is Great!

This morning the results from the latest National Assessment of Educational Progress (NAEP) civics and U.S. history assessments came out, and the results were, well, a bit blah. But that didn’t get the Bush administration off message. Like almost everything that happens in American education, they declared the results proof that the No Child Left Behind Act (NCLB) is working!

Let’s look briefly at the results, and then get to the spin.

First, U.S. history, which had scores for 1994, 2001 and 2006. In 4th grade, the proportion of students hitting the desired performance level – proficient – was a mere 18 percent, and that was only a one percentage point increase over 1994, the first year reported, and no change from 2001. The increase in students demonstrating at least “basic” knowledge was a little bigger, rising six percentage points from 1994 and four from 2001.

In 8th grade the proficiency increases were better, but final totals worse. The chunk of students hitting proficiency rose from 14 percent in 1994, to 16 percent in 2001, to 17 percent in 2006. Students hitting at least basic rose from 61 percent in 1994, to 62 percent in 2001, to 65 percent in 2006.

For 12th graders – our schools’ final products – a measly 13 percent were proficient in U.S. history, though that was up from only 11 percent in 1994 and 2001. The percentage hitting at least basic was also up, but only to 47 percent from 43 percent in the previous years.

Now to civics, where the scores were for 1998 and 2006.

In 4th grade, the proportion of students hitting proficiency rose from 23 to 24 percent, and at-or-above basic improved from 69 to 73 percent. In 8th grade there was stagnation, with the percent proficient stuck at 22, and at-least basic at 70. Finally, in 12th grade the percentage hitting proficiency rose from 26 to 27 percent, and at least basic from 65 to 66 percent.

So, on the whole, scores didn’t get any worse than in previous years but they also didn’t get much better, results I’d summarize as ho-hum. To read U.S. Secretary of Education Margaret Spellings’ reaction, however, you’d think we’d seen totally different reports – literally:

For the past five years, No Child Left Behind (NCLB) has focused attention and support on helping students become stronger readers. The release today by The Nation’s Report Card on U.S. History and Civics proves NCLB is working and preparing our children to succeed.

Wait a minute.

Reading? What the… Oh, right. Reading “counts” under NCLB’s accountability regime, but U.S. history and civics don’t. The secretary is therefore “bridging” – leaving the subject at hand in order to make an off-topic point, one intended to provide the standard Bush administration education message: NCLB is working!

The reports offer further indication that our nation’s achievement gap continues to narrow: our lowest-performing students are making the greatest gains, particularly in the early grades…. These results are a testament to what works. As students’ skills in reading fluency and comprehension strengthen, so does their ability to do well in other subject areas. While critics may argue that NCLB leads educators to narrow their curriculum focus, the fact is, when students know how to read and comprehend, they apply these skills to other subjects like history and civics. The result is greater academic gains.

Oh, politics! In what other realm could someone so deftly turn mediocre news about one thing into a declaration of victory in something else? But it’s all sleight of hand, a trick to take our eyes off the humdrum civics and history results and put them on reading “success.” But don’t be fooled.

The most recent NAEP reading assessment – you know, the one that actually assesses reading – provided results from 2002 and 2005, a period fully covered by NCLB, and showed that reading scores either stagnated or dropped in that time. For instance, the average 4th grade reading score was stuck at 219 (out of 500) in both 2002 and 2005, and 8th grade scores dropped from 264 to 262. And how were scores for those “lowest performing students” whose improvements Spellings touted? The average mark for students in the lowest ten percent of 4th grade performers rose from 170 to just 171 between 2002 and 2005, and was stuck at 196 for the lowest quarter. In 8th grade the average score of the lowest 10 percent dropped from 220 to 216, and of the lowest quarter dropped from 244 to 240.

So much for the assertion that NCLB-driven reading improvements have led to rising scores in civics and U.S. history – they haven’t even led to rising scores in reading!

Which brings us to the biggest civic lesson we can learn from the new NAEP results: Politicians are concerned first and foremost with making themselves and their programs look as good as they possibly can, not with being honest with the American people. It’s exactly why, both in education and many other things, government truly is best that governs least.

Another Advantage of Education Tax Credits

Sara Mead’s latest post over at the Quick and the Ed offers yet another opportunity to point out yet another advantage of tax credits over such alternatives as school vouchers or government monopoly schooling.

Before describing that advantage, though, I can’t resist addressing the logical fallacies at the heart of her post. Mead originally argued that tax credits are public money. When that was proven false, she fell back to the claim that tax credits are equivalent to public money in non-legal respects. That, in turn, was proven false in my last post, which contrasted the programs’ categorically different levels of taxpayer compulsion and linked to an exposition of further differences. Mead nevertheless continues to assert that tax credits are equivalent to government money because, she says, they have the same net effect on state budgets and have “a distorting impact on individual incentives.” This is a hybrid of the fallacy of composition and false analogy. The fact that two things share one or more particular traits in common does not make them equivalent. They may, as in this case they do, differ in other material respects. Mead thus remains mistaken in her persistent belief that tax credits are equivalent to government money.

The real reason that her post is worth responding to, however, has nothing to do with its interesting logical fallacies. Rather, it is because she mentions the “distorting impact” of education tax credits on “individual incentives.” In this premise at least, Mead is correct. Education tax credits do affect both parents’ and taxpayers’ behavior, but they do so less perniciously than is the case with either school vouchers or government schooling.

Under scholarship donation tax credits, taxpayers choose the scholarship granting organization that receives their money. If they are not happy with the quality or efficiency of their current choice, they can redirect their next donation elsewhere. Under vouchers or the status quo, taxpayers dissatisfied with the state system who decided to redirect their tax liability to a private scholarship organization of their choosing would eventually find themselves in jail. Their behavior is thus rather more profoundly circumscribed under government-funded programs.

The incentives for parents who claim personal use tax credits are also superior to those faced by parents under vouchers or the status quo. Under the sort of tax credit policy my colleagues and I advocate, the eligibility criterion for the personal use credit would simply be that parents take financial responsibility for their own children’s education (i.e., that the kids not be enrolled in government schools). They could allocate some of the money they saved for home instructional materials and some for tuition, for instance, weighing the value of each according to their own preferences. This ability to weigh alternative educational expenditures against one another produces an incentive for thrift and parental involvement. Such parental budgetary discretion is impossible under the status quo, and more problematic under vouchers (which tend to be limited exclusively to tuition because of the more intrusive regulatory restrictions usually applied to government subsidy programs).

As for Mead’s conspiracy theory about the “real” reason why my colleagues and I support education tax credits, it’s only worth a brief mention: Education tax credits are the best policy option under current conditions, both legally and practically. If conditions change, and I wake up some morning to find that a state has so drastically cut taxes that such a program would not be viable, I will happily suggest alternatives that would still fulfill the public’s unwavering desire for universal access to a good education. That’s provided I’m not struck by a flying pig on the way to work, of course.