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The effects of the tax deduction for postsecondary tuition: Implications for structuring tax-based aid

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  • Hoxby, Caroline M.
  • Bulman, George B.

Abstract

The tax deduction for tuition potentially increases investments in education at minimal administrative cost. We assess whether it actually does this using regression discontinuity on the income cutoffs that govern eligibility. Although many eligible households take the maximum, we find no evidence that it affects attending college, attending full-time, attending four-year college, the resources experienced, the amount paid, or student loans. Our analysis suggests that the deduction's inefficacy may be due to 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 potential costs but would make it more likely to relax liquidity constraints and be perceived as a price change (which it is) as opposed to an income change. We find that households who would be just above a cut-off manage their incomes to fall slightly below it. Such income management generates bias due to reverse causality. We choose optimal “doughnut-holes” that trade-off bias and statistical power.

Suggested Citation

  • Hoxby, Caroline M. & Bulman, George B., 2016. "The effects of the tax deduction for postsecondary tuition: Implications for structuring tax-based aid," Economics of Education Review, Elsevier, vol. 51(C), pages 23-60.
  • Handle: RePEc:eee:ecoedu:v:51:y:2016:i:c:p:23-60
    DOI: 10.1016/j.econedurev.2015.11.001
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    More about this item

    Keywords

    Educational finance; Rate of return; State and Federal Aid; Tax deduction; Tuition; College; Liquidity constraints; Salience; Regression discontinuity; Doughnut-hole;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • 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
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy

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