One of the things that has become clear to me in much of the commentary about the Net Zero Tuition material last week was that a surprising number of people really don’t understand how tax credits work, or what their distributive impact is.  Worth a review, then.

Bad Argument: Poor students don’t benefit from tax credits.  It is quite true that students whose income is not high enough to be taxable cannot use the credits themselves in the current tax year – indeed no credits get used that way.  But they can pass them on to parents or spouses who are supporting them, and who presumably find the tax relief of great benefit.  Nearly 40% of tax credits get distributed in this way.  Or, if their parents or spouses have no taxable income (rare), or if they just don’t want to give them up, they can carry them forward until such time as they have taxable income.  Fortuitously, this is usually about the same time their student loans start coming due.

Better Argument: Tax credits would be better if they were refundable.  No one would be better off in the end, but this way, at least, one could get rid of the carry-forward provision, and those students who currently have to wait to get their money could get it faster.

Bad Argument: The rich benefit more from tax credits than the poor.  This is a tricky one, because it has a different answer if you’re making this claim at the individual level, or on aggregate.

It is certainly true that some tax expenditures are worth more to the rich than the poor.  Tax deductions, for instance, reduce taxable income, which obviously is worth more if you’re in a higher tax bracket.  But our whole system shifted from deductions to credits twenty-five years ago.  And tax credits – by definition – are worth the same amount to everyone, regardless of their income.  The only case where this is not true is if someone has no taxable income – but that’s irrelevant for education tax credits, because of the carry-forward provision.

Where this argument is true is with respect to aggregate spending.  On aggregate, upper income families do receive more money from tax credits, because youth from upper-income families are more likely to attend PSE.  For most people, that’s a good reason to dislike them.  What’s hysterically funny, though, is that at least some of the people who use this argument simultaneously argue for greater tuition subsidies – which have exactly the same distributional consequences.  Charitably, these people could be described as “confused” (less charitable descriptions include: “cynical”, “ridiculous”, “dumber than a bag of hammers”).

Good Argument: Money spent on tax credits would be better spent on up-front, need-based student aid.   There are too many people receiving it who really have no need of it.  Spread that money – that big chunk of over $2 billion/year – less thinly, focus on those who need it most, and our system would be much more effective and equitable.