TAX CUTS FOR THE RICH? House Minority Leader Nancy Pelosi read the Democratic Party radio address this morning. (At press time, this address is not on the Democratic Party site, but it will likely be there by next Saturday.) Her address focused on what the party is calling their "Agenda for America." I'll leave it to the political theorists to evaluate its appeal, compared with, for instance, the Republican Party's 1994 "Contract with America." I'll leave alone for a moment the wishful thinking (we'll put senior citizen interests ahead of pharmaceutical company interests, and we'll raise the minimum wage and give everyone a pay raise.) For the moment, I want to focus on the proposed tuition tax credits and the lower interest rate on student loans. A simple tuition tax credit means the more you spend on tuition, the more tax credit you can claim. Let's do an incidence analysis on this. Joe Poor spends $2500 at a community college. Joe Poor may not be paying any income tax anyway. Richie Rich spends $40,000 at a name-brand private university. Richie Rich files the long form. Does my example generalize? Public finance students: looking for a thesis topic? You're welcome.
Now, let's lower the interest rate on student loans. That changes the risk-return profile on a college degree. It encourages more enrollment. Under the access and retention mentality that plagues all too many colleges and universities, this looks like a good thing. I suspect the policy also raises the attractiveness of the more expensive, more selective colleges (that positional arms race again) who might be in a position to adjust their tuitions further to reflect the incidence of the tax credits.