Education Tax Credits

Newspapers, Magazines, and blogs have been filled with articles and stories about the crippling reality of student loan debt on graduates. The national conversation about how to quell the exponentially increasing costs of a college education is one that has be continually in the spotlight, some have argued that student loan debt is the next financial bubble. As recently as this morning MPR was dedicating another hour on how to get an affordable college education. And for just as long as the debate has been going on, and even longer, government actors have been trying to devise some sort of relief for students. One of the more popular options has been education tax credits.

Education tax credits, such as the Hope Credit or Lifetime Learning Credit (see all options here), act as an offset to direct educational expenses that students incur. Credits are most often refundable, which means that some of the money could end up directly in the student’s pocket. Of course in this system the hope is that the extra money returned will be used to pay for other educational expenses. The question then remains if these tax credits do enough to change the reality of the large debt-load of college students?

The national average loan debt per student is currently around $25,000. If a student were to receive the The American Opportunity Credit for all four years of their undergraduate career, at its maximum level of $2,500 per year,  they would receive $10,000 in tax credits. This is a good amount against the national average debt loan, but the average does not tell the whole story. In Minnesota the average student loan debt is $29,000, the 4th highest in the nation. Which means the amount of the American Opportunity Credit becomes less substantial. And when you take into consideration the fact that some schools have an average student debt load about $40,000, the power of the tax credit dwindles further.

Education tax credits may not be as powerful a tool to combat student loan debt-load as they were originally thought to be, but they are still a tool that should be utilized.  As tuitions increase and the need for a college degree becomes even more essential, the conversation around student loan debt will continue. And as the conversation continues on, so should the use and expansion of education tax credits.

 

Lessons from the VAT

London’s Oxford Street has over 300 shops stretching along one and half miles; itreceives 200 million visitors each year, making it Europe’s top shoppingdestination. Just over a year ago,the United Kingdom decided to capitalize on this attraction by raising its VAT,value-added tax, from 17.5% to 20%. Actually, the increase had little to do with Oxford Street and everything to dowith the UK’s budgetary concerns coming out of the recession.

OnJanuary 4,2011 Chancellor Osborne increased the UK’s VAT 2.5 percentage points in effort to relieve debt byraising a projected £300billion in one year. Highlycriticized by the Labour Party, the Federation of Small Businesses, retailersand residents, the VAT hike quickly fell shadow to other financial issues, such as thedramatic increase in University tuition. The UK willsignificantly benefit from the additional VAT revenue brought in during the2012 Olympics – despite the fact most items over £75 are VATexempt for non-European Union tourists under the Retail Export Scheme and London taxpayers will have to cover costs of the mismanaged Olympic Park budget.

The value-addedtax, a consumption tax, is used in most developed nations but hasn't been seriously considered as an option in the United States - except in Michigan. The value-added tax is regressive innature, although the UK exempts products such as food, books, and children’sclothing; other items such as domestic utilities are taxed at 5%. As a result, many argue the VAT can be a fairly progressive form of taxation. The recent VAT rise in the United Kingdom willdisproportionately harm the poorest residents, but it avoids raisingincome taxes.

Thevalue-added tax resembles a traditional US sales tax to consumers because theend product is taxed at a flat rate; the difference lies in the multi-stageproduction process. VAT is only used on gross margins, the value-added along the supply-chain spectrum – this avoids tax cascading. The process benefitsbusiness and manufactures, however a dollar taxed to the consumer does notalways equal a dollar gained by the government - VAT createsadditional deadweight loss. Value-added taxes are structured to avoid taxevasion, but are oftentimes subject to carousel fraud.

Although the value-added tax is moreapplicable to international economies, it is an important alternative model tounderstand. Plus, Michigan used it!