A Tax Deduction for Educatoin; R. E. Cordato and S. Richman

In light of the recent defeat of the Prop osition 174 schoolchoice initiative in Cali fornia, perhaps it is time .to rethink the schoolchoice strategy. Even among advo cates of choice, there have been those who have had doubts about educational vouch ers. For decades they have warned that vouchers would be seen as a state subsidy to private schools and that that perception would be used to rationalize regulations from which private schools today are ex empt. How, it will be asked, can "the Roy Cordato is Lundy Professor of Business Philosophy at Campbell University. Sheldon Richman is senior editor at the Cato Institute. public's money" be permitted to go to just anyone who starts a school? Most people won't think it should be allowed. Thus, they will accept as reasonable an array of regu lations governing the hiring of teachers and curriculum. Advocates of vouchers are aware of that criticism, and they tried to prevent new regulation in Prop 174. But that may have been its undoing. The Economist com mented that the initiative ~ ~might well have passed if it had simply contained provisions requiring schools that received voucher money to meet some basic standards set by the authorities."

If so, advocates of vouchers who are concerned with the integrity of private schooling face a dilemma. What if the only voucher plan that has a chance of passing would make the private schools virtual car bon copies of the public schools? Surely, passing such a plan would not be worth the effort.

300 THE FREEMAN • JUNE 1994 What is needed is an alternative that cannot be mistaken for a subsidy, that cannot be used to rationalize regulation of private schools, and that will give parents at least some control over which schools their children attend. A federal income tax deduction for pri vate educational expenses would satisfy those criteria. Under this proposal, parents who finance their children's education di rectly from their own pockets would do so with pre-tax dollars. Similar to the way people contribute to an Individual Retire ment Account, all parents could take advan tage of this device, even if they do not itemize tax deductions. The deduction could also be available to those who paid for someone else's children's education. Tax free education savings accounts would be another way to accomplish the same goal. Educational expenses would include tuition for any sectarian or secular private school and outlays for homeschooling.

Critics might object that an education deduction would be a subsidy because it would lower the relative cost of private education. But economic analysis suggests otherwise. Such a deduction should not be considered a subsidy but the amelioration of a general tax penalty on savings and invest ment. When businesses are allowed to de duct from their taxable income those expen ditures intended to produce future income, those deductions are not considered a sub sidy. The economics of tax policy argues that all investment expenditures, whether made by businesses or individuals, should be treated in that manner; today they clearly are not. While some personal financial invest ments are not penalized (IRAs, and other retirement saving vehicles, for example), educational expenses are. Yet everyone from teachers' union president Albert Shanker to Milton Friedman acknowledges that education is an investment with some expected return. Its purpose is to enhance the future productivity and income of stu dents. Thus, principles of efficient tax policy suggest that all personal expenditures on education, whether by parents for their children's primary, secondary, or higher education, or by adults for continuing edu cation, should be made with pretax dollars.

And since an education deduction is not a subsidy, there could be no reasonable church-state objection to including reli gious-based schooling. A tax code that does not permit deduc tions for investment, including education, is biased against it. That seeming paradox -that apparently equal tax treatment of consumption and investment is in fact un equal treatment-is easily resolved. Imagine Jane Smith is deciding what to do with the $1,000 she hasjust earned. She will compare the satisfaction she can obtain from direct consumption, say, buying a big-screen television,· with the future in come that could be generated by investing the money in a certificate of deposit (CD) at a bank. If the $1,000 is taxed at 28 percent, both the returns to consumption (the size of the television) and the returns to investment are reduced. But the tax will reduce the investment returns a second time, because the interest on the CD will also be taxed. In that way, the income tax penalizes invest ment more heavily than it does consumption and therefore biases Jane's decision against purchasing the CD. Were Jane allowed to buy the CD with pretax income, the tax penalty would be eliminated. It is that logic that supports business deductions for capi tal expenditures, including payments for employees' education, from taxable in come. By forcing educational investment to be made with after-tax income, the govern ment penalizes such expenditures in the same way it does Jane's CD investment.

What's Fair Economics aside, the critics might persist in their belief that the tax deduction some how would be unfair. But in a free society, the fairness argument cuts the other way. As a matter of principle, letting parents keep more of their own money to educate their children should not be thought of as unfair. The claim that such a deduction would be unfair is based on the premise that the A TAX DEDUCTION FOR EDUCATION 301 government is entitled to all our income and that anything it lets us keep is a subsidy. That's an un-American idea to say the least. Far from being unfair, the deduction would actually create a more even-handed treatment of educational spending. Most public schools are supported by property taxes. Property taxes are tax deductible. Thus, parents' expenditures on public schooling are tax deductible. But their ex penditures on other forms of education are not. Our proposal would remove that bias by extending the deduction to alternative schooling.

A middle-class family in the 28 percent bracket that spent $5,000 for private-school tuition would save $1,400 in federal taxes, plus perhaps $500 more in state and local income taxes. That is not as much as the $2,500 that Prop 174 would have provided, but for some families it could be the margin of affordability between public and private school. The tax relief would not be as great for families in a lower bracket, although it might be enough to stimulate the launching of low-cost neighborhood private schools. The deduction might also prompt some parents to consider homeschooling, which more and more families are finding to be the best alternative of all. Finally, it may be asked, why shouldn't the tax laws favor the public schools? They should not, because in a free society and an uncertain world, people should not be un reasonably restricted in the trial-and-error process of raising their children and improv ing themselves to the best of their ability.

Public school administrators do not have a monopoly on wisdom. Parents and alterna tive providers may have a better idea. Free individuals should be able to face life's challenges with the widest latitude-and without being penalized by the tax code for doing so. 0 THEFREEMAN IDEASON LIBERTY Now FOR SOME SERIOUS EDUCATIONAL REFORM by Tibor R. Machan W hen the late Allan Bloom wrote his bestselling The Closing of the Amer ican Mind a few years ago, a debate ensued about just what might be wrong with Amer ican higher education. Bloom took what he considered to be a very serious approach to his subject matter and concluded, essen tially, that American colleges and universi ties have become hotbeds of philosophical relativism, the position that in the end ev erything is equally important, there are no objective standards by which to judge edu cational performance or even what is im portant to learn and what may be less important. Bloom said, in effect, that we have a philosophical problem with our ed ucational system, one that has serious harm ful practical consequences by leaving us without a compass, by disorienting us about values.