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Letters and Replies: Tax Credits for Education

From The Objective Standard, Vol. 6, No. 2.

To the Editor:

When I saw Richard Salsman’s forty-page article [“Economics in Atlas Shrugged” (TOS, Spring 2011)] listed in the contents, I couldn’t imagine how that much could be said about economics in Atlas, perhaps because Rand’s views on the subject always seemed so natural to me. Nevertheless, I loved every word. Salsman skillfully concretized the conflict by presenting modern views on economics before demolishing them with Rand’s words. I particularly enjoyed the description of Rearden at fourteen as the unmoved mover, and Salsman’s comparing Rearden to Steve Jobs. Thank you for the sheer pleasure of seeing two great minds at work, Rand’s and Salsman’s.

Eric Kalin
New York, New York

How can a tax-credit program keep government from regulating private schools, and is such a program politically viable?

To the Editor:

In “Toward a Free Market in Education: School Vouchers or Tax Credits?” (TOS, Spring 2011), Michael LaFerrara argues persuasively that voucher programs will lead to government regulation and control of private schools, and eventually to a de facto government takeover of private schools. But Mr. LaFerrara does not explain why this same objection doesn’t apply equally to his tax-credit program. He says simply, “The government would have absolutely no say in what constitutes legitimate education expenses and no ability to audit parents to determine whether they were using credits for expenses the government deemed acceptable” and goes on to show an attractive example of how the math would work out in practice.

Is it really plausible that any aspect of one’s tax life could remain totally and perpetually off limits to auditors? If so, it would immediately start attracting tax evaders who would create various types of “education”-related scams. More fundamentally, tax credits finance schools just as vouchers do. If money that people would otherwise owe the government were spent instead on private education, that would constitute an actual reduction in revenue to the government. So it seems that government would have all the same incentives under either a voucher or a tax-credit program to ensure that it approves of the schools that receive that money.

If these observations are true, the conclusion is that neither program would avoid an eventual takeover of private schools by government regulators, and that such a takeover can only be avoided by a full separation of education and state.

Alan McKendree
Austin, TX

To the Editor:

In Toward a Free Market in Education: School Vouchers or Tax Credits?” (TOS, Spring 2011) Michael A. LaFerrara discusses two proposals to reduce government control over education: subsidizing students through vouchers and tax credits. Mr. LaFerrara makes the case against vouchers by pointing out that, because “Whoever pays the bill ultimately has the power to set the terms,” the likely consequence of a voucher system is to increase government control over education. In its stead, he supports a tax-credits program, under which any taxpayer (including corporations) may reduce the amount of his tax bill according to how much he contributes to the education of children in K–12.

Doesn’t this proposal suffer from the same defect as the voucher program? Who will decide whether a particular expenditure qualifies as educational? How about a man who claims the tax credit for sending his child to the movies on Friday nights and to sporting events over the weekends? Or to political rallies? These expenditures are not without educational value, but will they be deductible? The decision will have to be made.

The government is in the tax-collecting business, and will be for the foreseeable future—and taxing authorities make decisions on deductibility. One cannot, therefore, eliminate the government’s say in what constitutes legitimate education expenses” or its “ability to audit parents to determine whether they were using credits for expenses the government deemed acceptable.”

That the government never gets its hands on the tuition dollars in question” will not stop it from claim[ing the right] to dictate . . . how that money is to be spent.” Those wanting controls will argue that a tax credit is the same as a subsidy—just as the same mentalities equate tax reductions with payments to the rich. They will claim that allowing the taxpayer to have a tax credit for his version of education is the same as the government’s giving the money to that version. Under this argument, the tax credit is no different from the voucher. It is then a small step to governmental limits on the uses for which the money is spent.

The breadth of the program will also work against it. The “fat cats and rich corporations,” the leftists will say, should not be allowed to use this “loophole” to give “our” money to “their schools” or to avoid their “fair share” of the tax burden. Leftists will also demand eligibility controls. For example, a bill pending before the Pennsylvania Legislature would establish, in part, tax credits for low-income children. To be eligible for the tax credit, however, a private school must “not discriminate in its admission policies or practices for opportunity scholarship applicants on the basis of measures of achievement or aptitude. . . .”

It will be more difficult for the government to justify regulation of education, but it will do it. I am sorry to make this point because it suggests that nothing can be done, in the short run, to ameliorate a horrible situation. Perhaps a more modest program that allows parents of public-school children to choose between the public schools would have some beneficial effect. Not a good solution, not really even a solution, but it does not possess the threat of extending control over private schools.

Steve Plafker
St. Davids, PA

Michael A. LaFerrara replies:

Mr. McKendree and Mr. Plafker argue, in essence, that the fundamental difference between my tax-credit program and school-voucher programs is insufficient to keep the government’s hands off the private schools. Mr. Plafker points out, “Those wanting controls will argue that a tax credit is the same as a subsidy.” Mr. McKendree says a tax credit is “money that people would otherwise owe the government,” and thus “government would have all the same incentives under either a voucher or a tax-credit program to ensure that it approves of the schools that receive that money.” Thus, they say, my tax-credit proposal suffers “from the same defect as the voucher program.”

First, note the philosophical divide underpinning the “school choice” debate: On one side is the collectivist notion that citizens’ earnings are the property of the state and children’s education is the responsibility of “society”—and on the other is the view that each citizen’s earnings rightfully belong to him and each child’s education is rightfully the responsibility of his parents. It’s either/or, and my proposal is based on and only defensible from the latter, rights-respecting perspective, a moral perspective that I assume my correspondents share.

Fortunately for those of us working from this moral perspective, the difference between the government taking and not taking possession of one’s money makes a legal difference—as the U.S. Supreme Court recently acknowledged. On April 4, 2011, the court rejected a challenge to a tax-credit program in Arizona precisely on the grounds that “tax credits are not owed to the State and, in fact, pass directly from taxpayers to private organizations. [The] contrary position assumes that income should be treated as if it were government property even if it has not come into the tax collector’s hands. That premise finds no basis in standing jurisprudence.”

Follow the money: With a voucher program the flow of funds passes from taxpayers to government to private organizations; with a tax-credit program, as recognized by the Supreme Court, taxpayers “spend their own money,” not “government property.”1 This distinction is real, it makes a difference, and the U.S. Supreme Court recognizes that difference.

Does this mean that leftists, teachers’ unions, and the like won’t argue that “a tax credit is the same as a subsidy”? Of course not; standing on the opposite side of the philosophical divide, they most certainly will make that argument. Indeed, Supreme Court Justice Kagan, writing for the minority in the above-cited case, did just that, claiming that it makes no difference whether the government were to “reimburse buyers with a check; or . . . pay with a tax credit.”2 But it does mean that as of now advocates of tax credits have both moral principle and legal precedent on our side. By embracing this fact and by arguing not only on legal grounds but also, and more importantly, on moral grounds, we can advocate a tax-credit program that serves as a bridge to move this country from the status quo, in which government involvement in education is violating rights and destroying minds, to a free-market education.

Not all tax-credit programs are created equal, however. For instance, the proposal before the Pennsylvania Legislature that would establish tax credits for low-income children and mandate that a private school “not discriminate in its admission policies or practices for opportunity scholarship applicants on the basis of measures of achievement or aptitude”—is the kind of tax-credit program that advocates of free-market education should reject, precisely because it calls for government control of private schools’ policies. To my knowledge, my proposed program is the only one that explicitly calls for walling off the government from both private money and private schools. It’s also the only proposal that is specifically designed to counter arguments for increasing or reinstituting government controls.

As to Mr. Plafker’s and Mr. McKendree’s concerns about “a man who claims the tax credit for sending his child to the movies” or the like, or “who would create various types of ‘education’-related scams” (although I’m not sure what is meant by “scams” here), under my proposed tax-credit program, parents would be within their rights to treat money spent on a child’s trip to a movie—or any other activity they regard as educational—as an educational expense. What’s the alternative? The only alternative is to have government dictate what constitutes a valid private educational expense—a practice that is the essence of the problem we need to solve. A government with the power to veto one “politically incorrect” private educational choice ultimately has the power to veto any educational choice. Again, it’s either/or.

The fact is, however, that the government has no moral right to dictate what constitutes a proper (private) educational choice. And because my program involves no public subsidization of private education, it defuses the primary political “justification” for government interference in parents’ decision making about their children’s private education.

As I argued in my article, the government should be statutorily forbidden“to audit parents to determine whether they were using credits for expenses the government deemed acceptable.” It is crucial that advocates of free-market education not concede the statist premise that the government has any right to regulate private education for any reason. If we do make such concessions, we may as well give up now.

As for the claim that the “breadth of the program” will work against it because it allows “fat cats and rich corporations” to divert their money from public to private schools, I disagree. I think most people will see this aspect of the program as a huge plus once it has been properly explained to them. Consider that under my program, if a wealthy man has an estimated education-related tax liability (ETL) of $100,000 and two children, the tax credits he may claim for the education of his own children are limited to the average per-pupil cost of public school attendance (AAC) in his area. In the examples in my article, I used a hypothetical AAC of $10,000; assuming that same AAC in this scenario, he could deduct only $20,000 for his children’s educational expenses. The remaining $80,000 of his ETL must either be sent in with his taxes per usual to fund the public schools—or be used by him to fund up to $80,000 worth of private education for other children. He thus has incentive to use his $80,000 to fund the education of other children according to his standards, rather than hand his money to the government. Either way, his “fair share” is paid and no child loses education funding.

Further, this aspect of the program would dramatically increase parental choice. Remember that under the status quo the child’s school is assigned by a government bureaucrat based upon the parents’ address—no choice at all. My proposed program would create an avalanche of philanthropy flowing from wealthier families and corporations to lower- and middle-income families seeking to send their children to private school. This would create myriad opportunities for countless families and children to receive a better education. Yes, the left will balk at all of this—as it always balks at expansions of freedom and contractions of political controls. But I think most Americans will see great value in this feature. And imagine the public outcry should the opposition attempt to block children of limited means from attending better schools funded by tax credit donations.

Mr. McKendree writes that “an eventual takeover [of private schools] by government regulators . . . can only be avoided by a full separation of education and state.” Such separation is indeed my ultimate goal. But America is not philosophically ready for such a separation to happen overnight. The best we can do given the current philosophical context is to take solid, principled steps in the right direction. Toward that end, we need a concrete program based on the principle that people have a moral and legal right to spend their untaxed money on private education as they see fit. By empowering parents to “opt out” of the government education racket, we are essentially initiating the separation of education and state one child at a time—with the ultimate goal being a fully free market in education.

Although Mr. Plafker’s suggested reforms such as allowing “parents of public school children to choose between the public schools” may yield small improvements in the short term, as he acknowledges they will do nothing “to ameliorate a horrible situation” in the long run. My plan, if enacted, would reduce government involvement in education immediately and lay the groundwork to eliminate it over time. That is worth fighting for.

← Return to Summer 2011 Contents

Endnotes

1 “U.S. Supreme Court Dismisses Legal Challenge to Arizona School Choice Program,” Institute for Justice, http://ij.org/about/3751, emphasis added.

2 Linda Stamato and Sanford M. Jaffe, “The State, Religion and the U.S. Supreme Court,” NJ.com, http://blog.nj.com/njv_guest_blog/2011/04/the_state_religion_and_the_us.html.