III. Educational Tax Credits:  Toward an Equitable Solution

     Immediate steps can be taken to encourage the development of the widest possible range of educational opportunity in America, by restoring control over educational choice to families and offering alternatives to a failed public education.

     The most important of those steps is to "de-tax" and deregulate educational choice by enacting educational tax credits.

The Clark Tax Credit: What It Is and What It Does

     What Ed Clark is proposing is not a tuition tax credit, nor is it a "voucher."  The educational tax credit is a new concept designed to facilitate maximum educational choice for all, while disentangling education from government monopoly control.

     The educational tax credit provides for a 100% credit against federal income taxes for educational expenses actually incurred during any taxpayer’s tax year.

     * A $1,200 maximum tax credit per student may be taken in any given year.  This amount will increase if necessary to account for inflation.

     * Students benefited may be enrolled in elementary, secondary, postsecondary or other similar programs but must be 21 or under.

     * Students benefited need not be related to the taxpayer.

     * Individual taxpayers may consume their entire federal income tax liability with educational tax credits, subject to the $1,200 per student maximum.  Corporations may also support the education of as many students as they wish under the tax credit's provisions (subject to the $1,200 ceiling each), but may consume only up to 25% of their corporate tax liability with such credits.

     * "Educational expenses" may include but are not limited to tuition and/or fees.  Educational expenses are broadly defined to include non-institutional and quasi-institutional educational alternatives as well as the currently widespread institutional ones. Examples include equivalency examinations and preparation for them, structured home-study courses, and work-study programs, among others.

     * At a minimum the states will be required to refrain from impairing the evenhanded application of the education tax credit by further restricting existing educational alternatives via accreditation or other public-school "protective" legislation.


     Implementation of the education tax credit will free up substantial sums for improving the educational opportunities that American children have available.

     The flexible design of the tax credit makes it possible for givers and beneficiaries to "link up" in any number of ways, and how they do so will depend upon their preferences.  It is safe to assume, however, that a consensus exists among a great many taxpayers, both individual and corporate, that they would prefer to see some portion of their present federal income tax payments spent to achieve a known good (such as education), rather than let the money disappear into the maw of Washington's bureaucracy.  Since such giving is economically costless to them -- taking the tax credit involves no loss of
other tax benefits -- the incentives for financing a wide variety of educational choices are unobstructed.

     Still, familiarity and long-standing practice suggest that, when it comes to educational tax credits used outside the taxpayer's own family, what might be called the "United Way" approach will at first predominate. The educational tax credit allows only expenditures of up to $1,200 per child to be credited against the taxpayer's tax; thus, if the taxpayer desires to give a larger amount to educational purposes and credit all of it against his tax, it would be necessary to show that his amount benefited more than one student.

     Three possible ways to do this are:

     * The taxpayer can give to, the United Way or some other voluntary social welfare organization, and the organization can distribute the money among the requisite number of students, either directly or indirectly,

     * The taxpayer can give to a school and the school can distribute the money among the requisite number of students, either directly or indirectly, or

     * The taxpayer can give directly to personally chosen students.

     Since the United Way-type organizations are currently in existence, and they are capable of accommodating the informational tasks of distributing educational tax credit-inspired gifts in accordance with the $1,200 per student ceiling, it is highly likely that most giving under the credit will occur via such organized voluntary social welfare organizations. Similarly strong possibilities include local community and/or parent-teacher organizations, unions, etc.

Fears Answered

     Since the design and intent of the tax credit is to encourage the spirit and practice of mutual aid on an individual and community level, it is proper to question whether this kind of interpersonal assistance is superior to the kind of bureaucratized, impersonal welfare assistance we now have, or to alternative programs.

     Some tax credit critics, notably the National Educational Association and voucher proponent John E. Coons, have raised the specter of "chattel slavery" being fostered by a system which encourages individuals to give toward the education of others.  Though this objection has not been raised in the past in relation to tax-deductible educational contributions, and no cloud has appeared over the practice of giving to colleges and scholarship funds, for some reason the full tax credit inspires fears of "the rich" exploiting "the poor" by giving them money.

     What is far more likely is that educational giving will take many forms, the most common of which occur within the extended family. Non-family educational expenditures will, as noted above, probably be routed through the same voluntary social welfare agencies which have capably raised and administered such funds in the past.

     The fear of exploitation via educational giving arises from an unreasoned extrapolation of the current shortages of givers relative to potential beneficiaries.  But, in fact an educational tax credit will dramatically expand the number of givers and the total amount of money given to educational purposes, and it is reasonable to infer that his shift will work to the advantage of the recipients of aid.  It is difficult to "exploit" a needy student when several low-cost educational alternatives compete for his or her choice.

     There are few in this day and age who would argue as a matter of principle that all social assistance should be centralized under the authority of government; recognition of the value of so-called "mediating institutions" is widespread.  Still, let us see what is claimed for government: that, because its functionaries have no interest in making a profit, it can operate at a lower cost than private agencies; and, most of all, that it dispenses social assistance without invidious discrimination.

     These tenets have been fairly debunked by a spate of analyses of government welfare, and these criticisms apply with special force to educational Government agencies do engage in self-seeking economic behavior, and the fact that 42 per cent of black seventeen-year-olds are functionally illiterate suggests that even though public educational finance may be innocent of invidious discrimination, it almost surely discriminates according to the social and political status of various constituencies.42

     Still, critics such as Coons insist on government enforced guarantees of aid, and they are willing to substitute for a diverse number of givers and multiple competing approaches a single monopolistic giver of educational aid, with whom needy students must take their chances. Their distrust of true diversity runs so deep that they would distribute general tax revenues to the public via "vouchers," rather than allow the public to allocate their educational dollars independently of the tax collection system.

     Whether or not vouchers can be constructed in such a fashion as to avoid government intervention in educational choices has been debated at length, most recently during the course of two California educational finance initiative campaigns.  Voucher proponents have placed a great deal of faith in the capacity of statutory language to restrict the natural Inclination of state departments of education to interfere in vouchers.  This Polyannish faith in legislation won't wash, however: so long as the government has the opportunity to give money, there is little that can keep it from exercising control by withholding.

     Milton Friedman, an early proponent of vouchers and one who sympathizes with the proposition that government should act positively to assure equal access to educational aid, nevertheless supported the National Taxpayers Union approach of letting voluntary, decentralized giving substitute for government administered educational aid. Speaking of the National Taxpayers Union California educational tax credit which closely mirrored the 1978 Clark for Governor proposal and serves as the precursor to this one, Friedman said:

I strongly support the Educational Tax Credit initiative sponsored by the National Taxpayers Union.  Its effect would be essentially identical with the kind of unrestricted voucher plan I have been supporting and promoting for decades.  Either plan would give all families, from the very poorest to the very wealthiest, the effective freedom to choose the schools their children attend, a freedom that is now available only to those families that can afford to pay twice for schooling.43
     Another fear oddly opposed to the one discussed above is that educational tax credits will create too wide a choice in schooling, opening the marketplace to quacks and unusual methods of education. Insofar as this apprehension arises from the possibility of charlatans arising in education, it should be answered by pointing out that free and open competition should help reduce, not increase, the incidence of consumer fraud in education.  To the extent that this fraud now goes on within public education, there is little recourse except to political action -- an imperfect avenue at best.

     Private schools, by contrast, have frequently taken it upon themselves to provide independent verification of the services they promise to consumers.  Speaking to the issue of proposed accreditation requirements to be added to the California education code, Joseph P. McElligott, Director of Governmental Relations for the California Association of Private School Organizations, said:

...The Western Association of Schools and Colleges (WASC) is the independent accrediting agency through which almost all public and private secondary schools are accredited.  At the elementary level, public schools have no accreditation requirement.  In the private sector, most denominational private school groups have developed their own "WASC-like" self-study and outside evolution processes and have been employing them for over a decade.  Currently, the Catholic school systems of the Archdiocese of Los Angeles and the Dioceses of Orange and San Diego have joined WASC's elementary accreditation system.  In summary, one could conclude that private elementary education is far ahead of public elementary education when it comes to accreditation.44
     Apparent proof of McElligott's claim was supplied when the state Department of Education staff, urging passage of restrictive legislation over private schools in 1979, relied upon the theoretical risks of an open education market rather than presenting a platterful of fraud and malpractice cases drawn from among California's then  - 3,040 nonpublic schools and 451,320 nonpublic school students.45

What Is the Tax Credit's Expected Effect?

     Interviews with private school officials and industry observers have led the architects of the educational tax credit to predict a maximum of 70% increase in nonpublic school enrollments during the first year of the credit's operation, taking nonpublic school attendance from approximately 4.5 million at present to 7.65 million.46

     This figure represents an expected upper limit on the public school enrollment loss depending upon a number of closely interrelated variables.  First, the capacity of major urban sectarian schools to absorb more enrollments is limited by their existing plant, unless public schools demonstrate an unexpected receptivity toward selling off unneeded school buildings to resurgent private competitors.

     The possible growth of quasi-institutional educational alternatives is also a major unknown, and will be affected by the degree of inflexibility found in the major parochial systems. Unaffiliated community-based or independent Christian schools represent the fastest-growing segment of the nonpublic school sector, and their expansion appears unlikely to slow in the near future, tax credit or no.47

     Finally, the applicability of tax and spending limits to public school systems will also shape the growth of educational alternatives. It can be expected that unless restrained, public school systems will attempt to compete against nonpublic alternatives primarily by means of increased budgets, and the threat this poses not only to fiscal sanity but also educational choice is serious enough to warrant an effort by the federal government to see that federal funds, at least, are not used to frustrate nonpublic competition at the local level.48

     A more comprehensive solution for this problem is to adopt at the state level a spending limit provision similar to that enacted as part of Proposition 4, the California spending limit passed November, 1979. Proposition 4 compels local government to restrict its spending (and to pass through savings in the form of tax cuts) in accordance with population changes and the consumer price index, but schools are obliged to substitute enrollments in place of population. Thus, if an inferior public school loses students to nonpublic alternatives, it is required to cut its budget accordingly. Failing state action in this regard, the federal government could begin to restrict aid to local school districts along the same lines.

Financial impact

     If the educational tax credit induces a 70% increase in nonpublic school enrollments, this will result in a sizable diversion of revenue out of government control into that of families. If each of the expected 7.65 million students in question claimed the full $1,200 credit, or the credit was claimed on their behalf by parents, relatives, of other donors, the effect might be as high as a $9.2 billion tax cut.

     This is an upper boundary for two reasons. First, many church-related schools do not charge as much as $1,200 per student, so their students could not claim the full maximum amount. Also, parents who have less than $1,200 in federal income tax obligations -- a substantial number under Clark's program for deep and general tax cuts -- might take only the credit which could be claimed on their own return and not seek additional assistance.

     However, the impact upon the federal income tax take represents only part of the social costs and benefits. With a 1977-78 average cost per pupil of only $819 compared to $1,739 for government run-schools49 nonpublic schools offer the possibility of major savings in the total cost of education.

     This more than 2-to-1 cost differential make possible a beneficial effect for even those students whose families choose public schools.  For, as some students choose non-public alternatives, the per-student savings at public schools out-weigh the maximum per student revenue losses, leaving more money per student for those attending public school.  The differentials between public and private tend to be highest where public schools are the worst, in major urban areas where public schools now spend upwards of $2,500 per pupil.

     This puts the lie to assertions that educational tax credits and the free choice they engender will "leave" a residual core of disadvantaged children to the public schools, now supposedly to be impoverished in the wake of the tax credit.  First, the public schools will have to be deprived of more than the tax credit's maximum amount before they end up with as little money per student as they had before.  Second, the public schools' high retention rate of socially and learning-handicapped children is the result of their own policy-determined attempts to make "mainstream" education attractive and useful to those pupils who in the past would have been consigned to classes for retarded or delinquent students.

     Without advocating a return to ostracism for children with special needs, it is increasingly being urged that some of these children do best in school situations which pay at least some attention to their needs.  This is an educational alternative hardly provided at all in "mainstreaming" situations, and oversupplied in classes which separate these students from their peers.  In other words, what we have here is a classic application of the flexibility and diversity which one finds in an open market as opposed to public monopoly service provision.  One would therefore not expect the parents, guardians, and others concerned about the needs of special children, to ignore those needs simply because public schools will take these students in for "free;" instead, one would expect nonpublic schools to exert their ingenuity in a competitive effort to provide these students with a useful education.

     With these considerations in mind, minority leaders such as Roy Innis of CORE and black economist Thomas Sowell have thrown their support to tax credits for education.  In Sowell's words:

(the tax-credit) is most important to those who are mentioned least; the poor, the working class, and all whose children are trapped in educationally deteriorating and physically dangerous public schools.  Few groups have so much at stake in the fate of this (program) as ghetto blacks...
The crux of the controversy is choice and power.  If parents are given a choice, public school officials will lose the monopoly power they now hold over a captive audience.  The monopoly power is greatest over the poor, but it extends to all who cannot afford to simultaneously pay taxes for the public schools and tuition at a private school.50
     This educational tax credit program will not destroy public schools.  In fact, it should improve them as they move to offer a better education to compete with other alternatives.  A dose of competition should be entirely beneficial to the public schools.  Of course, if public education does not improve, then, like any other good or service in the marketplace, it will attract a smaller
and smaller share of the market while its more creative, innovative, and responsive competitors continue to upgrade their product.

     What the Clark proposal would do is open up the system, giving all students the chance to get a decent education.  Can we do less for our children?

Chapter II
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