The Tax-Credit Proposal

Abstract

T HE tax-credit bill started several years ago when tax relief was in the air. There was, and still is, a feeling on the part of many Congressmen that they wished to provide some relief to taxpayers in the college education of their children and, at the same time, to alleviate institutional financial problems. The tax-credit plan did not originate with me. I merely became the spokesman for it before the House Ways and Means Committee in I958 in my capacity as chairman of the Committee on Taxation of the American Council on Education. Simply stated, the tax-credit plan is one way of using the tax laws to aid education. There is probably more agreement on this proposal than on any other that has been advanced. There is nothing unusual about seeking Congressional aid for colleges and universities through the tax laws. I feel that this means of aid is sometimes dismissed too lightly. An example of this sort of aid was the increase in I954 from 20 to 30 per cent in the permissible deduction for charity from income reported for taxes -a change which was achieved with relatively little effort. On the other hand, some educators worked very hard on the I954 Internal Revenue Code Revision to obtain certain additional tax deductions for parents of college students. Aid is also given to colleges through the subsidized interest rate on loans through the Federal Housing Program for the construction of dormitories and other buildings. Both public and private institutions, incidentally, have benefited from this. The tax-credit plan started about five years ago, and it is essentially quite simple. The word has special significance, in that it is a credit against the tax, not a deduction from taxable income. In other words, a taxpayer computes his tax and then deducts the amount of the credit directly from his tax bill. The approach for which I testified was a credit of 30 per cent of the amount paid for tuition and related fees to an institution of higher education. There was a maximum credit of $450. Thus, if tuition were $I400, the credit would be $420; if it were $6oo, the credit would be $i8o; if it were $ioo, the credit would be $30. The taxpayer would reduce his tax liability by 30 per cent of tuition, up to the limit of $450. Generally, this gives a much more substantial benefit to the taxpayer than would a deduction from income prior to the computation of tax. There is a precedent in the Internal Revenue Code for tax credits in the provision for dividends credit. Anyone who receives dividends and has filled out his forms and taken the 4 per cent credit knows exactly how the tax-credit plan works. The existence of this provision has helped considerably in the presentation of the tax-credit plan to the Ways and Means Committee and other professional men in Congress. The purpose of the credit approach, of course, is to equalize the benefit between the taxpayer in the high tax brackets and the taxpayer in the lower brackets. Take the example of an institution charging a tuition fee of $iooo. The taxpayer in the 20 per cent bracket gets a credit of $300 against his tax, and the taxpayer in the 8o per cent bracket will also get a $300 credit against tax. That, compared to other possible approaches, is an advantage. The ordinary way of providing relief would be to allow a deduction from the gross income subject to tax. However, a deduction greatly favors those in the high tax brackets and is rather unfair to those in the lower brackets. Under the tax-credit plan, any taxpayer with a child in college would benefit from this to some extent, except where an institution charged no tuition whatever. It would, of course, help only the individual who is paying some income tax. It would not help the taxpayer who receives a large part of his income from tax-exempt bonds, nor the individual whose exemptions are large enough to cover his entire income. Some have objected that the benefit would be wasted on students with well-to-do parents, in that these individuals do not need tax relief to send their children to college, and the government would lose the revenue. This loss could