Rethinking Education Tax Credits

Should advocates of free markets and economic liberty promote such reforms as charter schools, vouchers, and tax credits for education?

In an article for the Objective Standard — and a follow-up reply to critics— Michael LaFerrara argues that vouchers threaten to subject nominally private schools to government controls, whereas tax credits promise to “reduce government involvement in education immediately and lay the groundwork to eliminate it over time.”

LaFerrara grants that choice among government-run schools (such as the charter system) “may yield small improvements in the short term,” but without achieving long-term advances in liberty. I am somewhat more enthusiastic about charter schools; Colorado has done reasonably well under a robust system of choice among traditional “public” schools and charter alternatives. Two of my second-cousins attend a good charter school north of Denver, and I’ve been impressed by the Ridgeview Classical School in Fort Collins. However, such reforms apparently haven’t helped to improve Colorado’s worst schools. Do either vouchers or tax credits offer hope for more fundamental reform?

LaFerrara opposes vouchers for the basic reason that they act as government subsidies. Vouchers pass from the hands of taxpayers, to the government, then to parents for use in schools of their choice. This creates two major problems. First, it leads to more government controls of nominally private schools. As LaFerrara summarizes, “Whoever pays the bill ultimately has the power to set the terms” — and he gives concrete examples of how precisely this has happened with voucher programs. Second, vouchers entrench the welfare element of government education by forcibly transferring money to lower-income parents.

To LaFerrara, the key distinction of tax credits — and he promotes a robust reform allowing anyone who pays taxes for education to direct their money to the education of any child — is that the person earning the money spends it, and it never passes through the government. For this reason, he argues, tax credits do not inherently threaten market schools with more government controls, nor do they entrench forced wealth transfers.

However, I remain unpersuaded that a tax credit proposal such as LaFerrara proposes would remain immune from onerous government controls. Notably, the article from the Alliance for the Separation of School and State that LaFerrara cites favorably and extensively in his original article claims that “the drawbacks of vouchers are also inherent in universal tax credits.” This is an issue I’ve wrestled with; one of the first articles I wrote for my web page criticized vouchers and tax credits,whereas an article I coauthored earlier this year more seriously entertains the potential for tax credits even while acknowledging their drawbacks.

The fundamental weakness of LaFerrara’s argument is that, with tax credits, the government continues to forcibly transfer people’s money to education. Yes, you can choose either to pay taxes to standard “public” schools or redirect that money to the educational activities of your choice. True, under a tax credit system such as LaFerrara describes, the money goes directly from its earner to an educational activity, rather than first pass through the government. But still the person who earns that money is forced by law to transfer it to education, one way or another. You could not, for instance, spend that money on your own (noneducational) business, a vacation, or your retirement plan.

Thus, even though a tax credit does not funnel that money through the government, it still extends the government’s claims over that money. In a very real sense, the government continues to claim ownership of the funds in question. The difference is that, rather than forcibly seize those funds directly, the government directs those who earn the funds how to spend them (within broad limits). The money is not fundamentally owned by the person who earns it.

In his critical letter, Steve Plafker raises the possibility of parents spending “their” education money on going to the movies and sporting events. We can extend the examples: what about Disney Land? What about schools that teach Satanism or Islamic Jihad? LaFerrara replies, “[U]nder 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.”

But there is simply no way a law such as LaFerrara describes would ever pass. Because tax credits in fact recognize government claims to the money in question, tax credits would inevitably extend government controls over the use of that money. Government would define acceptable uses of the funds, and the notion that a tax credit program could encompass a School for Watching Cartoons or a School of Islamic Jihad or a School for Christian Fundamentalism is a fantasy.

Consider also the rampant corruption a totally uncontrolled tax credit system would promote. Here is a hypothetical. A parent could claim the entire tax deduction, start a “school” that consists of watching free online cartoons, and then pay himself a “salary” for the entire portion of the tax credit. Again, it is simply a fantasy that a law allowing such a thing could ever pass.

A tax credit system may not threaten as severe of controls over nominally private schools, but certainly it would bring government guidance for the spending of those funds. There might be other good reasons for promoting universal tax credits for education, but tax credits will not eliminate government controls over education spending.

What, then, does real education reform look like? Advocates of liberty in education must protect and expand the liberties of homeschoolers and private schools. They must check runaway spending on government education and seek to disempower the teachers’ unions.

Beyond that, the basic effort must be educational and ideological. That is, people must advocate real liberty in education, including the individual freedom to choose not to fund any educational activity. (Please keep four salient points in mind. First, currently the government forces people without children to fund education. Second, in a truly free market, many people would willingly contribute huge sums of money to education. Third, parents who do not provide their children with a basic education, as with parents who do not provide adequate nutrition, may be charged with child abuse. But, forth, many parents could ably educate their children for much less than they’re forced to pay in taxes for education.) As LaFerrara recognizes, a truly free market in education remains a distant ideal. But we cannot move closer to that ideal without advocating the fundamental principles of liberty and individual rights.

Insofar as tax credits further entrench the principle that government may force people to spend their earnings on other people’s education, they hinder, rather than hasten, the movement toward true freedom in education.


RussK commented June 18, 2011 at 3:39 PM
I enjoyed LaFerrara’s article in The Objective Standard very much, but, likewise, I was hesitant concerning the tax credit solution. Ever since I was introduced to the voucher versus tax credit debate–going back to the beginnings of the Florida voucher system–I have always been more open to tax credits; however, there is much that makes it a problematic solution for both freedom and education, of which you point out in your article. Simply put, the government will continue to define education, whether the money flows through vouchers or tax credits. Just as the Florida voucher system brought standardized testing to private schools, it is just as likely a tax credit system would do the same. Furthermore, on a more economic level, tax credits can have a negative or inflationary market effect, whether housing, green energy, or, in the future, education. Freedom and proper education should be promoted through principle. Flooding education with tax credits, the use of which would be defined by the government, would only skirt the issue of freedom and how to educate a child, as well as further destroy what is left of private education.

Brian T. Schwartz commented June 19, 2011 at 9:44 AM
For what it’s worth, Andrew Coulson of the Cato Institute (& author of “Market Education, The Unknown History”) has a working paper titled “Do Vouchers and Tax Credits Increase Private School Regulation?”

“School voucher and education tax credit programs have proliferated in the United States over the past two decades. Advocates have argued that they will enable families to become active consumers in a free and competitive education marketplace, but some fear that these programs may in fact bring with them a heavy regulatory burden that could stifle market forces. Until now, there has been no systematic, empirical investigation of that concern. The present paper aims to shed light on the issue by quantifying the regulations imposed on private schools both within and outside school choice programs, and then analyzing them with descriptive statistics and regression analyses. The results are tested for robustness to alternative ways of quantifying private school regulation, and to alternative regression models, and the question of causality is addressed. The study concludes that vouchers, but not tax credits, impose a substantial and statistically significant additional regulatory burden on participating private schools.”

The PDF is here:

Anonymous commented June 19, 2011 at 11:13 AM
Reminds me a similar argument. Should we support or oppose tax loopholes? Some Libertarians claim tax loopholes are mini bits of freedom. I say we abolish all tax loopholes in favor of a much reduced tax rate for every producer.

Regarding charters and the destruction of private school? Reminds me of a conversation I had with 3 senior citizen limited government folks. I suggested vouchers and they about flipped. They said government control follows government money. I simply said, don’t accept the money if you don’t want it. Secondly, government education monopoly will destroy the private market eventually anyways.

At the end of the day, The Feds need to be completely removed from education. State education should be minimalized and county may fund some schools however there is absolutely no reason why education cannot be totally privatized. Sure some will not educate in the tradition of current standards. Put them to work, oh yea we also have to abolish child labor laws.

Go to Khan Academy if you do not believe me. Free, non government education is here. It is waiting for the Statist to get out of the way.


Anonymous commented June 20, 2011 at 8:11 AM
More to the point,

So long as there is taxation for education, vouchers should be the norm. What better way to illustrate the benefits of choice and competition.

To ignore vouchers is to protect status quo. Status quo is the destruction of humanity.


Ari commented June 20, 2011 at 9:42 AM
The alternate view, Jeff, is that taxation for education is the status quo, and vouchers are a meaningless variation of that.

Anonymous commented June 20, 2011 at 10:10 AM

I see vouchers as an argument against education taxation. Many small schools will result, ultimately destroying the government monopoly.


mike250 commented June 21, 2011 at 8:56 PM
quite the opposite, the vouchers will just result in a greater monopoly. its just a pragmatic approach and I think education philosophy comes first.