Simple Tax Idea For Students And Businesses

I have long held that our current system of taxation is a bad one.  It’s oppressive, is changed too often, and encourages cheating.  Further, the more complicated the tax code, the more likely you are to have to spend more time, and in many cases money, sorting out what you do and don’t owe.  It’s onerous and I hate the current system.  I want to hack it.

With that out of the way, it was with some interest that I was reading this article about the multitude of tax programs which are being enacted to help students get out of debt post school.  When thinking about any program, I view it in the same lens as I would a product that I would take to market.  First is who is my customer, but second is how do they become aware of the product.  For the average person, staying on top of all of these government programs is challenging at best.  In times like these, I prefer to opt for simplicity.  With that, let me propose some assertions, and then a potential solution:

1) As a country, we should aspire to have a more educated work force

2) The cost of college, university, and graduate education is rising faster than the rate of inflation, making it more un-affordable with each passing year

3) With the current tax system, a higher paid, and more productive, work force should, ceteris paribus, generate more tax revenues

If we can all agree on those assertions, then I propose this simple tax plan:

If you borrowed money to attend college or graduate school, and are now working full time, you do not pay taxes.  All federal taxes that you would have paid are instead diverted to paying down your student debt.  There are no exemptions allowed to reduce tax burden, and by extension extend the debt repayment schedule.

Simple right?  There needs to be some teeth in this, and fleshed out a bit more, but I am offering this one up to Congress for free.  Why?  Because I don’t have the ability to move the ball forward short of throwing this out there and having the community at large comment on, improve upon, and forward this to someone who might be able to something with it.

Think about who this serves.  As a student, you worry less about debt that you are taking on, because the mountain of debt waiting you at the end of your scholastic journey is now much, much more manageable.  As a body politic, we benefit from having a generally up leveling in the education level of our population because more people will find the prospect of continuing their education more economically feasible.  Unlike these other programs which seek to essentially allow for debt forgiveness, each person is responsible for their debt until it is paid off.

Someone looking at this might say that there would be a huge revenue hole to the government if all of the sudden you removed the tax revenues of debt repaying students.  I see that as an investment by the government in the population.  The notion that the better educated population will generate more tax revenues should be simple enough for them to understand.

Why is this good for business?  First, we have the better educated employees.  Second, you have an employee base that has more carefully considered their options.  No 18 year old really knows what they want to be when they grow up.  If you could go back to school at 25, knowing that the debt you are taking on will get repaid first before tax dollars, you are far more likely to make that decision.  As an older employee, with more work experience, and life experience, you are more likely to know what you want/ought to be doing with your life, and if that requires more education, it’s better for everyone that you remove yourself from a job you didn’t want (opening that position for someone else), and positioning yourself for a job you do want without fear of how you are going to pay for it.

How about looking at this from a numbers stand point.  The average student graduating in the class of 2008 will owe $23,200 for their efforts.  That’s a painful number.  I found this study which claims the range for post-secondary debt levels ranges between $27,000 and $114,000.  Yowsa.

For the sake of this discussion, let’s take a WA state resident, making $40K per year, but deciding that going back to school for a degree which will enable them to make $75k per year.  The difference in annual Federal taxes withheld (filing as single and no exemptions) is $5,268 for the lower income, and $14,164 for the higher.  Now, assume you jump from $75K to a $150K per year job (which is not crazy if you get an MBA).  The annual Federal tax liability jumps from $14,164 to $35,135.

See what I am getting at here?  A smart, thrifty student would pay down their debt the same way they were before this plan was enacted, but get the additional paydown accelerator afforded by this plan.  I am guessing most people would actually just have their taxes pay down the debt, which would free up disposable income, which is likely to be spent on taxable items.

Is my reasoning sound?  Am I missing something?  I am not a tax expert.  This is simply an idea that has been rattling around in my head for a while that I would love to see explored more.  Please, prove me wrong.  Tell me why this won’t work.  More discussion can only lead to more ideas.

  • CD

    Doesn't this scenario encourage borrowing money instead of saving money for college? I live a froogle life with alot of hard work to pay for my own college. If this were a true tax scenario I would be encouraged to borrow money (or work less) since my tax burden would be practically equivalent to my loan burden. You can't expect some to work extra to save the money to pay for college while others (even if they legitimately cant afford it since you cant make a distinction between someone who is lazy and someone who is less fortunate) wind up in the same situation, either pay tax or pay loans.

  • I think you're missing a major part of the economic impact of subsidizing higher education. Market forces come into play and the price of attending college will eventually rise to compensate for the subsidy.

    At the core of this problem is that supply for quality higher education is limited. There are only so many good teachers, well-designed curriculums, etc, and because there is a lot of demand, the price of attending these organizations is high. The local community colleges in my area (Indiana) are very affordable (~$3k/yr tuition) and provide a decent education. I think the real problem, if anything, is the disparity between middle- and upper-class institutions.

  • Aaron

    The main difficulty is that this plan would further remove the brakes from the already runaway cost of higher education in the United States (…), since it essentially allows universities to decide how much of the Federal pie it wants to eat.

    Investing in education at a national level is surely a good idea, but you need some kind of market or legislative force to manage the expense.

  • Interesting comments here and at Hacker News…basically that this plan would be a subsidy of the government, which would ultimately increase the cost of education, potentially pricing the very people this was meant to serve out of the market.

    @Steve points out that this is a scarcity issue related to the education itself. The implied statement is that this plan is addressing the wrong side of the curve. Would a degree from an online institution which mimicked Harvard's curriculum, and administered the same tests yield the same result as attending Harvard? I don't know the answer to that one, but feel confident in asserting that Harvard (an others like them) enjoy the price premium and would work hard to defend it.

    My bigger problem is in ascertaining whether the price run-up makes economic sense. Look at a school such as Harvard (I hate to be picking on them), but they basically have enough money in their endowment to let anyone attend. There will always be enough students who pay full boat that they don't have a problem. That said, with the endowment growth (the last 24 months notwithstanding), why does the cost of the education go up and up and up? Is it the new buildings? Are professorial salaries rising at the same rate? What are the cost components of these budgets that necessitate these increases?

  • eapen

    I really hope Obama sees this since he was asking for economic advice. This is really a good plan and one that will benefit the country.