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.