Income inequality, education and taxation

A recent blog post from The Tax Foundation (3/16/12) points out - "Census Data Shows Inequality Linked to Education, Not Taxes."   For years, data has shown that college grads tend to make a lot more annually than do those without a college degree.  But whether that means that taxes are completely innocent for the college versus non-college earnings situation doesn't tie for me. I raise the issue here of whether some of the government spending decisions, including the structure of tax expenditures (special tax rules), supports inequities that may make it more difficult for low-income individuals to get to college and to complete a college degree.

Some examples:

• The American Opportunity Tax Credit provides up to a $2,500 tax credit annually for each of the first four years of college for a student (so $10,000 tuition and expense assistance in total). This special tax rule is not available to all taxpayers because there is a phase-out provision. But that phase-out provision doesn't start to kick in until a fairly high income level - $160,000 for a married couple (no credit available once their income exceeds $180,000).  At this level of income, the couple is unlikely to qualify for a needs based college scholarship for their child.  We often hear that there is insufficient funding for Pell grants. So why are we giving government dollars (that come from all taxpayers) to people who don't really need it? (see my 3/22/11 post)
• Some (including me) would argue that our current charitable contribution rules are too generous.  There are a few examples, I'll share one tied to this education and tax topic.  I often hear from friends that the PTA or Home & School Club at their child's public school tells them they are expected to "donate" a certain amount based on how many kids they have attending the school. Under our existing tax law, this is a deductible charitable contribution.  The money is used for your kid's education. If they were at a private school, the amount would not be deductible. Let's eliminate charitable contribution deductions to schools your child attends.  This would raise more revenue that could be used to help schools where parents can't afford to donate money, for example.
• Another inequity tied to donating money to schools (or anywhere) is that as a deduction, it is an "upside down" subsidy in that it provides a greater benefit/subsidy to higher income individuals. For example, two people donate $2,000 to ABC Elementary School (or any charity). One donor is in a 20% tax bracket and the other in a 35% tax bracket. The 20% bracket donor is out of pocket $1,600 after taxes, but the higher income donor is only out of pocket $1,300. Changing the deduction to a credit would make this more equitable. It could also be cut back to enable federal and state governments to have more revenues to help address inequities in educational opportunities.
• Another area for modifying charitable contribution deductions is to reduce the deduction (or ideally credit percentage - see prior bullet point), is to have categories of donations. Some donations are made to entities with billions of dollars, such as some private college endowments. We are all funding getting more into these rich coffers due to the tax deduction. This could be cut back and revenues used to improve educational opportunities for those in need.

This is just a few examples of how the tax law contribute to enabling or supporting inequities that help continue income inequalities. The examples above tie to education but there are other inequities in the tax law which, if addressed, could generate funds to help reduce educational opportunity inequities that can help reduce growing income inequalities.

What do you think?