The cost of kludge

There was a good piece yesterday at the New York Times’ Upshot by Susan Dynarski detailing how the $20 billion the government spends each year on tax credits for families paying college tuition is producing no rise in college enrollment. The squandering of this tax subsidy is a good case study and quantification of the consequences of kludgy public policy.

Each year, the government spends more than $20 billion dollars on a trio of tax credits for families paying for college: the Hope Tax Credit, the Tax Credit for Lifelong Learning, and the American Opportunity Tax Credit. The primary aim of these tax credits is to partially subsidize the cost of attending college, with the goal of encouraging more students to enroll in school.

How effective are these tax credits at boosting college enrollment? Not effective at all, it turns out. Dynarski describes the findings of a careful study conducted by economists George Bulman and Caroline Hoxby finding that the tax credits had no discernible impact on college enrollment. The economists poured through IRS data studying the tax credits’ “phase-out” zone—the income range where the credits are steadily reduced to taxpayers—to see if the declining value of the credits had any effect on household behavior. As Dynarski puts it, “If the tax credits help to increase college attendance, we should see this positive relationship between income and college attendance weaken where the tax credits phase out.”

Bulman and Hoxby found that phasing out the tax credits had no impact on enrollment decisions. This is probably because (1) the tax credits disproportionately help middle-class and high-income families, for whom a $2,500 tax incentive is unlikely to be a determinative factor in enrollment; and (2) the timing of the tax credits is not aligned to enrollment and tuition payment.

The latter explanation—that these tax credits are delivered too late to have any impact on decision-making—is part of an increasingly common shortcoming in our public policy. We are essentially pumping $20 billion or more each year to enroll students in college each fall, but we aren’t paying families this subsidy until the following spring. This makes little sense if the goal of the policy is to make college accessible and to nudge toward enrollment those students for whom $2,500 matters.

This timing mismatch has become endemic as we’ve increasingly baked our social policy into the tax code, creating what Suzanne Mettler calls a “submerged state” of hidden subsidies and social programs. For instance, in order to curtail direct subsidies to the poor, we’ve replaced traditional welfare with a tax credit meant to increase the value of work. But this tax credit only comes in an annual tax refund, and is not aligned to the work someone puts in throughout the year. And rather than pay families a child allowance to help defray the cost of raising a family, the government instead gives families a single annual tax break that is also ill timed to meet year-round childrearing costs and needs.

In short, we’ve been constructing policy in the exact opposite of the maxim of Occam’s Razor: the simplest solution might be the best, but the most convoluted policy has become the one most likely to see enactment. Political scientist Steven Teles wrote in 2012 about our political system’s bias toward policy “kludges”—that is, “inelegant patch[es] put in place to be backward compatible with the rest of a system.” “For any particular problem,” Teles writes, “we have arrived at the most gerry-rigged, opaque and complicated response.”

The higher education tax credits are classic kludges. Rather than simply directly subsidize the cost of college, we’ve opted to bury this financial benefit in the tax code, where it is difficult to access and doesn’t arrive when families need it.

There are numerous institutional causes of this tendency toward kludging. Our constitutional structure—a presidential national government with divided powers, and “marble-cake” federalism with overlapping state and federal authority—creates endless veto points that legislation must pass through. During the political and legislative process, relatively simple policy is often compromised down to an unduly complex shadow of its former self in order to appease a consensus of interests. In divided government, a president cannot simply sweep away past programs in the same way a parliamentary system might; instead, presidents typically must layer new policy on top of old programs in recognition of societal path dependence.

Moreover, the ideological preferences of the parties sometimes converge around policy kludges. Liberals favor government spending, while conservatives favor tax relief. Increasingly, both sides have mutually agreed to funnel targeted government spending through the tax code in the guise of a tax cut.

Teles points out that this easy harmony is bad for both liberals and conservatives. For liberals, sneaking social spending through the tax code leaves people unaware that they are benefiting from government assistance, facilitating the conservative myth of rugged individualism and pure self-reliance. For conservatives, promulgating kludgy and hard-to-navigate tax programs creates a class of private actors benefiting from the complexity, turning them into lobbyists for entrenched government activity. This is why we see the tax prep industry fight so ardently against any attempt to simplify our uber-kludge tax code.

These costs of kludge, however, are nothing compared to the social costs. More than 20 percent of families eligible for the Earned Income Tax Credit fail to claim it. And now we know that the $20 billion spent to help families afford college has little impact. By relying on kludges, we create needless inefficiency and dilute the effectiveness of our policy programs.

This is not to say that these compromise policies aren’t worth enacting. They help inculcate the principle that education, work by low-income families, and children are worth investing in—a principle that hopefully can later be built upon with a more robust system of investment.

The shining example of what our policy could be is Social Security, where government simply collects a tax from our paychecks during our working years and automatically cuts us a regular check during retirement. If our higher education subsidy program operated like our retirement subsidy program, we would simply subsidize the cost of tuition at the time of payment, rather than asking families to front the money and be reimbursed come tax time.

Social Security is one of our most popular government programs precisely because of its simplicity. And there is a clear political hunger for dredging the kludge out of our public policy. Much of the appeal of Sen. Bernie Sanders’s call for single-payer healthcare seems to arise from a basic desire to simplify the experience of accessing and financing healthcare, and to streamline the current system’s exhausting byzantine complexity.

As tempting as it may be to root the kludge out of the system, the political and institutional forces toward kludge show little sign of ebbing. However, there is one solution to move us in the right direction that may be more politically palatable: fighting kludge with kludge.

ObamaCare is often held out as the ultimate kludge, hacked up by five congressional committees to finance quasi-universal health insurance through a fragmented and primarily private system. But it did subvert at least one kludge: it pays out its “tax credits” for those who purchase private insurance on health exchanges directly to the insurers at the time of premium payment. Had ObamaCare gone full kludge, it could have taken after our other submerged state policies and paid out its subsidy for insurance through a single lump sum tax refund, which would have drastically reduced its usefulness and effectiveness.

Instead, ObamaCare has helped establish the advance tax credit as a feature of our public policy. We could use the ObamaCare model to turn our higher ed subsidies into advance tax credits paid directly to colleges, as Bulman and Hoxby suggest. We could similarly make periodic payments of our childcare and earned income subsidies to families to better meet childrearing costs and work performed. (The Earned Income Tax Credit used to have an advance payment option, but the program failed to gain much traction because it was run through employers and suffered from other flaws.)

It’s worth noting that the term “advance tax credit” is somewhat disingenuous, as an advance tax credit is indistinguishable from a subsidy. But this structure capitalizes on our political system’s preference for tax spending while ironing out the timing inefficiencies inherent in traditional tax credit subsidies. In doing so, our policy more closely approximates the direct and simple tax and payment structure of Social Security or a child allowance.

Our policymaking instinct to settle upon the kludgiest common denominator is producing suboptimal outcomes, costing us in college enrollment and beyond. In a perfect world, we’d straighten out our roundabout tax code social programs. But in the world we live in, we may stand a better chance of bending backward from the status quo to improve the efficacy of our tax credit welfare state—in essence, doubling down on kludge.

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