Tuesday, April 22, 2008

Saving the Economy

Pennsylvania is the next state "up for grabs" in the Presidential "competition", and all three candidates are revising their plan to revive the country's faltering economy. On this day of the democratic primary in Pennsylvania, I have a suggestion for the candidates on how to improve the economy. It is not a novel idea, nor a difficult idea to realize. It will reduce the amount of taxes that are collected by the government, but not enough that it cannot be recouped through some other venue. So here it is.

Make interest paid on educational loans tax deductible across all income levels.

It's hard to imagine why this would improve the economy, but if you bear with me, I'll explain. We need to start with some basic facts. First, when adjusted for inflation, Americans make more money today than in 1970. But, when corrected for level of education, Americans make less now than in 1970. Second, more and more Americans have college diplomas, and having said diploma is becoming more and more necessary to find a secure job. In 1970, a college diploma set you apart from many other job applicants. Nowadays, not having one sets you apart from other job applicants. Third, obtaining a college degree has become more expensive, even when adjusted for inflation. Witness the blowup from partnerships just short of collusion between universities and tuition loan companies. Fourth, college graduates earn more money than high school graduates. Fifth, people who make more money generally spend more money, and for any number of reasons--more expensive products, greater number of items purchased, etc. And lastly, people who earn more money pay more taxes. People who are in the top 10% of income pay 50% of the tax collected by the government.

Put those six facts together, and what you have is a growing population of higher income earners who are more educated, but also carrying larger education loans. This group is covering a greater percentage of tax dollars and is also spending more for the health of the economy. The problem is the income limit for tax deduction of student loans, which creates a catch-22. You want people to spend more money. You want people to be better educated. You need the taxes these people pay. But because of the disproportionate level of student loans (like the hosing bubble), the equilibrium that is created hinders many people from getting that higher education. Creating an incentive like tax deductible student loan interest will work as an incentive. The reduction in taxes will be minor, since we are only talking about deducting interest payments and not principal payments. But the potential change in thinking about education could be enormous.

I don't disagree that education of children is important. If you can't get into high school, you can't get into college. Certainly. But if paying for college in not in your long term financial interest, you'll end up with a country run by high school graduates, which will not turn out well for the United States. If we are serious about reclaiming some of the educational and academic ground lost to European and Asian countries over the years, we need to make it not only sensible and practical but advantageous to earn that degree. Other countries may not have the same degree of wealth disparity, but education is still a revered benefit that is a worthwhile investment.