TY - JOUR AU - Bulman, George B AU - Hoxby, Caroline M TI - The Returns to the Federal Tax Credits for Higher Education JF - National Bureau of Economic Research Working Paper Series VL - No. 20833 PY - 2015 Y2 - January 2015 DO - 10.3386/w20833 UR - http://www.nber.org/papers/w20833 L1 - http://www.nber.org/papers/w20833.pdf N1 - Author contact info: George Bulman Department of Economics University of California 1156 High Street Santa Cruz, CA 95064 E-Mail: gbulman@ucsc.edu Caroline M. Hoxby Department of Economics Stanford University Landau Building, 579 Serra Mall Stanford, CA 94305 Tel: 650-725-8719 Fax: 650-725-5702 E-Mail: choxby@stanford.edu M1 - published as George B. Bulman, Caroline M. Hoxby. "The Returns to the Federal Tax Credits for Higher Education," in Jeffrey R. Brown, editor, "Tax Policy and the Economy, Volume 29" University of Chicago Press (2015) M2 - featured in NBER digest on 2015-04-01 M3 - presented at "Tax Policy and the Economy", September 18, 2014 AB - Three tax credits benefit households who pay tuition and fees for higher education. The credits have been justified as an investment: generating more educated people and thus more earnings and externalities associated with education. The credits have also been justified purely as tax cuts to benefit the middle class. In 2009, the generosity of and eligibility for the tax credits expanded enormously so that their 2011 cost was $25 billion. Using selected, de-identified data from the population of potential filers, we show how the credits are distributed across households with different incomes. We estimate the causal effects of the federal tax credits using two empirical strategies (regression kink and simulated instruments) which we show to be strong and very credibly valid for this application. The latter strategy exploits the massive expansion of the credits in 2009. We present causal estimates of the credits' effects on postsecondary attendance, the type of college attended, the resources experienced in college, tuition paid, and financial aid received. We discuss the implications of our findings for society's return on investment and for the tax credits' budget neutrality over the long term (whether higher lifetime earnings generate sufficient taxes to recoup the tax expenditures). We assess several explanations why the credits appear to have negligible causal effects. ER -