The Benefits to Taxpayers from Increases in Students - RAND ...

26 The Benefits to Taxpayers from Increases in Students’ Educational Attainment
replicated all the calculations assuming that the effects of increases in education were
25 percent smaller than our estimates.
As noted above, we use data collected in 2002 to estimate the models used in this
analysis. In doing so, we assume that the estimated relationships between education
level and governmental revenues and costs will remain approximately the same into
the future. Specifically, we assume that the effects of education on income and, consequently,
on tax payments, participation in social programs, and incarceration in the
future will be generally the same as the effects observed in 2002. We also assume that
federal, state, and local tax structures, social support programs, and incarceration patterns
will not change substantially in the future.
The level of education needed to succeed in labor markets has been increasing
for decades. And the earnings gaps between individuals with differing levels of education
have consequently grown consistently over time. It seems likely that the gaps
that existed in 2002 when the data used to estimate our models were collected will, if
anything, widen into the future. If they do so, the effects of education level on government
revenues and costs will exceed the estimates presented here. If the increases in
relative income resulting from increases in education level grow over time, they will
cause greater increases in relative tax payments and greater decreases in participation
in social programs and in incarceration.
Federal and state tax structures are changed from time to time, but the changes
are generally marginal. Tax brackets and rates are occasionally modified, and deductions
are introduced or eliminated. The Economic Recovery Act of 1981 shifted some
of the federal tax burden from individuals to businesses, effectively shifting the federal
tax more toward a consumption tax. The Taxpayer Relief Act of 1997 introduced tax
credits, in essence a spending program operating through the tax system. But the overall
structure has not been significantly changed for decades.
Similarly, the rates and ceilings that determine Social Security and Medicare
contributions have been increased over time, but the general structure of the systems
remain the same. If anything, the growing federal budget deficit and growing concerns
for the future of the Social Security and Medicare systems as baby boomers begin to hit
retirement suggest that the payroll taxes levied to support these programs will increase
over time. If that occurs, the estimates presented here will understate the effects of
increased educational attainment on contributions to government revenues.
Recent legislation has introduced disincentives for participation in social programs.
Commonly called “welfare reform,” the 1996 Personal Responsibility and Work
Opportunity Reconciliation Act and the 1997 Balanced Budget Act have resulted in
more stringent eligibility rules for many programs and in lifetime-total and one-time
caps on participation in income support programs. There has not been significant
debate over the structure of these programs since then.
It is obviously possible that the structure of one or more of the social programs
we consider here will be significantly modified sometime in the future. The 1996 and