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

30 The Benefits to Taxpayers from Increases in Students’ Educational Attainment
Federal personal income taxes—taxes on income levied at the federal level.
We use family income data from the 2002 administrations of the SIPP (U.S. Census
Bureau, 2005a, 2005b, 2005c) and 2002 taxation rates by income group (Parisi,
2004 –2005) to estimate federal income tax payment on a family basis. We split this
amount among all adults in the family to compute tax payments by individuals. We
then model payments as a function of education level, age, and demographic characteristics
(gender, place of birth, and race/ethnicity). Finally, we forecast payments
throughout the entire life of an adult through age 79 using appropriate survival rates
to estimate the differential impact of education level on public revenues.
This approach understates the effects of education on federal income tax payments.
Because more highly educated people earn more, on average, and federal income taxes
are progressive, the more highly educated adults in a family contribute disproportionately
more to the family’s tax obligation. By attributing a proportional share of federal
tax payments to each adult in the family, we understate the effects of education level
on federal tax payments.
We excluded Earned Income Tax Credits (EITCs) due to highly inadequate data
in the SIPP. In the full SIPP topical tax module sample of 68,700 people, 66,800 did
not even answer the EITC question. Another 900 responded “don’t know.” Only 862
claimed any EITC. Response choices for EITC amount were in terms of brackets of
$200, and 122 of the responses (15 percent of the beneficiary subsample) were in the
broad “more than $3,500” category.
EITC is now the largest transfer program, larger than Temporary Assistance to
Needy Families. Because increases in education level result in higher earnings, increases
in education level will reduce the likelihood of participation in EITC. The exclusion
of EITC from this analysis therefore biases the estimates of the effects of education on
the costs of social support programs downward.
Federal payroll taxes—taxes on earnings levied at the federal level that finance
Social Security and Medicare benefits. We use individual earnings data from the 2002
administrations of the SIPP and statutory tax rates (and the Social Security tax cap) to
estimate payroll tax payment on individual basis. However, payroll taxes are paid only
by those who have any earnings. Therefore, we first model the probability of employment
as a function of education level, age, and demographic characteristics. For those
individuals who work, we then model tax payments based on educational attainment,
age, and demographic characteristics. Finally, we forecast payments throughout the
entire life of an adult through age 79, using appropriate survival rates, to estimate with
the differential impact of education level on public revenues.
State income, property, and sales taxes—taxes on income that are levied at
the state level and taxes on consumption that are levied at the state and local level,
including sales, real estate, and excise taxes. We use family income data from the 2002
administrations of the SIPP and national average state and local tax rates by income
group to estimate state tax payments on a family basis. We divide this amount evenly