From TaxVox: Trump’s child care tax breaks would mostly benefit families who need them the least

September 21, 2016

This post originally appeared on TaxVox.

With great fanfare, Donald Trump has proposed a new plan to help families pay for child care. However, the proposal, which is a revised version of an idea he rolled out in August, would mostly benefit high-income families who need government child care subsidies the least. For those who need it the most, such as low-income married couples with a single earner, there is much less to Trump’s plan than meets the eye.

His plan has three major pieces: a child care savings account, a new deduction that could even help high-income families with no paid child care, and a separate credit for some low-income families.

First, let's look at the dependent care savings account. Yes, we already have one in the tax code, although few people use it. Firms offer the plans to less than one-third of all US workers. High income families tend to benefit the most. (Middle income families tend to benefit from the child care credit and low-income families benefit from neither.)

Trump wants to double-down on the savings account idea, however. Families can contribute up to $2,000 per account – even if a child has not yet been born. No other tax-advantaged savings plan would be as generous. Contributions would not be taxed and accounts would grow tax-free. It would be like the best of a traditional IRA and a Roth IRA wrapped into a single account.    

Some very high-income families will be very excited about this new tax shelter. But while low-income families could get a match of up to $500 on a $1,000 contribution, Trump has left out many key details such as when the government would make the match and how long a worker would have to keep the money in the account in order to qualify. Some low-income families, presumably, would not have enough money to take advantage of these accounts. Plus, those facing very low tax rates would receive little tax benefit from the accounts.

Next, Trump is proposing an above-the-line tax deduction for child care expenses. The maximum deduction would be based on the average cost of child care in the taxpayer’s state. (No, we do not know if this calculation would vary by age of child – a large factor in determining actual costs.)

It makes some sense to avoid taxing people on expenses associated with going to work. But Trump’s plan would also give a deduction to parents who incur no child care costs.

The way Trump has designed his plan, benefits from the deduction would go disproportionately to high-income families. For starters, many low-income families already pay no federal income tax. Their income is below their standard deduction and personal exemptions or they already have credits that offset their taxes owed. Thus a new deduction does nothing to raise their after-tax income.

If they do owe income tax, they pay at the 10 or 15 percent rate, and the deduction saves them just 10 or 15 cents on the dollar. For a top-bracket taxpayer, a deduction reduces their tax liability by 39.6 cents on the dollar.

To address that problem, Trump offers the third piece of his plan, a special benefit for very low-income families that would increase an eligible family’s EITC by almost $1,200 per year.

As explained here, families would get a credit worth up to half of the payroll taxes paid by the lower-earning parent. This is important. While the campaign makes a point of saying the deduction goes even to stay-at-home parents, it's not so for low-income couples where one parent stays at home.

Keying the credit to the lower earning spouse means that if you’re low-income and one spouse doesn’t work – you get no credit (since the lower-income spouse owes $0 in payroll taxes). The campaign says if you are eligible as a single parent or a family with two working parents and earn $31,200 – you would get the maximum credit of $1,200. That’s a credit of a paltry 3.8 percent – hardly enough to make a dent in child care costs.

I already lament the confusing nature of the two child care tax benefits we currently have. And Trump would add three more.  

Finally, no column on child care tax benefits would be complete without mentioning that childcare costs are typically incurred over the course of the year. Thus, a benefit that doesn’t come until taxes are filed offers little help to cash-constrained families. Trump might be talking about helping people pay for child care, but higher income families clearly stand to gain a lot more than their low-income peers.

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Pence pays little in federal taxes thanks to ineffective, regressive education tax credits

September 13, 2016

Republican vice presidential nominee Mike Pence’s recently released tax returns attracted attention for how little tax he paid: just $6,956 in federal income tax on $115,526 in total income, a rate of 6 percent. Pence’s tax bill would have been 72 percent higher had it not been for $5,000 in higher education tax credits enacted under Presidents Clinton and Obama, which have been increasingly demonstrated to be ineffective and regressive.

Tax credits that help offset the tuition paid by college students and their families have been in place since 1997, and were significantly expanded in 2009. These credits are available to married-couple families with incomes up to $180,000 ($90,000 for single-parent families), with varying formulas and eligibility rules for each of the credits. They totaled $17.5 billion in 2013, more than half the size of the Pell grant program for low-income students.

The availability of these tax credits to families with relatively high incomes combined with the fact that children from higher-income families are more likely to go to college means that the credits disproportionately benefit higher-income households. An analysis of the 2009 tax returns of households with 19- and 20-year-olds by George Bulman and Caroline Hoxby showed that the top third of families in terms of income (those making more than $70,000) reaped 62 percent of the benefits of these credits. Families in the middle third got 31 percent. The bottom third of families—those making less than $30,000 per year—got a paltry 7 percent.

The regressive distribution of education tax credits among families with traditional-age college students is offset to some degree by the use of credits by older college students, who tend to come from lower-income families. And the distribution of benefits might be tolerable if the credits at least accomplished their goal of getting more people to enroll in and graduate from college. But Bulman and Hoxby also find that the tax credits have zero or very small effects on college enrollment and the type of college attended.

The ineffectiveness and regressive nature of federal education tax credits appears unlikely to change. A new study found that providing families with better information on the tax credits had no impact on their likelihood of applying to or enrolling in college. In other words, the ineffectiveness of the tax credits at promoting educational attainment does not appear to be due to a lack of understanding about their existence or how they work.

Higher education tax credits are politically popular, likely due to the fact that they are distributed to a wide range of families in terms of income. That may be why neither of the 2016 presidential candidates has released a plan to reform or eliminate them. Such a change may only be possible as part of a broader bipartisan effort at tax reform led by liberals who desire a more progressive distribution of education benefits and by conservatives focused on reducing government waste of taxpayer dollars.

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“We, the people” includes immigrants

September 2, 2016

Republican presidential candidate Donald Trump summarized his point of view about immigration in a speech in Arizona this week: “There is only one core issue in the immigration debate, and that issue is the well-being of the American people.”

Trump presented a clear “us” versus “them”: the American people on one side, and immigrants on the other. The problem with this rhetoric is that the American people are by definition comprised of immigrants and descendants of immigrants. One in four Americans currently are first- or second-generation immigrants. And even those in the third and higher generation very often live with foreign-born family members, or work, study, pray, or parent alongside immigrant community members.

immigration visualization

Among the 13 percent of American residents who are immigrants, the majority are in the United States legally (74 percent). The largest subgroup of legal immigrants, 42 percent of all foreign-born, are naturalized US citizens who have passed an English and civics exam and sworn their allegiance to the country.

Legal permanent residents (green card holders), who most often intend to stay in the country, make up 28 percent of all immigrants, and those on temporary visas comprise less than 5 percent. The remainder or 26 percent of all foreign-born residents (around 3 percent of the total US population) are not authorized to be living in the United States.

The undocumented are also inextricably connected to US citizens and legal immigrants. They share households with an estimated 8.7 million US citizens and legal immigrant family members. A majority of undocumented immigrants have been in the country for 10 years or more, and have woven themselves into the fabric of US communities.

Simple dualities, “us” versus “them,” do not capture this reality of communities all over the United States, where Americans have more and less direct immigrant ties. In the Los Angeles metro area, nearly 60 percent of children have a foreign-born parent, while in the St. Louis metro, that share is 8 percent. Some of the most economically vibrant areas of the country are those with highest immigrant shares, while some of those areas with low immigrants and economic strain are clamoring to entice immigrants to join their communities.

Nationally, immigrant workers make up one-sixth of our workforce, and are disproportionately likely to be entrepreneurs, contributing to the vitality of the country. One-quarter of students in US schools—that is, the country’s future workforce, parents, and voters—are children of immigrants. More than half of recent marriages among immigrants were to a US-born partner.  And immigrants from around the world are serving in the US military, spurring technological innovation, and diversifying and enriching the country’s cuisine, music, business, art, and research.  

Yes, the well-being of the American people should be a very top priority for our nation’s leaders. The American people, no matter when our families arrived, widely cherish our history of immigration, which has shaped and continues to shape “us.” Our next president should value this immigration reality too.

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Pushing to expand Social Security, Clinton makes history

August 4, 2016

Hillary Clinton made history last week in Philadelphia when she became the first woman ever nominated for the presidency by a major political party. But she also broke new ground by becoming the first presidential nominee in 68 years to use her acceptance speech to call for expanding Social Security.

Her comments signal a remarkable reversal in the Social Security policy debate, especially within the Democratic Party. After focusing for years on raising program revenues to preserve existing benefits, many party leaders, including Clinton, are now trying to boost benefits.

For a program that paid nearly $890 billion to 60 million beneficiaries last year, Social Security is barely discussed when presidential candidates accept their party’s nomination. More than half of the 42 acceptance speeches delivered since the Social Security Act was signed in 1935 didn’t reference Social Security at all, and most of those that mentioned the program did so just once, often only in passing.

The exception occurred in 2000. As George W. Bush accepted the Republican nomination that year, he mentioned Social Security five times—more than any other Republican—vowing to “strengthen” the program. Al Gore named Social Security a record 12 times when he became the Democratic nominee a few weeks later. He stressed the need to protect Social Security and shore up its financing but rejected Republican proposals to divert part of the program’s taxes to personal accounts. Neither candidate advocated raising benefits.

Clinton is only the second nominee of a major political party to call for expanding Social Security. The first was Harry Truman, who declared support for extending coverage and raising benefits in his 1948 nomination acceptance speech, when Social Security was much smaller than it is today.

If elected, how would Clinton expand Social Security? She didn’t give details at the Philadelphia convention, but the Democratic Party platform and her campaign website call for boosting survivor benefits and providing Social Security credits to people who interrupt their careers to care for family members and friends. They also advocate raising taxes on high-income workers to pay for these benefit sweeteners and close Social Security’s long-range financing gap.

Although relatively modest, these reforms could improve financial security for older women, especially widows who are now more than three times as likely to live in poverty as married older adults. But as our colleague Melissa Favreault has pointed out, improving survivor benefits won’t help the growing ranks of low-income older women who never marry or who divorce before qualifying for Social Security spouse and survivor benefits, and providing caregiver credits could raise benefits for many higher-income women who don’t need more support.

Clinton could choose to pursue Bernie Sanders’s much more ambitious goals for Social Security. He has proposed creating a minimum Social Security benefit equal to 125 percent of the federal poverty level for retirees with at least 30 years of covered employment, raising cost-of-living adjustments, and reworking the benefit formula to increase payouts to all retirees but disproportionately to beneficiaries with low lifetime earnings. To pay for this expansion and improve the program’s financing, Sanders would subject all earnings above $250,000 a year to the Social Security payroll tax, which now applies only to the first $118,500 earned each year. He would also impose an additional 6.2 percent tax on investment income for high-income people.

One of us (Smith) recently used DYNASIM, Urban’s dynamic microsimulation model, to evaluate Sanders’s proposal. Once fully phased in, these expansions would significantly raise after-tax incomes for lower and middle-income retirees. Very high income older adults would fare somewhat worse under the plan because the analysis assumes that employers would trim wages to offset the additional payroll taxes imposed by the plan.

Impact of Sanders's Social Security Expansions on Family Income

Sanders’s plan would also improve Social Security’s deteriorating financial situation. The program’s trustees now project that system costs will exceed total revenues beginning in 2019, and the deficit will grow until the trust fund is depleted in 2034. Thereafter, Social Security would be able to pay only about three-quarters of scheduled benefits. The additional tax revenue in the Sanders plan would extend solvency until 2073, nearly 40 years longer.

Although Clinton mentioned Social Security only once in her acceptance speech last week, her comments could mark a turning point in the Social Security reform debate. As stagnant wages, disappearing defined benefit pension plans, and rising out-of-pocket health care costs stoke concern about retirement security, the debate may be shifting from a focus on containing costs to expanding the system.

But Clinton’s shift in tone doesn’t end the debate. The Republican Party platform remains firmly opposed to any Social Security tax hikes. And devoting more money to Social Security leaves less for other policy goals, like trimming the national debt, helping low-income children, and rebuilding our crumbling infrastructure. At a minimum, perhaps the next president and Congress can begin serious discussions about how to fix Social Security’s long-term financing problems to safeguard this crucial program for future generations.

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From TaxVox: Kaine's tax record reflects Clinton's present and possibly future

July 27, 2016

This post originally appeared on TaxVox.

Tim Kaine, Hillary Clinton’s choice for vice president, served as governor of Virginia from 2006 to 2010 (the state has a one-term limit). During his four years, Kaine proposed tax hikes to pay for new government programs and tax cuts for low- and middle-income residents. It’s a combination that closely parallels Clinton’s tax proposals for the nation. However, political opposition in his state legislature derailed Kaine’s larger ambitions and forced him to settle for smaller changes.

Kaine’s big goal was raising taxes to pay for new transportation spending. He asked the Virginia legislature in 20062007, and 2008 for a mix of tax hikes on car sales, auto insurance premiums, and driver fines. And each time the legislature rejected his ideas in favor of debt financing and transfers from the general fund.

Broadly, Kaine’s preference for raising taxes to fund road and transit projects is similar to Clinton’s plan to fund education and infrastructure spending with new taxes. But there is one big difference: Kaine proposed tax hikes that would have affected most Virginians while Clinton would target only the most wealthy Americans.

As governor, Kaine was not a one-note act on taxes. He also advocated several tax-relief measures. In 2007, Kaine and the legislature raised Virginia’s income tax filing threshold from roughly $7,000 to $12,000 for individuals and from $14,000 to $24,000 for married filers, taking more than 300,000 Virginians off the tax rolls. The bill also raised Virginia’s personal exemption from $900 to $930, a Kaine accomplishment that mirrors Donald Trump’s idea to raise the standard deduction (though on a much smaller scale). By contrast, Clinton would leave overall taxes roughly unchanged for middle-income households, though she’s promised to deliver a tax cut for low- and middle-income Americans later in the campaign.

Kaine also signed three sales tax holidays into law: one for back-to-school supplies, one for energy-efficient products, and another for hurricane-preparation gear. These brief periods of tax-free shopping are popular with politicians and voters, but don’t actually benefit most shoppers. (All are still in effect, though the state recently combined all three into one weekend.)

In a move that goes against the Democratic grain, Kaine also backed repeal of Virginia’s estate tax. While Trump wants to kill the federal levy, Kaine’s top-of-the-ticket running mate would boost the national estate tax.

Governor Kaine failed at two other major tax changes. During his 2005 campaign and throughout his administration, he pushed for a homestead deduction that would have delivered a 20-percent property tax rebate to homeowners. However, Republicans in the legislature scuttled the plan, afraid it would lead to tax hikes on commercial property.

And in one of his final acts as governor, Kaine’s proposed 2010-12 budget would have hiked the state’s top income tax rate from 5.75 percent to 6.75 percent. His idea was to swap the state’s regressive personal property car tax for a progressive income tax hike mostly aimed at wealthier Virginians. However, after the term-limited Kaine left office, his Republican successor dropped the proposal.

Finally, as you hear stories about Kaine’s successes or failures as governor of Virginia, keep in mind that state chief executives have a relatively limited impact on their economies. This is as true for Kaine as for Trump’s running mate, Indiana Governor Mike Pence. For example, Virginia’s unemployment rate was below the national average during Kaine’s tenure—as it’s consistently been for decades

So stick with his policy decisions. Kaine was not afraid to propose both tax hikes and tax cuts as governor. He cut deals with his political opposition but was also stonewalled on major proposals (unsurprisingly, tax cuts were easier to pass than tax hikes). Given ongoing gridlock on Capitol Hill, his experience could prove useful if a future Congress tries to cherry-pick ideas from Clinton’s grab bag of tax proposals.

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From TaxVox: Trump's huge tax cuts

July 18, 2016

This post originally appeared on TaxVox.

Presumptive Republican presidential nominee Donald Trump’s tax plan would slash taxes for individuals and businesses. Trump would quadruple the standard deduction to $50,000 for couples ($25,000 for singles) and collapse the current seven individual income tax brackets, which range from 10 percent to 39.6 percent, into three: 10, 20, and 25 percent. That would cut the top tax rate 14.6 percentage points, or more than a third. 

Trump would cut the top corporate income tax rate by more than half from 35 percent to 15 percent (one of many differences between his business tax plan and the one proposed by House Republicans). Notably, Trump would also cut the top rate for “pass-through” business income to 15 percent. Currently, owners of pass-through firms, such as partnerships, pay individual income taxes at rates of up to 39.6 percent. Lowering this rate would likely encourage many taxpayers to avoid tax by reclassifying themselves as “independent contractors.”

Trump would repeal the alternative minimum tax, the estate tax, and the Affordable Care Act’s 3.8 percent investment tax (so long-term dividends and capital gains would face a top rate of 20 percent). He’d preserve deductions for mortgage interest and charitable giving but cap the value of most other individual tax deductions. He’d leave payroll taxes unchanged.

Overall, Trump’s “unprecedented” tax cuts tax cuts would cost nearly $10 trillion over the next decade.

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From TaxVox: Trump’s choice for VP, Mike Pence, is an experienced tax cutter

July 15, 2016

This post originally appeared on TaxVox.

Donald Trump’s choice for vice president, Indiana Governor Mike Pence, has only run the state since 2013, but he’s already built a reputation as a premier tax cutter. In just three years as governor, Pence successfully pushed proposals to cut income taxes, corporate taxes, personal property taxes, and completely eliminate the state’s inheritance tax.

When Pence took office, Indiana’s 3.4 percent flat individual income tax rate was already the second-lowest in the nation (only  Pennsylvania’s 3.07 percent was lower). Still, in his first state of the state address, Pence pitched a 10 percent cut as an “affordable” way to “unleash half a billion dollars” into Indiana’s economy. The legislature eventually passed a 5-percent reduction, bringing Indiana’s tax rate down to 3.23 percent over the next two years.

The same legislation also immediately killed Indiana’s inheritance tax and repealed its dormant estate tax. The inheritance tax, which affected estate transfers greater than $250,000, was already scheduled to phase out by 2022, but Pence and the legislature repealed the tax for the estates of all persons deceased after Dec. 31, 2012.

Pence proposed more tax cuts in 2014. That year, he signed legislation that will gradually lower Indiana’s corporate income tax rate from 6.5 percent in 2015 to 4.9 percent in 2021. The legislation also allows Indiana counties to trim personal property taxes for businesses—although Pence wanted to repeal the tax. He championed both proposals as ways to make Indiana more competitive with neighboring states, though the relationships between tax structure or even tax reductions and state economic growth is mixed. 

Pence did not secure further tax cuts in 2015, but he signed a law that changes the rules for taxing the sale of certain manufacturing equipment. This simplification brought Indiana more in line with how other states treat these business-to-business sales. Pence proposed completely exempting such sales from tax, but the legislature passed the more modest change because of revenue concerns.

Unlike some other governors, Pence maintained Indiana’s balanced budget throughout his three years of tax cutting—mostly by keeping his state’s spending growth rate below inflation.

Finally, the Trump campaign is sure to tout Indiana’s economic record during Pence’s tenure. Indeed, since Pence took office in January 2013, Indiana’s unemployment rate has fallen from 8.4 percent to 5 percent. But a state’s economy depends on a lot more than what the governor does, especially in three short years. Besides, Indiana’s unemployment rate has roughly tracked the national average for decades, and did the same during Pence’s term, when the national rate fell from 8.3 percent to 4.7 percent.

That’s why it’s always better to examine what a governor can control: policy decisions. And Pence will win kudos from conservatives as a successful tax-cutter who kept his budget balanced with offsetting spending reductions. 

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Why presidents have limited influence over the economy

June 29, 2016

A couple of weeks ago, Donald Trump retweeted an image with nine charts about the US economy that purported to show a central thesis: The Obama presidency has been really bad for America. Student loans have skyrocketed; food stamps, health care costs, and federal debt all rose swiftly; and labor force participation, median family income, and homeownership all fell dramatically.

@realdonaldtrump economy charts

It’s hard to see the labels on either the vertical or horizontal axes, so it’s difficult to discern exactly what each graph is showing. As Philip Bump at the Washington Post has ably shown, many of the graphs cut off halfway through the Obama presidency, cut off the vertical axis, or mix time frames.

But most politicians are wont to take the broader view that the country’s economic picture is tied to the exact time a president is in office. Unfortunately, that thesis is inherently flawed. A president can’t control what is happening in the economy (or the world) prior to his (or possibly her) election to office.

President Obama was elected on November 5, 2008, but wasn’t sworn into office until January 20, 2009. Does that mean we should attribute everything in the economy—good and bad—to him starting in November or January?

A careful look at unemployment rates shows how that approach misses the big picture. A year before Obama was elected (in December 2007, when the recession officially began), the unemployment rate hovered around 5 percent and stood at exactly 5.0 percent in April 2008. In May, the unemployment rate began to tick up steadily, reaching 6.8 percent in November, the month Obama was elected. It continued to climb thereafter, reaching 7.8 percent in January 2009.

The unemployment rate would, of course, continue to climb as the economy soured, ultimately reaching a peak of 10 percent in October 2009 before beginning its slow decline back down to its current rate of 4.7 percent.

Unemployment rate line chart

Data on participation in the Supplementation Nutrition Assistance Program (SNAP), formerly known as food stamps, tell a similar story about the importance of context. Again, participation was edging up prior to the presidential election and continued to rise after Obama took office. Two pieces of context are key.

First, such increases are a primary feature of many safety net programs: they are designed to expand to meet need during economically troubled times.

Second, there was legislation that served to further increase participation: the economic recovery act of 2009 (signed by Obama) intended to increase SNAP participation (and thereby reduce food insecurity during the recession).

Per capita SNAP participation chart

What should politicians take from these examples? Yes, both SNAP participation and the unemployment rate continued to rise during the Obama presidency, but as we’ve seen, he inherited an economy that was already tanking when he took office.

We can also see that both series have declined over the past two years; perhaps not as fast or as low as one might like, but they have declined. Whether those changes are due in part or at all to the president is also a matter of debate. We can certainly argue about whether participation is too high and that it did not start to decline sooner, but that’s a policy argument, not a data argument.

So let’s zoom out a bit and see what we can learn from SNAP over the past 40 years. Here, I’ve placed SNAP participation on the horizontal axis and the unemployment rate on the vertical axis (each point represents a year). I’ve also added a color dimension—red shows years in which a Republican was in the Oval Office and blue shows years in which a Democrat was in the Oval Office.

Unemployment and SNAP trends

If you look carefully, you can see trends in and around presidential terms that you can’t necessarily pin on that president.

Take, for example, the transition between Presidents Ford and Carter. The unemployment rate dropped between 1975 and 1977, while SNAP (then food stamps) participation increased slightly. Once Carter took office in January 1977, the unemployment rate continued to decline for another couple of years. Is that to his credit or to existing trends and policies?

Similarly, after President G.W. Bush took office in January 2001, the unemployment rate started to increase swiftly; but the Internet bubble collapsed starting around 1999, so is it fair to assign blame for the early-2000s recession to Bush?

This is all to make a simple point: The economy is much too complex to simply pin a president’s swearing in as a turning point. That nuance, though important, is not something our presidential candidates typically deem worthy.

As we move into the general election phase and the candidates and parties try to assign blame for this and that to the other, let’s keep in mind that those dates are often arbitrary and have little meaning. Maybe nuance would be a good thing.

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From TaxVox: The striking contrast between the Trump and House Republican tax plans

June 29, 2016

I’ve never seen anything quite like it: A presumptive presidential candidate proposes a major policy initiative and a month before he is due to be formally anointed at his convention, his own party’s House members roll out a dramatically different plan.

That, of course, is exactly what House Speaker Paul Ryan and his caucus just did to Donald Trump and his tax reform proposal. While there are some similarities between the two blueprints—both would cut taxes primarily for business and high-income households—there are also major differences.  The contrasts are so strong that it is hard to imagine how candidates sharing the same ticket can square them.

Trump-Ryan tax plan comparison

Read the rest on TaxVox.

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Student debt relief is the wrong way to promote entrepreneurship

June 28, 2016

Today, Hillary Clinton released a new policy agenda aimed at increasing technology, innovation, and entrepreneurship. These are laudable goals, but Clinton’s proposal to provide student debt relief to entrepreneurs is the wrong way to accomplish them. This proposal is based on a weak evidence base and would result in an inefficient allocation of subsidies.

Clinton’s proposal would allow student borrowers to stop making payments on their student loans—with taxpayers covering the interest—while they are starting new businesses. In addition, the founders of particular categories of businesses, such as those “that provide measurable social impact,” would be eligible for up to $17,500 in loan forgiveness.

The idea that student loans hold back entrepreneurship is based on shoddy evidence, such as public opinion polls in which respondents report that they did not start a business because of their debt. Polling data don’t tell us anything about the causal relationship between student loans and entrepreneurship, a question on which there is no high-quality evidence. (Gallup is probably the worst offender in terms of misinterpreting such polls.)

Student debt needs to be considered in light of both the repayment burden it imposes on borrowers as well as the returns to the educational investment it was used to finance. One way to avoid student loans is to skip college, which may have an even larger negative effect on entrepreneurship.

It is also important to note that income-driven repayment plans provide a safety net that protects all borrowers, including entrepreneurs, from unaffordable monthly payments during periods of low income.

Efforts to stimulate entrepreneurship through changes to the student loan system are likely to be inefficient and unfair. Clinton’s interest-free deferral proposal, for example, would provide the largest benefits to the borrowers with the largest loans. These high-debt borrowers may or may not be those most in need of taxpayer subsidies to help them start a new business, as the amount borrowed depends on a range of factors including family income, the college attended, and work and spending habits while in college.

The student loan program is already used for too many purposes for which it is ill-suited, such as subsidizing the employment of borrowers in the public and nonprofit sectors. There is nothing inherently wrong with subsidizing certain sectors of the economy—whether struggling nonprofits or Silicon Valley startups. But policymakers should do so directly, such as through tax credits, rather than through the student loan system.

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