We continue our discussion of Education Tax Credit Scholarships.  Part I is available to read Here.  We continue reviewing “Toward Market Education:  Are Vouchers or Tax Credits the Better Path?” February 23, 2001 by Andrew J. Coulson with the Cato Institute:

In most cases, institutions granting private scholarships require recipients to make tuition co-payments or to commit some of their time, on a regular basis, to helping out at their children’s schools.  Both of these requirements help to enfranchise parents, giving them a personal stake in their children’s education that is lacking under entirely tax-funded   “free” schooling.   The problem of schools focusing on whoever is paying the tuition, rather than on the families they serve, is also mitigated by this plan.  While schools are likely to lobby scholarship-granting organizations to arbitrarily raise the size of their scholarships, their chances of success will be far lower than they would be under state-funded vouchers.  The key reason for this difference is the multiplicity of scholarship-granting institutions that would exist under this plan, compared to the single state authority under voucher plans. Instead of having to lobby only one agency to increase spending, schools would have to lobby every institution distributing scholarships.  Similarly, no single scholarship-granting organization could unilaterally increase the size of its scholarships out of proportion with the others, or taxpayers might choose to donate their money elsewhere.

Another benefit of local private scholarship-granting organizations is that they enjoy both a greater facility and a greater incentive to avoid fraud than the monolithic and impersonal state-run alternative.  They meet with and know recipients personally, making fraud more difficult.  They also risk going out of business if they are found to be defrauded or to be committing fraud themselves, because other organizations are capable of taking their place.

Education systems funded by individual third-parties, particularly state agencies, have a long and consistent history: they eventually lead to pervasive state control over, if not outright operation of, schools by the state. The only cases in which this trend has been mitigated have pertained to the education of young adults at the college level (e.g., the G.I. Bill). This looming threat is one of the most significant drawbacks of voucher programs.

Just as parents need to be free to choose their children’s schools, educators need to be free to exercise their professional judgment.  They must be able to cater to specific audiences, to innovate, to leverage their unique talents, and to pursue missions and philosophies of their own choosing. The absence of these freedoms leads to frustration and low morale among teachers, to inefficiency, and to pedagogical stagnation. The advantages in these areas enjoyed by educators in private practice over their colleagues in the public sector are well-documented.

Because voucher-redeeming schools receive public money directly, they are far more susceptible to suffocation by regulation.  Opponents of parental choice, competition, and educational diversity will seek to saddle voucher programs with a panoply of debilitating regulations, in an attempt to impede their effectiveness and thereby justify their discontinuation.

Note again that all of these forces will also be in play under tax-credit programs, but the parental-choice and scholarship credits offer an added margin of insulation from them because they do not use public money. Without the lever of public funding, arguments for subjecting the professional freedom of educators and the discretion of parents to minute state regulation are clearly weaker.

In order for education markets to function properly, there must be a critical mass of service providers actively competing with one another to attract students.  Two important factors are the total number of providers and the average number of providers competing to serve each individual student.  A higher total number of providers increases the rate of  innovation,  leading  to  the  creation  of more  and  better  methods  and  materials.  Equally if not more important is having the maximum number of providers competing for the patronage of each student. The larger the number of competing providers families can choose from, the harder each provider must work to attract their patronage.

The benefits of vigorous competition are numerous.  Historically, competition has forced educators to focus on the avowed needs of families, kept prices down, spurred the adoption and dissemination of the most effective methods, and generated information about the pros and cons of different service providers. All of these advantages can be seen in market education systems as far back as Athens in the 5th century BCE. In the absence of competition, school systems have tended to ignore or marginalize parents, increase spending without demonstrating improved services, and adopt pedagogical methods and materials without concern for their effectiveness.

The ability of voucher programs to foster vigorous competition depends on their design.  In its current form, the Milwaukee program caps participation at 15,000 students distributed over a large metropolitan area.  This figure is small both in absolute terms and in terms of the concentration of nearby choices available to eligible families.  As a result, competition is more limited than would be the case if the cap were eliminated and the program expanded to the entire state.  Milwaukee’s program is also means-tested, so even if it were expanded statewide, its ability to promote the creation of new competitors would be limited by the ineligibility of much of the student population.  This is not to say that means-testing is necessarily inappropriate, but only that it has a negative effect on the level of competition engendered by the program.  Since home schoolers cannot participate in the program, its benefits to competition in the on-line education and educational materials markets will also be somewhat circumscribed.

The design of Florida’s Opportunity Scholarships program currently produces even lower participation rates and lower provider density. By limiting eligibility to students in “failing” schools across the entire state, the program does not ensure a critical minimum level of competition in any location.  While the design of the Opportunity Scholarships Plan was politically astute and almost certainly advantageous in enabling its passage, the limits on eligibility will have a negative  impact  on  its  ability  to  promote competition  between  independent  service providers, and hence on its overall success.

The four factors thus far described: choice and financial responsibility for parents, and freedom and competition for schools, are enough to prevent the worst educational abuses, but they are not enough to promote educational excellence on a long-term, wide-spread basis. For that, it is necessary to introduce the incentive of profit making.

The widespread absence of the profit motive from the field of education has had a dramatic stultifying effect. First, it has all but eliminated the incentive structure needed to overcome the risks of expansion, causing even the most popular nonprofit private schools to accumulate waiting lists of students instead of expanding to meet growing demand.  This consistent failure to grow in response to pent up demand is unheard of in the for-profit sector, whether in education or in other fields.

A second problem with the absence of the profit motive in education is that it discourages effective, results-oriented research and development.  Consider the following innovations: radios, televisions, VCRs, and cell phones. What these and most other innovations have in common is that they began as expensive luxuries and became consumer goods affordable to the average citizen.

The dissemination process for innovations hinges on the ability of innovators to recoup high research and development costs with high initial prices.  Competition then drives prices down.  What spurs this entire process on is the prospect of earning profits.

There is nothing in the design of the parental-choice or scholarship credits that would interfere with education entrepreneurs making profits. While the scholarship clearinghouses would themselves be non-profit, there is no reason that this requirement would have to extend to the schools.

Vouchers, too, can allow for-profit education service providers to flourish. Nevertheless, it is likely that under both tax credits and vouchers there will be attempts to exclude profit-making schools, either by opponents of for-profit education, such as the teachers’ unions, or by associations of nonprofit schools seeking to erect barriers to the spread of for-profit competitors.  The likelihood that such efforts will succeed depends on the resistance of the programs to regulation, and tax credits seem to have the advantage in that respect.

Based on a comparative international and historical study of education markets, the conditions for their success are: choice and direct financial responsibility for parents; and freedom, competition, and the profit motive for educators.  When evaluated on these criteria, education tax credits represent the most promising policy option.

The single most important difference between education credits and vouchers is that tax credits do a better job of preserving direct parental financial responsibility.

The second most significant advantage of tax-credit programs is that they avoid use of public money. Since all the money involved in these programs is privately and voluntarily spent, issues of church-state entanglement and necessary public oversight of public spending are rendered moot. Because of the greater resistance to regulation that follows from the absence of state funding under tax-credit programs, those programs do a better job of protecting all the criteria for effective markets from regulatory encroachment.


We continue Part III tomorrow with “The Public Education Tax Credit” December 5, 2007 by Adam B. Schaeffer, Cato Institute.














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