Economics 147

1
Economics 147

• Winter 2005
• Lecture 19

2
Outline for today

• Difference between voucher system and private
  school scholarships
• Marginal and inframarginal effects of vouchers
• Block grants and crowding out
• Foundation and power equalization aid
• Variants of school choice plans
• Tax credits vs. tax deductions
• Compensating wage differentials

3
What do voucher experiments evaluate?

• Potential gains from vouchers
• (1) Public schools get better when forced to
  compete for students
• (2) Students are served better in private schools
  so moving them from public to private is good
• Lottery studies evaluate effect of private
  schooling on students who enter lottery
• Effect of private schooling now might differ from
  in a fully voucherized world
• Students who enter lottery may differ from other
  students
• Lotteries are too small to exert competitive
  pressure

4
Marginal effect of voucher transfer income to
family of student who would have gone to public
school otherwise (changes behavior at the margin)
Spending on all other goods
With voucher, spend amount V on tuition
No voucher zero spending on tuition
Spending on tuition
V
Blue BC is initial BC without voucher
Purple BC is BC with voucher for tuition amount V
5
Inframarginal effect of voucher transfer income
to family of student who would have gone to
private school otherwise (changes utility within
the private school attendance margin)
Spending on all other goods
With voucher, spend amount V (or more) on tuition
No voucher spend V on tuition
Spending on tuition
V
Blue BC is initial BC without voucher
Purple BC is BC with voucher for tuition amount V
6
Block grants crowding out
Exp on pvt goods
Y total income in the town
YBG
Y
Exp on educ
Y
YBG
actual change in E
change in E without any crowding out
7
Foundation aid

• Guarantees minimum spending per pupil (F)
• Taxes districts on property values per pupil to
  do so
• ti property tax rate in district i
• vi property value per pupil in district i
• tF foundation tax rate set by state
• vs mean property value per pupil in state
• States budget constraint (self-financing case)
• Tax revenue collected PP Foundation aid paid
  out PP
• tF vs F
• Per pupil revenuei ti vi (F - tF vi)

8
Power equalization (PE) aid,a.k.a. guaranteed
tax revenue (GTR) aid

• Foundation aid guarantees a floor, not
  equalization
• Extreme form of PE can actually equalize
• State sets tax rate tG
• District i sets tax rate ti tG
• State guarantees tax base vs on first tG mills
  of ti
• mill 1/1000th
• Districts own tax base used for remaining ti -
  tG mills
• Per pupil revenuei tGvs (ti -tG)vif(vs-vi)
• f gt 0
• f(0) 1

9
Types of charter/voucher plans
10
continued
11
Types of tax plans

• Income tax rate t applied to income Y
• Tax payment tY
• Tax deduction for tuition t
• Tax payment t(Y - t)
• Tax credit for tuition t
• Tax payment (tY) - t

12
Compensating wage differential
S for low- amenity school
Wage P
S
w
w
D
Q
Q
Q
w w CWD