Vouchers vs. Tax-Credits: Functional Comparison of Optimal Programs

One of the most decisive determinants of the effectiveness of an education marketplace is the degree to which parental choice and school autonomy are unfettered by regulation. The optimal voucher and tax credit programs described earlier both minimize the intrusiveness of such regulation, but no legislation is immutable. As previous sections have argued, broad-based tax credits may have the greatest resistance to regulatory encroachment over time. A few decades into the operation of these programs, therefore, vouchers could well suffer substantially more regulatory encumbrances than tax credits. The functional implications that flow from that conclusion are occasionally referred to explicitly in the discussion that follows, but even when they are not, the reader should keep the issue of differential regulatory encroachment in mind.

Responsiveness to Families

The central goal identified at the start of this paper was to make school systems more responsive to families. Some have argued that vouchers and tax credits are more or less equivalent in this respect. In the words of one economist:

[B]oth a voucher and a tax credit system ensure that schools are more responsive to parents, as parents would directly control school funding through choosing a school for their child. It is this increased ability to influence schools, and the greater choice between schools, that will encourage parents to become more involved in their children’s education, not the medium through which they gain their benefit.[85]

The claim, in other words, is that parental choice matters while parental financial responsibility does not. This belief is confuted by the historical and modern evidence. The services offered by government-funded private schools in India are less responsive to parents’ demands than are the services of the country’s fee-charging private schools. This is particularly noticeable in the much greater availability of popular English language instruction in fee-charging schools. The religious charity schools of 19th century Britain were less responsive than contemporaneous fee-charging “Dame” schools that served families from the same towns and neighborhoods. Church of England charity schools often chose not to teach writing to their poor patrons because they did not wish to upset the prevailing class structure by contributing to upward social mobility and the written expression of political dissent. Charity schools set up in the post-Bellum South by white philanthropists usually prepared African American students for manual labor alone, despite the enormous pent up demand among black families for literacy and academic instruction.[86]

Only non-refundable personal-use tax credits preserve parents’ full and direct financial responsibility, and it is only this mechanism that is likely to enjoy the full benefits of the fee-charging schools described above. Because schools respond to these fee-paying parents by adjusting their services accordingly, other parents, whose educational expenses are subsidized, will also benefit to the extent that they share the needs and demands of the fee-paying consumers.

Like vouchers, donation tax credits constitute third-party payment, but they too retain an edge over government vouchers. While vouchers are a single-payer system, donation-funded scholarships are available from multiple SGOs. Restrictions imposed by one SGO will not necessarily be imposed by another, so parents with a given set of preferences can shop around for the SGO whose scholarship restrictions are the least intrusive and problematic for them. This is not possible under single-payer voucher programs. Voucher families in Holland or Maine seeking an alternative to the official curriculum and testing structure have no place to turn within the subsidized education sector. Worse yet, competition from the nationally subsidized voucher sector has all but eliminated parent-funded schooling in the Netherlands, drying up the supply of truly independent education.

In addition to the varying level of direct financial responsibility between voucher and tax credit programs, an examination of the characteristics of existing laws reveals that, in practice, tax credit plans typically impose fewer constraints on the freedom of parents to choose and the freedom of schools to tailor their services to specific groups of parents. Voucher plans more often impose mandatory curricula and testing, for example, as well as rigid admissions policies that prevent schools from catering to distinct clienteles. Though not currently widespread, the considerable barriers to the entry of new schools erected under the Dutch voucher system are also worrisome.

School Atmosphere, Size, and Physical Conditions

Parents want schools that are clean, sound, and safe, and usually ones that are small enough so that students and staff can all know one another by name. Though comparative data are extremely scarce on this point, schools paid for directly by parents may have an edge. A study in the Indian state of Tamil Nadu, for example, found that schools paid for by parents had better (and better-maintained) facilities than government-funded schools (both privately- and government-run).[87] Once again, families assuming the cost of their children’s education with the help of personal tax credits would stand to benefit from this effect, to whatever extent it in fact exists.

The prospects for keeping schools small under voucher programs are also somewhat worrisome given the situation in Holland. There, the government is on a long-standing school consolidation binge much like the one that has gripped U.S. public schools since the 1920’s.[88] There is an analogous consolidation program under way in New Zealand at the moment as well, though it applies to that country’s national system of charter-like schools rather than to a voucher program. The current kiwi Labour party government has been frenziedly closing and merging small schools for over a year. In both the Dutch and New Zealand cases, the ostensible aim is the same as it has been in the U.S.: controlling government spending. Of course, Herbert Walberg and William J. Fowler have revealed that this is only wishful thinking. In the U.S. at least, larger public schools and school districts are generally less efficient.[89]

There are no established large-scale UETC programs to which we can compare this voucher consolidation pressure, but the fact that tax-credit programs do not use public money is likely to insulate them somewhat from governments’ quixotic efforts to increase the efficiency of their spending.

Though the long-standing voucher programs in Maine and Vermont have not led to forced school consolidations, this may be due, in part, to the fact that they are “escape-hatch” programs for small numbers of children in areas not served by public schools, rather than universal programs in which virtually all schools are offered (and accept) government funding.

Academic Achievement

Student performance, like school responsiveness and physical condition, is usually found to be superior under fee-charging systems than under government-funded systems. This is most noticeable when comparing fully parent-funded private schools with fully government-funded private schools, as in India. There is also evidence, however, that under partially-parent-funded school systems, the schools that receive a greater share of their funding from parents do better academically, when comparing schools with comparable per-pupil spending (as in Indonesia).[90]

Since more parents would be assuming greater direct financial responsibility for their children’s education under a tax credit plan than under a voucher plan, tax credits may enjoy a long-term advantage in this area.

To the extent that voucher programs come under heavier curriculum and testing controls over time, they would also be less likely to spur pedagogical innovation. Restrictive school admissions policies would also preclude voucher schools from targeting bright or slow students, or students with particular academic strengths or weaknesses. Since performance-based student grouping has been found more effective than heterogeneous grouping, this could well have a negative impact on achievement.[91]

To the extent that state-imposed curricula and testing cause schools to change what and how they teach, the skills at which students become proficient will also diverge from those parents might value most highly. A state’s imposition of the PISA mathematics test, for instance, would likely lead to students developing different skills than they would without a state mandated testing system.

System-Wide and School-Level Efficiency

Large-scale evidence from Indonesia shows that school efficiency is positively correlated with the share of school finances that come directly from parents. Put another way, the higher the share of government funding a school receives, the less efficient it is. This is true of both private and public schools, though for a given share of parental funding, private schools have a slight edge over public schools. These findings are bolstered by the fact that they were derived from an analysis of 68,000 schools of widely varying descriptions.[92] Similar results obtain in India, where fee-charging private schools are generally found to be more efficient than either government-funded private schools or public schools. Certainly these results are consistent with the view that people expect more from a service provider when they spend their own money than when they spend someone else’s. So, because of the greater parental financial responsibility under a tax credit program, tax credits may enjoy a long-term edge in school-level efficiency.

Tax credits also offer an advantage over government vouchers, at least in principle, in system-wide cost control. In practice, government vouchers have been limited to defraying the cost of tuition at government-approved schools. In their 2003 book Education and Capitalism, Herbert Walberg and Joseph Bast state that vouchers are issued “for the purpose of paying tuition at a participating private or public school.”[93] This means that if the value of the voucher is raised, voucher-redeeming schools will necessarily benefit from the entire increase (voucher savings accounts à la Heartland Plan were rejected earlier). That is a clear and substantial incentive for voucher-redeeming schools to band together and lobby for higher vouchers just as public school employees’ unions have done under public schooling. Over time, the cost of such lobbying can add up, viz., the more than fifteen-fold increase in public schools’ inflation adjusted per-pupil spending since 1920.

In an earlier publication, Joseph Bast suggested that the opposite might happen under voucher programs: that efficient private schools might “join with taxpayers… to form a coalition against increasing the value of the vouchers.”[94] There is as yet no evidence of such an anti-spending coalition forming in any of the existing U.S. or international voucher programs. There is, however, evidence that government-subsidized private schools can and do lobby for larger vouchers. In Chile, for example, “[p]rivate school associations… have proven adept at lobbying for increases in the size of the voucher.”[95]

To the extent that personal use education tax credits can be claimed against expenses other than tuition, the benefits of a higher credit will not necessarily accrue directly to private schools, as is the case with vouchers. And there are precedents that personal use tax credits and other tax benefits can be applied to a broader range of expenses than can direct government subsidies. The Illinois personal use credit can be claimed not only for tuition but also to pay for school books and lab fees. The federal child dependent credit does not place any limits on how the taxpayer may spend the money he saves. Federal tax-free Coverdell Education Savings Accounts allow parents to use the tax-benefit program to pay not only for tuition but also for tutoring services and even home computers.

Under a personal use tax-credit program, parents may thus choose to obtain a variety of educational services from different providers (difficult or impossible under vouchers), to buy educational items such as books or computers, or even to spend some of the money on other activities they think will be of benefit to their children. The incentive for schools to lobby for higher credits is thus weaker than the incentive of schools to lobby for larger vouchers, because the lobbying schools might not enjoy any of the additional funding under a larger credit. (This, again, only applies when the credit is fungible across a wide range of educational expenses).

Personal use credits are of course only a part of the optimal UETC program, and likely a smaller part than donation credits. With donation credits, the cost control case is yet clearer. None of the existing or proposed tax credit programs tie the size of the credit to the size of the scholarship. That means that increasing the size of the credit will not necessarily translate into larger scholarships and hence tuitions (the money could instead go to increase the number of scholarships available or the range of things parents can spend the scholarships on). Private schools thus do not have the same incentive to lobby for larger credits as they would for larger vouchers.


Another issue central to controlling system-wide costs is the minimization of fraud. Any third-party payment system opens the door to fraud. Under vouchers, for instance, no amount of regulation or bureaucratic oversight will be able to prevent abuses. The current U.S. public school system is saturated with regulations and yet it is rife with fiscal malfeasance.[96] If it is possible for public school officials to cheat the system by drawing funds for non-existent students, and it is,[97] then the same thing is possible under vouchers. Parents, by contrast, tend to know how many children they have, and can’t be duped into paying tuition for any additional ones. Kickback schemes also become feasible under vouchers, since schools can offer to hand back some fraction of the voucher under the table to parents who choose their schools. When parents pay their children’s tuition themselves, kickbacks are meaningless.

With donation tax credits, however, there is no reason to think that SGO employees would be any less likely to try to defraud their donors than voucher program administrators would be to try to defraud taxpayers. There are in fact two SGOs under investigation for possible fraud in Florida as of late 2003.[98] If fraud is proven, these SGOs will undoubtedly be shut down, but even if it isn’t they are unlikely to attract any new donations unless they somehow manage to convince donors that they are indeed squeaky clean. And that is a key difference between donation tax credits and either government vouchers or traditional public schools: tax credit donors can direct their funds to the organization in which they have the greatest confidence, cutting off a questionable SGO at the first hint of a scandal. Taxpayers, on the other hand, cannot stop paying for government voucher or public school systems no matter how badly those programs might be wracked with corruption or mismanagement, and few if any public schools have ever been shut down in response to evidence of fraud or corruption.

Conviction, Compulsion, and Conflict

It is in the nature of voucher programs that all taxpayers are compelled to support every type of legal schooling, regardless of their personal convictions. Unfortunately, compulsion has been the single greatest source of education-related social conflict in history. Most often it has taken the form of compelling students to receive instruction that is contrary to their parents’ wishes, but compelling citizens to pay for the inculcation of views they find objectionable has also created much strife. The religious character of early U.S. public schools led to animosity and even violence between Catholics and Protestants, for example. In the late 1800s, Catholics objected to having to fund openly Protestant public schools with their taxes since Catholic public schools were not provided for them. When Philadelphia did allow public schools with predominantly Catholic enrollments to use the Catholic Bible instead of the Protestant one, a mob of rioters burned St. Augustine’s Church to the ground, and 13 people were killed in the ensuing violence.

Today, many school choice advocates downplay the significance of this issue, reducing it to a simple legal discussion of Blaine amendments. Since Blaine amendments were unquestionably motivated by religious bigotry, and since they have usually been found to prohibit sectarian schools from participation in voucher programs, school choice proponents have often criticized them.

It is possible that the U.S. Supreme Court may eventually rule, as the Institute for Justice[99] and others have argued, that Blaine amendments and “compelled support” clauses represent unconstitutional discrimination against religion and in favor of secularism. Alternately, some state supreme courts may decide that taxpayer-funded vouchers for religious schooling do not violate these state constitutional provisions, as happened in Wisconsin. But even if every such constitutional provision in the country is either overturned or ignored, we will still have to wrestle with the fact that voucher programs force some citizens to violate their convictions. It is easy, for those of us in favor of greater parental freedom in education, to get caught up trying to “win” the legal battles without realizing that some legal victories may be Pyrrhic — i.e., they may come at too high a cost to American ideals and social peace. Is it right to increase parents’ freedom of choice at the expense of taxpayers’ freedom of conscience?

The harm of such a Faustian bargain is not limited to the compulsion of individual taxpayers but extends to the social friction that this compulsion creates. Consider the situation in the Netherlands. Disconcerted by what they perceive as sexist, isolationist, and anti-Western teachings in the more conservative Islamic schools, many Dutch citizens and several politicians have been searching for ways to preclude the creation of any more such schools. If they fail, their convictions will be trampled as they are forced to continue funding these schools, and if they succeed, the educational choices of all Muslim families will be much diminished and their religious freedom trampled. The fires of resentment will thus be stoked in one group or the other, no matter the outcome.

In an effort to eliminate this Catch-22, I suggested some years ago that states with voucher programs could add a check-box to their tax forms. The box would read, in essence: “check here if you do not wish your taxes to support devotional religious instruction.” Two separate government voucher funds could thus be maintained, one for any sort of school, and one for secular schools alone. This seemed a promising solution at the time, but I now conclude that it would not solve the problem because it underestimates the diversity of conscientious objections. Not all tendentious educational practices boil down to a question of religiosity vs. secularism.

A recent turn of events in Florida provides a real-world example of a situation not resolvable by the check box idea. In 2003, a closeted gay student at a private Christian high-school was asked by the school chaplain if he was homosexual, and the student acknowledged that he was. Though the school did not have an explicit policy against enrolling gay students, it decided to expel the boy.[100] As a privately financed school that does not enroll any students under Florida’s voucher programs, it is almost certainly legal for this school to discriminate against gays in its admissions policy. And, under current law, this school is almost certainly eligible to accept voucher students because the present anti-discrimination clause in the enabling legislation does not encompass sexual orientation. Were the school to accept state vouchers, however, many socially liberal citizens, both religious and secular, would strongly object and insist that it change its policy, and that the law be modified to require such a change. Many socially conservative citizens, on the other hand, might not have a problem with the school’s policy, whether or not it accepted vouchers.

There is no way that a single simple checkbox, as I previously proposed, could adequately deal with this very real scenario or many others like it. Nor does any alternative solution come to mind. In cases involving conflicting moral or religious convictions, voucher programs provide no means to satisfy all parties. Either the freedom of schools and the choices of parents will be constrained or the convictions of taxpayers will be violated. This is a recipe for the never-ending cycle of social strife that manifests itself in the world’s government-run school systems (including our own).

Since UETC programs rely entirely on private voluntary action, they do not put the wishes of parents, taxpayers, and schools into conflict with one another. Parents claiming personal use credits can spend their own money as they see fit, and no taxpayer is forced to fund those parents’ choices. Taxpayers can choose the SGO to which they make their donations in accordance with their most deeply held values. After just two years of operation, Florida’s donation tax credit program has seven different SGOs to choose from while Arizona’s has 47 and Pennsylvania’s, 150. Under a mature tax credit program, there would almost certainly be SGOs that would willingly fund scholarship students at the Florida Christian school mentioned above, and SGOs that would refuse to fund scholarships at schools that discriminate based on sexual orientation. The school, which has done nothing illegal, would be permitted to retain its religiously derived admissions policy but no one who opposed that policy would be obliged to support it. By minimizing compulsion,[101] UETC programs can thus make a substantial contribution to harmonious social relations among the many different communities that make up our increasingly diverse nation. Though UETCs may not create a social utopia, they represent a tremendous improvement over the current regime, under which every citizen must pay for schools of which he or she may disapprove.

Funding Stream Portability

Unlike education tax-credits, which must be claimed against specific state and/or local taxes, vouchers can be funded via any government revenue stream. This means that vouchers can be implemented just as easily in states that rely heavily on a sales tax as in those that rely mainly on an income tax. Tax-credits are more difficult to implement in states whose budgets are chiefly financed through sales taxes, because it would be prohibitively difficult to maintain records on precisely how much sales tax each taxpayer had paid. Vouchers can thus be easily implemented across a somewhat wider range of states than can tax-credits. It is always possible for states to revise their tax systems to make them more amenable to education tax credits, but this would present a significant hurdle.

Funding Stream Sufficiency

The ability of tax-credits to make private schooling financially accessible to all families has long been a concern. Programs that offer only personal use credits are particularly susceptible to this criticism, as Joseph Bast has shown. Bast, president of the Chicago-based Heartland Institute, concluded that a personal use income tax credit proposed for New Jersey would have been worth only $530 for a family earning $40,000 per year.[102] For families at or below the poverty line who owe no state income taxes, it would have provided no benefit at all. Writing on the Illinois personal use tax credit, People for the American Way has claimed that “taxpayers earning more than $80,000 annually claimed 46 percent of the entire $61 million credit amount in 2000, or $28.2 million. Taxpayers earning $60,000 or more claimed almost two-thirds of the total credit. On the other hand, less than 3 percent of the total credit was claimed by taxpayers making less than $20,000 a year.”[103]

One way of making personal use credits more valuable is to allow them to be applied against a wider range of taxes. Sales taxes are a difficult case, as already noted, but property tax credits might be more feasible. The national median property tax burden for owner-occupied dwellings was $1,334 in 2003,[104] which, when combined with an income tax credit, would make a significant dent in high-school tuition and would cover about half the average private elementary school tuition ($3,267 in 1999-2000).[105] Coming back to the New Jersey case discussed above, the benefit of adding a property tax credit would be greater still, since that state has an average property tax assessment of roughly $4,000[106] — higher than the average private elementary school tuition.

Still, the average family with children has more than one child (1.86 of them according to the 2000 Census)[107] so even a combined property and income tax credit would leave many families with insufficient resources to cover all their private school expenses. That, of course, is where donation credits and private scholarship granting organizations come in. The scholarships provided by SGOs can be used both by the lowest income families and those in the middle income bracket whose tax liability is insufficient to earn them a substantial personal use credit. Donation credits can, in principle, raise as much money as voucher programs. The only major tax that cannot easily have a credit applied to it is a sales tax, and sales taxes raise only about a third of state revenue nation-wide.[108]

The only question that remains is: will enough taxpayers make use of the credits to provide scholarships to every family that needs and seeks them? Though the answer to that question cannot be known with certainty, there is considerable reason to conclude that it will be “yes.” First and foremost, the United States had a substantial tradition of educational giving prior to the rise of modern state schooling, and that giving only ebbed in direct proportion to increases in tax spending on the public schools. Given a chance to once again control their educational giving, and acknowledging the public’s dissatisfaction with public schools, the ability of donation tax credits to raise sufficient funds does not seem in serious doubt.

The popularity of existing donation programs is a less reliable guide at this stage because of their relative youth, and because they are currently seen as (and designed to be) limited escape hatches from the public schools rather than as the cornerstones of an alternative system of mass education. Still, the early results are promising. The Florida and Pennsylvania programs, both just two years old, are already helping 15,000 or more students each—a greater number than any of the currently operating voucher programs. Most of Pennsylvania’s $20 million donation tax credit allocation has been claimed within the first few days after applications are accepted in both years of its operation.[109] The Arizona program, now in its sixth year, is serving approximately 19,000 students despite its $500 limit on individual contributions and its complete lack of corporate donation credits.

Individualized Attention to Subsidized Families

Donation tax credits enjoy a practical advantage over government vouchers in the greater degree of individualized attention made possible by Scholarship Granting Organizations. Under government vouchers, all parents, or at least all parents of a given income level with non-disabled children, receive the same subsidy. When scholarships are distributed by private SGOs, a much greater degree of flexibility exists. Consider the case of a low-income single mother enrolled in college or a job training program. It is easy to envision how she might have neither the time nor the funds to both continue her own education and pay a co-payment to (or perform equivalent volunteer work at) her child’s school. Under a bureaucratically administered government voucher program, there would be no way to bend the rules to waive the co-payment/volunteer requirement. An SGO, by contrast, could more easily do just that.

Social Engineering Through the Tax Code

One criticism aimed specifically at tax credits is that they constitute social engineering through the tax code, twisting what is supposed to be a neutral system for generating government revenue to achieve social policy aims. According to the think tank Tax Analysts, for instance, Florida’s business donation credit “violates the most basic principles of sound tax policy. The tax system should not be used to shape social policy.”[110] But the belief that a UETC program would manipulate citizens’ behavior more than the other education policies under discussion is not only mistaken, it is exactly backward. Schooling is one of the only industries currently dominated by a massive tax-funded government provider, and that tax-funded monopoly grossly distorts parental behavior and explicitly controls taxpayers’ behavior.[111]

In public opinion polls, a majority of parents say they would send their children to independent schools if it were not for the substantial financial penalty associated with doing so.[112] Their behavior is thus wildly skewed by the “free” public schools. Taxpayers have no choice under the current system, being obligated to fund the public schools. Their behavior is utterly controlled by the system.

Voucher programs improve on the situation for parents, allowing them to choose from among government-approved independent schools with little or no financial penalty. Their education consumption is still distorted, however, given that the vouchers must be spent on tuition alone. For taxpayers, the behavioral distortion remains at the same level as under public schooling. Taxpayers must still fund education, and they have no direct control over the kind of education their taxes go to support.

An optimal UETC program would further reduce the behavioral distortions that persist under vouchers. Rather than being taxed by the state and then possibly being given back that same money in the form of a voucher, parents would simply keep the money they would have paid in education taxes, and would have more autonomy in choosing how to spend it. Taxpayers without school-aged children would also find their behavior somewhat freer than under either public schooling or vouchers, being able to choose the SGOs that accept and distribute their donations instead of having to pay taxes to the one-and-only state. Short of a completely free education market with no government involvement whatsoever, UETCs offer the minimum possible level of tax-system induced behavior manipulation.

Timing of Fund Availability

Another tax-credit-specific criticism is that tax credited earnings may be returned to taxpayers in the spring, after the close of the tax year during which the educational expenses were incurred. In other words, when parents need to spend the money, they don’t have it. First of all, this criticism only applies to personal use tax credits. It does not apply to donation tax credits because the timing of the donor’s credit need not be linked to disbursal of the scholarships. In the case of both income taxes that are subject to withholding and property taxes that are paid from escrow accounts, taxpayers can easily avoid the timing problem simply by adjusting their withholding/escrow transfer amounts according to the size of the credit for which they qualify. In that way, taxpayers are never charged, and never pay, taxes for which they are not liable. Since they do not overpay their taxes in the first place, they do not need to wait for an excess tax payment to be returned to them.[113]


In allowing homeschoolers to benefit both from personal use credits and from scholarships offered by willing SGOs, an optimal tax credit program would be of much greater financial help to homeschoolers than a voucher program that excludes them entirely. Though school choice opponents might be interested in extending additional controls over home schoolers should they benefit in any way from a tax credit program, it is almost certainly the case that those same opponents would like to increase regulation of homeschooling even without a credit. The addition of non-refundable tax credits to the homeschooling equation seems unlikely to tip the balance of power on this issue in most state legislatures. In the rare cases where it might, that could be taken into account.