Blog Ipsa Loquitur

Published on under A Day in the Life

The average student graduates college with about $25,000 in loans that will take years to repay. (When I graduated law school, I had … more than that.) That kind of indebtedness can seem oppressive when you’re struggling to start a career; who’s really going to try to start the next Twitoogle or Fourspacebook when you have payments to make right away? Why not just have the government pay off everyone’s student loans, freeing up the next generation of entrepreneurs and innovators to take risks and lead us into our digital destiny?

That’s the sort of stuff we hear as the “forgive the student loans” crowd becomes more boisterous. To be fair, there are more than just social media portmanteaus at stake here; none of the other arguments let me write the word “Twitoogle,” so I went with the goofy one.

Of all the folks looking for student loan forgiveness, the crowd with all the student loans is probably the loudest. This sort of self-interested advocacy is far from unique: it’s the basis of what I can only assume is somewhere between “most” and “all” of the lobbying in America today (with a handful of very notable exceptions). But I do have to take the calls for forgiving student loans with a grain of salt, because it seems kind of like a shameless handout, just for actual people instead of banks with legal personhood.

Middle Ground and Deducting Interest

Death and Taxes has an article rounding up most of the points I’ve talked about, and I wish I’d read it first dammit recommend you give it a read. Kevin Hand gives a good account of the arguments against the stimulative effects of forgiving over $1 trillion in student loans. He also mentions an interesting middle ground, and you know how I love me some compromise pie, Dear Reader.

Right now, Congress is pretending to care about debating a number of different ways to get the economy going. One of the measures pundits have kicked around but which will never get a real vote is the elimination of the Home Mortgage Interest deduction. If you’d like an interesting and concise discussion of some of the primary effects this would have on our economy, I liked Mark Thoma’s view.

Briefly, the home mortgage interest deduction lets you deduct from your taxable income the amount of money you paid in interest on your mortgage. (Conditionally; I’m glossing over as always for the sake of discussing principles.) If you make $50,000 a year, and you paid $15,000 on your mortgage this year, of which $3,000 was interest, you get to list $47,000 as your income. Simple, right?

Student loans work the same way. The interest I pay on my student loans is deductible just like the interest I pay on my mortgage. Piece of cake.

Industrial Machinery and You

Paul David, Professor Emeritus in Economics at Stanford University, has a cool title and a cooler idea. In 2002, he proposed an income tax regime that treated student loans less like mortgages and more like industrial machinery; like a capital expenditure.

Actually, I find Professor David’s rationale for this proposal as interesting as the proposal itself. He notes that investing in new machinery is treated more favorably by the tax code than investing in education for workers. Even better, (he argues) that a progressive tax regime encourages the sheltering of income in the form of tangible property instead of in “human capital” – educated workers make more money and pay more in taxes, but a new machine is 100% deductible over time.

Capital expenditures are tangible goods that are going to be employed by a business over the course of a number of years. My income tax class always used a doughnut-making machine as an example. You buy a Donut-Tron 5000 and you expect it to last 5 years. The income tax code lets you deduct the cost of that machine, over a period of several years – the exact span depends on how long the machine is expected to last, and yes, the IRS has decided how long it thinks doughnut making machines are expected to last. (Compare with a “normal” business expense, which is deductible all at once in the same year in which it was incurred.)

So capital expenditures are deductible from your income, like interest payments, but you do it over a much longer period of time. In this way, we promote investment in updated industrial equipment every so often, by giving tax breaks to companies that invest in new equipment.

A Capital Idea

See where this is going? Professor David likes that we promote investment in shiny new things for our businesses. He doesn’t like that said promotion dis-incentivizes investment in education. His solution?

Treat student loans like capital expenses. Don’t just let people deduct their interest payments – let them deduct the whole thing over time.

Instead of the government dumping a trillion dollars into the economy today to forgive everyone’s student loans, let the government give smaller tax breaks every year, eventually adding up to tax breaks costing what the one time Student Loan Forgiveness Day would have cost. You’re either handing out a trillion dollar check today, or handing out a series of tax breaks worth a trillion dollars over a period of years.

Yes, But Is That Stupid?

It’s an interesting thought: and if you believe that rules permitting long-term deductions (called “depreciation” by tax professionals and people with blogs) of capital expenditures promote investment in personal property, why can’t it do the same for student loans?

I think you could argue that we don’t need to promote students to take out more loans that they won’t be able to pay back. However, I think the sensible reply is that business buy machinery and long-lasting goods no matter what, too. You don’t need to incentivize Krispy Kreme to buy a doughnut-making machine. They ain’t doing it by hand.

Krispy Kreme does, however, get to take the money they save by depreciating their capital expenses and apply it to other things: employment, expansion, research & development on new sprinkle technology, or whatever. Similarly, folks paying off their student loans would receive much larger deductions if their loans were classified as capital expenses.

If we can stimulate business growth by encouraging investment in capital goods, as Professor David suggests, can’t we encourage investment in human capital by treating student loans like we treat capital goods?