Journal of Public Economics 69 (1998) 211–228

Educational vouchers, welfare effects, and voting

William H. Hoyt a , *, Kangoh Lee b
a
Department of Economics Gatton College of Business and Economics University of Kentucky,
Lexington, KY 40506, USA
b
Department of Economics Towson University, Towson, MD 21252, USA
Received 1 February 1997; received in revised form 1 December 1997; accepted 21 January 1998

Abstract

We analyze the welfare effects and voting equilibrium with vouchers for private schools.
The analysis shows that vouchers, like tuition tax credits [Martinello and West (1988); Frey
(1983)], may improve the welfare of all families, including families whose children remain
in public schools, if public educational quality is unchanged and publicly-financed
educational expenditures decrease. Thus, voters will approve a voucher only if it reduces
taxes. When public educational quality is endogenous, a voucher may increase quality by
reducing the tax cost of quality and will be approved if it reduce taxes at the pre-voucher
public education level and increases quality.  1998 Elsevier Science S.A.

Keywords: Educational vouchers; Tax reduction; Voting

JEL classification: H72; I22; I27

1. Introduction

While the concept of educational vouchers has long interested economists [see
Friedman (1962) and Friedman and Friedman (1979)], with the recent interest in
vouchers for private schools in the political arena, most notably the 1993
California referendum on educational vouchers, the topic of educational vouchers
has become an increasingly relevant policy issue. Scholarly interest by economists

*Corresponding author. Tel.: 11 606 2572518 (O); fax: 11 606 3231920; e-mail:
whoyt@pop.uky.edu

0047-2727 / 98 / $19.00  1998 Elsevier Science S.A. All rights reserved.

PII: S0047-2727( 98 )00023-1
212 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

and other social scientists has also increased, presumably reflecting the increased
public interest.
Among recent studies on educational vouchers and similar policies, two strands
of research are particularly relevant. The first strand studies the impact of vouchers
on the quality of public education. Vouchers may affect the quality of public
education because of increased school competition [Chubb and Moe (1990) and
Hoxby (1994)] and because of changes in the peer group [Epple and Romano
(1994)]. The second strand discusses the effects of vouchers on taxes, focusing on
the possibility that vouchers or tuition tax credits reduce taxes [Frey (1983),
Martinello and West (1988), and Ireland (1990)].
We analyze both the welfare effects of vouchers and the voting equilibrium with
a voucher, thereby predicting political support for vouchers. As in the earlier
studies we consider whether, and under what conditions, vouchers can reduce
taxes, and hence can be approved by voters. However, we extend the analysis
found in these studies in several ways. First, we explicitly incorporate hetero-
geneity into the analysis, distinguishing families by income.1 Second, these studies
assume a fixed (and exogenously determined) level of public educational quality.
We relax this assumption and let public educational quality be endogenously
determined. Third, we analyze the impact of a voucher starting from the current
system without vouchers, rather than focusing on the impact of a marginal change
in the amount of a voucher. By incorporating both heterogeneity and endogenously
determined public educational quality into our model, unlike Martinello and West
(1988) and Frey (1983), we can predict both the welfare and distributional effects
of a voucher. By analyzing discrete, rather than continuous increases in vouchers,
our analysis improves our understanding of the actual implementation of a
voucher.
We first consider the case where the quality of public education is fixed or the
voucher has no impact on the quality of public education. A voucher can improve
welfare for all families by decreasing the publicly financed costs of education and
therefore decreasing taxes. Intuitively, if a $2000 voucher leads a student who
costs the district (and state) $5700 to educate in public schools to choose a private
school, then taxes in the state can be reduced by $3700. Of course, taxes increase
to the extent that families with children already in private schools receive
vouchers. Thus, the possibility of a voucher reducing taxes depends on the fraction
of students in private schools in the absence of the voucher and how many
students will leave public schools as a result of the voucher plan. For example,
based on average spending per student and the fraction of students in private
schools in the United States in 1993–94, 2.3% of public school students must
leave public schools for a $1000 voucher to decrease taxes.
Section 2 presents a simple model of the choice between public and private

1
In reality, since income is not the sole determinant of private school attendance, the welfare effects
of voucher plan do not depend on income alone as is implied by this model, a point we discuss later.
 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228 213

schools and Section 3 analyzes the welfare impacts and voting outcomes. Section
4 extends the analysis to the case with endogenously determined quality of public
education. Section 5 presents some calculations that provide some indication of the
magnitude of the enrolment changes or price elasticities of private school
enrolment needed to reduce taxes. In Section 6 we discuss possible extensions,
caveats, and empirical relevance of our analysis.

2. The choice between public and private schools

There is a continuum of families in the district, each with one child, who differ
only by income, y, where the distribution of y is characterized by a density
function n( y) with support [y,y¯ ] and the cumulative distribution function, N( y).
The number of families is normalized to unity so N( y) can be interpreted as the
fraction of families with income less than y. All families have identical preferences
defined over a private good (x) and the educational quality (e) with the quasi-
concave utility function U [x,e].2
Each family has a choice of sending its child to the public school and receiving
educational quality of q or using a voucher and sending their child to a private
school to receive educational quality of Q, where Q is the choice of the family. We
assume that the quality of education, either q or Q, depends only on education
expenditures as in Stiglitz (1974).3 Thus we abstract from any peer-group effects
frequently considered in the education literature [see Henderson et al. (1978),
Brueckner and Lee (1989), de Bartolome (1990), and Evans et al. (1992)]. To
simplify our analysis we further assume that marginal cost of quality is constant
for both public and private education with the cost being unity in public schools
and p in private schools.4
Each family receives utility of U [y(12t),q] if it sends its child to public school,
where t is the income tax rate for the district. If the family sends its child to a
private school, it receives utility of U [y(12t)1v2pQ * ,Q * ] where v is the
amount of the voucher and Q * is the quality of private education chosen by the
family. Define the function D(q,v,t,y) as

D(q,v,t,y) ; U [y(1 2 t) 1 v 2 pQ * ,Q * ] 2 U [y(1 2 t),q] (1)

To determine a family’s choice between public and private education we assume

that Uxx ,0 and Uxe $0. Of course, v,pQ * – the voucher can not exceed the

2
If we include families without children, it does not change our qualitative results. An earlier version
of the paper is available that includes analysis with families without children.
3
For a different argument see Hanushek.
4
More detailed results when our analysis is extended to consider increasing marginal costs in both
private and public education are available from the authors.
214 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

private school tuition and therefore the family will choose a private school only if
Q * .q. These assumptions imply

≠D/ ≠y 5 (1 2 t)[U Qx 2 U qx ] . 0, (2)

where the subscript x refers to the partial derivative of U with respect to x and the
superscript Q or q refers to value of the variable when the family sends its child to
private or public school respectively. Thus, the following result, which simplifies
the subsequent analysis, can be stated:

Proposition 1. If a family with an income of y sends its child to private ( public)

school, so do all families with y9.(,) y.

We assume an equilibrium with children in both public schools and in private

schools. Then families with an income of y * are indifferent between public and
private education. Formally y * is defined by
D(q,v,t,y * ) 5 U [y * (1 2 t) 1 v 2 pQ * ,Q*] 2 U [y * (1 2 t),q] 5 0. (3)
Given y * , N( y * ) families send their children to public school and 12N( y * )
families receive a voucher of v and send their children to private schools. Then the
district budget constraint is given by
t 5 [qN( y * ) 1 v(1 2 N( y * ))] /Y, (4)
ȳ
where Y 5 e yn( y)dy is mean income.
y
]
Eq. (3) and (4) determine the two endogenous variables, the tax rate, t(q,v),
and the ‘critical income’ y * (q,v), given (q, v). Using (3) and (4) we can obtain
≠t(q,v) 1 1
]] 5 ][(1 2 t)(1 2 N( y * )) 2 C(q 2 v)n( y * )]]
≠v A Y

F ≠(1 2 N( y * )) 1
5 1 2 N( y * ) 2 (q 2 v)]]]] ],
≠v Y
G (5)

where we assume A512t2y*(q2v)n( y*) /Y .0 5 and C5U xQ /( U xQ 2 U xq ).0. A

priori, the sign of (5) can not be determined and will be discussed in the next
section. In addition to the impact of the voucher on the tax rate, from (3) and (4)
we can find the impact of the voucher on y * and the impact of educational quality
on both t and y * . The results of these comparative statics are summarized below:

Proposition 2. ≠y*( q,v) / ≠q .0, ≠y*( q,v) / ≠v ,0 and ≠t( q,v) / ≠q .0.

5
A .0 is an assumption, but sign[A]5sign[Y 2( q 2 v) ≠N / ≠t] and A.0 simply means that a tax
increase, in the absence of any change in v or q, can not reduce costs by reducing the number of
students in public schools. Essentially, the tax rate is below the rate that maximizes net revenue,
tY2[qN 1v(12N)].
 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228 215

Proof of Proposition 2 is in the Appendix: An increase in the quality of public

education leads some families with children in private schools to send them to
public schools, increasing public enrolment and y * . In contrast, an increase in the
voucher makes private education less expensive, increasing private school
enrolment and decreasing y * . An increase in educational quality increases taxes,
because it costs more to increase the quality of public education and because it
increases public school enrolment.

3. Basic analysis of vouchers

While we expect public educational quality (expenditures) to be influenced by

the institution of a voucher plan, in this section we examine the effects of vouchers
while assuming that the quality of public education is fixed. This assumption
highlights the impact of vouchers in the most apparent manner and forms a basis
for our analysis of the impacts of vouchers with endogenous quality in the next
section.

3.1. Welfare effects of vouchers

To discuss the impact of a voucher of amount v on family welfare, starting from

the current system with no voucher 6 , note from Propositions 1 and 2 that
≠y * (q,v) / ≠v,0 – families whose children attend private schools without a
voucher continue to do so with a voucher. However, some families whose children
attend public schools in the absence of a voucher may send them to private schools
with a voucher. These families have higher incomes than the families whose
children remain in public schools. Thus we need to consider the impact of
vouchers on the welfare of three types of families: (i) families with y,y * (q,v)
whose children attend public schools with or without the voucher; (ii) families
with y[[y*( q,v), y*( q,0) ] whose children attend private schools with the voucher
but public schools when there is no voucher; and (iii) families with y.y * (q,0)
whose children attend private schools regardless of whether they receive a
voucher. Then the welfare effects of a voucher of a v may be expressed by

U [y(1 2 t(q,v)),q] 2 U [y(1 2 t(q,0)),q] for all y , y*(q,v) (6)

U [y(1 2 t(q,v)) 1 v 2 pQ * ,Q] 2 U [y(1 2 t(q,0)),q]

for all y [ [y * (q,v),y * (q,0)] (7)
6
Our analysis, of course, also applies to the effects of an increase in a voucher, say from v to v’.
216 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

U [y(1 2 t(q,v)) 1 v 2 pQ * ,Q * ] 2 U [y(1 2 t(q,0)) 2 pQ * ,Q * ]

for all y . y * (q,0), (8)
where Q * is a function of ( y,q,v, p) and differs with and without a voucher. Eq.
(6)–(8) enable us to evaluate the welfare effects of the voucher on families as
follows:

Proposition 3. ( i) If t( q,v) , t( q,0) then the voucher makes all families better off.
( ii) Assume t( q,v). t( q,0), ( ii-a) The voucher makes families with y , y * ( q,v)
worse off. ( ii-b) If y[ t( q,v)2 t( q,0)].(,)v, then the voucher makes families worse
( better) off for y . y * ( q,0). ( ii-c) There exists some y˜ . y*( q,0) such that the
7
voucher makes families better off for y [[ y*( q,0),y˜ ].

If the voucher decreases taxes, families with y , y * ( q,v) are better off because
their welfare only depends on how the voucher affects taxes as in (6). Families
with y[[y*( q,v), y*( q,0) ] are also better off, because they always have the choice
of keeping their children in public schools as families with y , y * ( q,v) do.
Families with y . y * ( q,0) are better off as they receive the voucher for private
schools and pay lower taxes. Thus if the voucher decreases taxes, it makes all
families better off as in (i) of the proposition.
Turning to part (ii) of the proposition, if the voucher increases taxes, it makes
families whose children remain in public schools worse off (ii-a). The welfare
effect on families whose children attend private schools even in the absence of a
voucher depends on the voucher amount, v, and on the additional taxes they pay,
y[t(q,v)2t(q,0)]. Whether the voucher exceeds the additional taxes depends on the
family’s income. If the voucher exceeds the additional taxes, v.y[t(q,v)2t(q,0)],
the voucher makes them better off. If v,y[t(q,v)2t(q,0)], the voucher makes
them worse off (ii-b). As y[t(q,v)2t(q,0)] is monotonically increasing in income,
these families will have the highest incomes. However, even if the voucher
increases the tax rate, there always exist some families with y.y * (q,0) who are
better off with a voucher regardless of the quality of education, amount of
voucher, or distribution of income (ii-c). Finally, the welfare impact on families
who switched from public to private schools as the result of the voucher is
ambiguous and therefore not discussed in Proposition 3. While they are better off
by sending their children to private schools with the voucher than keeping their
children in public schools, at least some of these families may have been better off
with their children in public schools without the voucher but with lower taxes,
t( q,0).
Perhaps the most interesting implication of this proposition is that the voucher
need not be viewed as benefit only to those families who will send their children to
private schools if they receive a voucher. Families that are unlikely to send their
7
Proof that y[t(q,v)2t(q,0)],v for some y˜ .y*(q,0) is found in the Appendix.
 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228 217

children to private schools with a voucher, in our model those with the lowest
incomes, may still benefit from the voucher because it reduces the taxes they pay.
Another interesting implication is that a voucher could actually make some
families with children in private schools worse off. If this is to happen, it does so
for the highest income families. Thus if t(q,v). t(q,0), political opposition to
vouchers may not only come from low income families whose children are in and
will remain in public schools but also the highest income families who pay more
in taxes than they receive from the voucher, y[t(q,v)2t(q,0)].v. While our model
has a proportional tax, the decrease in welfare and the expected opposition to a
voucher by the highest income families would be even greater with a progressive
income tax.
Given Proposition 3, it is natural to ask when a voucher can actually reduce the
tax rate. Proposition 4 summarizes these conditions.

Proposition 4. For a given quality of education ( q), the voucher v decreases the
tax rate, t( q,v), t( q,0), if

(q 2 v)[N( y * (q,0)) 2 N( y * (q,v))] . [1 2 N( y * (q,0))]v, (9)

where (9) is simply a discrete version of (5), ≠t( q,v) / ≠v. The left side of (9) is the
reduction in educational expenses that occurs as a result of students leaving the
public schools in response to the voucher. The right side of (9) is the increase in
expenses because students already in private schools also receive the voucher. If
(9) is satisfied, the reduction in public educational spending associated with the
change in enrolment exceeds the cost of providing the voucher to the students
previously enrolled in private schools. Consequently, the voucher will reduce the
tax rate if (9) holds. As an example, consider a voucher of $1000 with q5$5500
and N( y * (q,0))50.9. Then (9) is satisfied if h[N( y * (q,0))2 N( y * (q,v))]j /
N( y * (q,0)) .h[12N( y * (q,0))](v /(q2v))j /N( y * (q,0))50.022 / 0.950.024. Thus
taxes are reduced by the $1000 voucher if 2.4% of the families with children in
public schools send their children to private schools with a voucher. With a private
tuition of $4266 (the national average in 1993–94), the $1000 voucher is a price
reduction in private schooling of 23%, meaning that with a price elasticity of
demand for private schooling of less than 20.94 the 22% increase in private
school enrolment (0.022 / 0.1) needed to reduce taxes can be achieved.

3.2. Voting on vouchers

The welfare effects of a voucher scheme give us an indication of the political

support for vouchers. In this section we examine the outcomes that may be
expected when the voucher amount is determined by majority-rule voting.
It is well known that no majority voting equilibrium on public good levels may
exist when private alternatives are available. Stiglitz (1974) discusses the
218 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

possibility that a voting equilibrium on the level of public education may not exist
in a system with both public and private schools. The difficulty arises because for
some families there may be two local maxima: one at the voucher amount that
minimizes taxes (v˜ ) and where they send their children to public schools and
another at a voucher v9. n˜ where they send their children to private schools. As a
result, preferences are not single-peaked and no majority voting equilibrium may
exist. To ensure both the existence of equilibrium and for sensible results in the
next section with endogenously-determined public educational quality, we assume
that N( y * (q,v))..5 so that a majority of families send their children to public
schools for the values of q and v we consider.8
To determine the outcome with voting, note that all families whose children
remain in public schools prefer the voucher that minimizes the tax rate regardless
of their income because they are better off the smaller [t(q,v)2t(q,0)]. Since these
families constitute a majority of voters by the assumption that N( y * (q,v)) ..5, the
voucher amount determined by voting, v * , minimizes the tax rate. A voucher will
be approved if (9) is satisfied for some v.0 as this ensures that the tax rate with a
(positive) voucher is lower than the tax rate with no voucher. These results on the
voting equilibrium are summarized below.9

Proposition 5. For a given quality of education, q:( i) 0# v * , q; and ( ii) v * .0 if

there is a v .0 that satisfies (9), that is, t( q,v), t( q,0).

Any voucher plan approved by majority voting and for which more than 50% of
families send their children to public schools must minimize the tax rate because
the voucher only affects these families through its impact on the tax rate. Thus,
they always vote for the voucher that minimizes the tax rate.10 Consequently, any
v.q cannot be approved by majority voting, as in (i) of the proposition, because
such a v will reverse the inequality in (9) and hence increase the tax rate.

4. Endogenous quality of public education

The impacts of a voucher on public educational quality, as well as the

importance of educational quality in determining the likelihood of a voucher being

8
While in this section, we consider q to be exogenous, it should be clear that if N( y*),0.5 a
majority of voters would choose q50 (or q may be the minimum level of public education determined
by the state government) when q is endogenously determined in the next section. To be consistent with
the next section and to avoid such a pathological case, we assume that N( y * ).0.5.
9
We implicitly assume that each district sets its own amount of vouchers. The last section briefly
discusses how the results may be modified if the amount of vouchers is determined at the state level.
10
In practice, however, voters may not necessarily be able to choose the voucher that minimizes the
tax rate because of agenda control and other imperfections related to referendum voting. Instead, voters
will support the voucher, among alternative amounts, that decreases taxes the most.
 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228 219

instituted, are obviously important when evaluating any policies related to

vouchers. However, as is well known in the public choice literature, voting
equilibria do not normally exist when voting upon multiple issues. To overcome
this analytic difficulty, we assume families vote on the amount of vouchers, and
the school board will select the quality of public education that the decisive voter
most prefers conditional on the voucher amount chosen by voters.11 While the
limited number of actual voucher proposals makes it difficult to characterize the
institutional setting for the joint determination of spending and vouchers, this
assumption enables us to focus on voting on vouchers while still considering the
interplay between vouchers and public educational quality.

4.1. Vouchers and the quality of public education

Given our two-stage voting process, we first consider the second stage, the
determination of the quality of public education, given the amount of the voucher
determined in the first stage. The preferred level of public education for a family
of income y,y * (q,v), given v, satisfies

H(q,v) 5 2 U qx y(≠t(q,v) / ≠q) 1 U qe 5 0 (10)

We assume that the preferred level of public education, q(v,y), increases with
income.12
As discussed earlier, the public education level is the most preferred level for
the decisive (median) voter. As in the income of the decisive voter is less than the
median income as families with children in private schools desire no spending on
ˆ
public education. Then the decisive voter has income of y(q,v) ˆ
where y(q,v) is
defined by

ˆ
N(y(q,v)) 5 0.5 2 (1 2 N( y * (q,v)) 5 N( y * (q,v)) 2 0.5. (11)

Of the 50% of families with q(v,y),q(v) where q(v)5q(v, yˆ ) denotes the public
education level preferred by the decisive voter, N( y * )20.5 send their children to
public schools and 12N( y * ) send their children to private schools. Then given
that the decisive voter’s child attends public school, q is chosen to maximize
U [yˆ (q, v)(1 2 t(q, v)), q] and satisfies (10) for the decisive voter.
To get an understanding of the impact a voucher may have on educational

11
That the Board of Education chooses the level that maximizes the utility of the decisive voter is a
stronger assumption than we need to generate the results of this section. If, for example, we assume that
the Board of Education increases educational quality when the demand for education increases and
decreases it when the marginal tax cost of increasing quality increases then we essentially get
qualitatively similar results to what is obtained here.
12
It can be shown that the single-crossing condition [Westhoff (1977)] implies this assumption.
220 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

quality, we examine the impacts of a marginal increase in a voucher on

educational quality. To this end, we differentiate (10) with respect to v, giving

q9(v) 5 2 ]]] ]]]

≠v ≠q F
≠H(q,v) ≠H(q,v)
G 21
≠H(q,v)
. ( # ) 0 if ]]] . ( # ) 0,
≠v
(12)

where

≠H(q,v)
2

F
≠ t(q,v) ˜
≠y(q,v)
]]] 5 U qx 2 yˆ ]]] 1 [´MUx 2 1]]] ]]
≠v ≠q≠v ≠v
≠t(q,v)
≠q

ỹ ≠t(q,v) ≠t(q,v)
2 ´MUx ]] ]] ]]
(1 2 t) ≠v ≠q G (13)

where ´MUx 5 2 xU qxx /U qx . While we assume that U qxe 5 0 for simplicity, this
assumption does not change the qualitative nature of our results since they are
ambiguous with or without this assumption. The first term of (13) is the change in
the marginal tax cost of educational quality. The increase in the voucher reduces
enrolment in public schools, making an increase in quality less expensive, and
reduces the cost of a student moving from a private to a public school. Thus the
voucher reduces the marginal tax cost of educational quality, ≠ 2 t(q,v) / ≠q≠v , 0.13
The second term is the reduction in demand for public education quality that
occurs because the highest income families in public schools opt for private
schools and hence the decisive voter now has a lower income (≠y(q,v) ˜ / ≠v , 0).
The impact of this effect on public educational quality depends on how much y˜
changes and what effect changes in income have on the demand for q. The demand
for public educational quality depends on the elasticity of the marginal utility of
the private good, ´MUx . Stiglitz (1974) suggests that ´MUx is between one and two.
The last term represents the impact of the change in after-tax income of the
decisive voter as a result of the voucher. If the voucher decreases the tax rate, this
term is positive because the increase in after-tax income increases the demand for
education. If the voucher increases the tax rate, this term is negative.
As this discussion shows, the impact of a voucher on the quality of public
education cannot be predicted on theoretical grounds alone because of the
conflicting effects of the reduction in the income of the decisive voter and the
decrease in the marginal tax cost of educational quality.

13
Ignoring Y, we can express ≠t(q,v) / ≠q 5 N( y 0 [1 1 (q 2 (v /q))´Nq ]), where ´Nq 5 (≠N( y * (q,v)) /
≠q)) /(q /N( y * (q,v))) is the elasticity of public school enrolment with respect to public educational
quality. Then in the case of constant elasticity because ≠y * (q,v) / ≠v , 0 in Proposition 2 it follows that
≠ 2 t(q,v) / ≠q≠v , 0.
 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228 221

4.2. Welfare effects of vouchers and voting on vouchers

Since the analysis of the welfare effects of vouchers is similar to that of the
voting equilibrium, we only discuss the voting equilibrium to conserve space. Our
main result on the voting equilibrium with endogenously determined quality of
education can be stated as follows.

Proposition 6. v * .0 if there exists a voucher, v .0, such that t( q(0),v),

t( q(0),0) and q(v). q(0).

Note that the condition t(q(0),v),t(q(0),0) does not require that the voucher
reduces the tax rate, t(q(v),v),t(q(0),0), but only to reduce it at the pre-voucher
level of q, which is q(0). To prove Proposition 6, we consider two possibilities:
t(q(v),v),t(q(0),0) and t(q(v),v).t(q(0),0). If t(q(v),v),t(q(0),0), then since
public educational quality has increased and taxes are lower, everyone is better off
and the voucher would be passed. Alternatively, suppose that t(q(v),v).t(q(0),0).
Consider the decisive voter with income yˆ 5 y(q(v),v).
ˆ Since he can choose his
most preferred level of public education with the voucher but could not prior to the
voucher, and since the tax rate decreases with the voucher at the pre-voucher level
of education by assumption in the Proposition 6, the voucher makes him better off.
Formally,

ˆ 2 t(q(v),v)),q(v))] $ U [y(1
U [y(1 ˆ 2 t(q(0),v)),q(0))]
ˆ 2 t(q(0),0)),q(0))]
. U [y(1 (14)

where yˆ 5 y(q(v),v).
ˆ The first inequality follows from the definition of q(v), and
the second uses the condition that t(q(0),v),t(q(0),0). This means that the
decisive voter prefers a bundle with a higher education level and higher taxes
[q(v),t(q(v),v)], to a bundle with a lower education level and taxes [q(0),t(q(0),0)].
Then, since the demand for education increases with income, all families with
ˆ
y [ [y(q(v),v),y * (q(v),v)] also prefer [q(v),t(q(v),v)] to [q(0),t(q(0),0)] and (14)
also holds for them. Given that these families constitute 50% of voters, the
voucher will be approved by majority voting.14
Proposition 6 provides a sufficient condition for a voucher to be passed.
However, even if the voucher increases taxes at the pre-voucher level of public
education (t(q(0),v).t(q(0),0)) it still may make fifty percent of the families better
off if it also increases educational quality (q(v).q(0)). This is because some
families desire a higher level of public education and are willing to pay more in
taxes. Thus, a voucher may be passed even if it increases taxes at the pre-voucher

14
ˆ
While the voucher makes the 50% of families with y [ [y(q(v),v),y * (q(v),v)] better off, the voucher
ˆ
also makes some families with y slightly less than y(q(v),v) better off by continuity. Thus, the voucher
will make more than 50% of the families better off, and will be approved by majority voting.
222 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

level of education, something that cannot occur in the case of fixed public
educational quality.
If a voucher decreases both the tax rate at the pre-voucher level of public
education (t(q(0),v),t(q(0),0)) and the level of public education (q(v),q(0)),
then no clear conclusion can be drawn about the possibility that a voucher will be
approved by a majority of voters without further assumptions made about the
income distribution and preferences. It is the discrete change in the amount of the
voucher, not the endogeneity of public educational quality, that makes the analysis
difficult. To see this, consider a small increase in the voucher starting from v. This
increase makes the decisive voter better off as long as it decreases the tax rate,
regardless of whether it increases or decreases the quality of public education,
because it is chosen to maximize the decisive voter’s utility (envelope result).
Thus, if q9(v).0, then the increase in the voucher makes fifty-percent of families
ˆ
with y [ [y(q(v),v),y * (q(v),v)] better off, and hence the increase will be approved
by majority voting. Alternatively, if q9(v),0, then the increase in the voucher
makes all families that have lower demands for education than the decisive voter
better off. These families include the lowest income families in the public schools
ˆ
with y [ [y,y(q(v),v)] and the highest income families opting for private schools
]
with y [ [y * (q(v),v),y¯ ]. Since these two groups of families constitute fifty percent
of families, an increase in vouchers will be approved. Therefore, as in the case of
fixed public educational quality, regardless of whether an increase in the voucher
increases or decreases public educational quality, it will be approved by majority
voting as long as it decreases the tax rate.

5. Tax reductions and enrolment changes

In this section, we employ the condition necessary for a voucher to reduce taxes,
(9), to determine the magnitude of enrolment changes needed to reduce taxes. To
keep the analysis tractable, we treat educational quality as fixed. In Section 5.1 for
every state we determine the enrolment changes needed to reduce taxes for
vouchers of $1000 and $2500 and in Section 5.2 we determine the magnitude of
the elasticity of private school enrolment required for vouchers to reduce taxes.

5.1. Tax reduction and enrolment changes

To gain some insight into whether a voucher plan could reduce taxes we
determine how much public school enrolment needs to change in response to
vouchers of $1000 and $2500 in each of the fifty states, amounts consistent with
recent voucher proposals and discussions. We can express (9), the condition that a
voucher can decrease the tax rate as
(Nprivate /Npublic )(v /(q 2 v)) , 2 dNpublic /Npublic . (99)
Table 1
Minimum Changes in Public Enrolments and Implied Tuition Elasticity for Voucher to Reduce Taxes, 1993–94
State Public % D Public D Public Tuition State Public % D Public DPublic Tuition
Spending $ a Private $1000 $2500 Elasticity Spending $ Private $1000 $2500 Elasticity
Voucher % Voucher $1000 Voucher % Voucher % $1000
Voucher b Voucher

W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

United States 5767 11.0 2.3 8.4 20.89 Missouri 5114 13.4 3.3 12.8 21.03
Alabama 4037 9.9 3.2 16.0 21.39 Montana 5598 5.5 1.2 4.5 20.92
Alaska 8882 4.6 0.6 1.8 20.54 Nebraska 5651 13.8 3.0 10.9 20.91
Arizona 4611 5.7 1.6 6.7 21.17 Nevada 5049 4.3 1.1 4.2 21.04
Arkansas 4280 6.5 2.0 9.1 21.29 New Hampshire 5723 9.7 2.1 7.5 20.89
California 4921 10.5 2.7 10.9 21.08 New Jersey 9677 16.7 1.9 5.8 20.49
Colorado 5097 8.4 2.0 8.1 21.03 New Mexico 4261 6.1 1.9 8.7 21.30
Connecticut 8473 13.9 1.9 5.8 20.57 New York 9175 17.1 2.1 6.4 20.52
Delaware 6621 20.9 3.7 12.7 20.75 North Carolina 4894 6.0 1.5 6.2 21.09
DC 10 180 19.7 2.1 6.4 20.46 North Dakota 4674 6.4 1.7 7.3 21.15
Florida 5516 11.1 2.5 9.2 20.94 Ohio 5971 13.6 2.7 9.8 20.85
Georgia 4915 7.7 2.0 8.0 21.08 Oklahoma 4697 4.2 1.1 4.8 21.14
Hawaii 5879 16.6 3.4 12.3 20.87 Oregon 6263 6.5 1.2 4.3 20.80
Idaho 3844 3.3 1.2 6.2 21.49 Pennsylvania 6983 19.4 3.2 10.8 20.71
Illinois 5893 15.3 3.1 11.3 20.86 Rhode Island 7333 15.7 2.5 8.1 20.67
Indiana 5630 9.5 2.1 7.6 20.91 South Carolina 4761 8.0 2.1 8.8 21.12
Iowa 5288 10.1 2.4 9.1 20.99 South Dakota 4586 6.7 1.9 8.0 21.18
Kansas 5659 8.0 1.7 6.4 20.91 Tennessee 4149 9.6 3.0 14.5 21.34
Kentucky 5107 8.8 2.1 8.5 21.03 Texas 4898 5.7 1.5 6.0 21.08
Louisiana 4519 18.2 5.2 22.6 21.20 Utah 3439 2.1 0.8 5.5 21.73
Maine 6069 8.0 1.6 5.6 20.83 Vermont 6600 8.7 1.6 5.3 20.75
Maryland 6958 14.2 2.4 8.0 20.71 Virginia 5109 8.0 1.9 7.6 21.03
Massachusetts 6959 14.2 2.4 8.0 20.71 Washington 5751 7.5 1.6 5.8 20.89
Michigan 6658 11.6 2.1 7.0 20.75 West Virginia 5713 4.4 0.9 3.4 20.90
Minnesota 5720 10.5 2.2 8.1 20.90 Wisconsin 6717 16.5 2.9 9.8 20.74
Mississippi 3660 11.6 4.4 25.0 21.59 Wyoming 5899 1.9 0.4 1.4 20.86
a
Current spending per student, 1993–94 from Digest of Educational Statistics, 1996, Table 163.

223
b
Based on 1993–94 average primary and secondary U.S. private tuition of $4266 from Digest of Educational Statistics, 1996, Table 60.
224 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

Expression (99) indicates that the likelihood of a voucher decreasing taxes depends
on the fraction of students already attending private schools and spending per
student in public schools. Using state-level data from the Digest of Educational
Statistics, 1996 on the percentage of students enrolled in private schools and the
average current expenditure per student in public elementary and secondary
schools for the 1993–94 academic year we calculate the minimum percentage
decrease in public school students to reduce costs with a voucher, dNPublic /NPublic ,
for vouchers of $1000 and $2500.15 These figures are found in Table 1.
While the change in public enrolment needed to reduce taxes as the result of a
$1000 voucher varies among states, for no state is a reduction of more than 5.2%
needed. In fact, based on the average current expenditures per student ($5767) and
percentage in private schools (11.0%) in the U.S., a decrease in public enrolments
exceeding only 2.3% would reduce taxes. As (99) suggests, smaller changes in
public enrolments are needed in states with high public expenditures per student
and / or few students in private schools (for example, Alaska, Utah, and Wyoming).
Analogously, greater changes in public school enrolment are needed in states with
extremely low public spending and / or high private school enrolments (Mis-
sissippi, Delaware, and Louisiana). For the voucher of $2500, greater changes in
enrolment are needed but in 14 states a reduction of 6% in public enrolment will
decrease taxes and an 8% reduction in public enrolment would reduce taxes in 30
states.

5.2. The elasticity of private school enrolment

Tax reductions as a result of the institution of a voucher depend on the

responsiveness of private school enrolments to the voucher. The elasticity of
private school enrolment with respect to the voucher, ´12N,v is a convenient
measure of this responsiveness. Unfortunately the limited experience with vou-
chers precludes the existence of studies that provide any direct empirical evidence
on the magnitude of ´12N,v . However, ´12N,v 5 2 ´12N, p v /pQ * where ´12N, p 5
d ln(1 2 N) /d ln( pQ * ) is the price elasticity of private school enrolment (tuition
elasticity). Then we can use (5) to show that

v ≠t(q,v) v
S (q 2 v)
S 1
´t,v 5 ] ]] 5 ] (1 2 N( y * (q,v)) 1 1 ]] ´12N, p ]
t ≠v t pQ * Y DD (15)

From (15) we can see that for a voucher to reduce taxes (´t,v ,0), the tuition
elasticity must satisfy

15
We use average current public expenditure per student as a measure of q in our model and thus do
not include any capital outlays. If we include capital outlays, the decrease in public expenditures
resulting from fewer students in public schools due to vouchers would be greater at least in the long
run. Thus, the reductions in public enrolment necessary to reduce taxes will be smaller than the
amounts in Table 1.
 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228 225

´12N, p , 2 pQ * /(q 2 v). (16)

If, for example, we evaluate (16) at the national means for private tuition ($4266)
and public spending per student ($5767) in 1993–94, for a voucher of $1000 to
reduce taxes the tuition elasticity needs to be less than 20.89. As shown in Table
1, for a low-spending state such as Utah ($3439) ´12N, p must be less than 21.73
while for a high-spending state such as New Jersey ($9677) ´12N, p needs only to
be less than 20.49. While data limitations make the estimation of private tuition
elasticities difficult and somewhat unreliable, several studies [Lankford et al.
(1995) and Lankford and Wyckoff (1992)] find tuition elasticities well below 21.
Given evidence of a relatively elastic demand for private schooling and relatively
low tuition, it appears a majority of states might reduce taxes by instituting a
voucher of $1000.

6. Conclusion

In this paper we have ignored several issues that will influence both the welfare
effects of and the political support for vouchers that future research may wish to
consider. First, to focus our attention on the political support for vouchers, we
assume that only educational spending determines educational quality. However,
empirical evidence suggests that educational attainment also depends on the
abilities of fellow students, peer group effects. If student ability and family
incomes are correlated, as is often assumed, then a voucher plan will have an
adverse effect on the quality of public education, as more able students from
higher-income families leave public schools. To the extent that the loss of
high-income students reduces educational quality for the remaining lower income
students, our analysis, which focuses only on the impacts on taxes and public
spending on welfare, will overstate the gains (or understate the loss) to the
lower-income families. By an analogous argument, we understate the gains (or
overstate the loss) to the higher-income families that send their children to private
schools. Consequently, the consideration of peer-group effects may affect the
pattern of political support for vouchers.
Second, we have ignored the supply side of education. It is often argued that
vouchers may improve the quality of public education through increased competi-
tion among public schools, increasing the welfare of families whose children
remain in public schools. In addition to the impact of vouchers on the quality of
public education, private education costs may increase with vouchers if marginal
cost is increasing and not, as we assumed, constant. Then fewer students may
move from public to private schools due to the voucher and therefore the voucher
may reduce taxes less (or increase more) than our analysis suggests. Hence we
may overestimate the tax-reducing effects of vouchers.
Third, our analysis considers the district-level voucher plans. In reality, most
vouchers have been considered at the state level although some state-sponsored
226 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

voucher programs are implemented at the local level (Cleveland and Milwaukee).
Since each state consists of districts with different incomes, the welfare effects of
vouchers on a family and hence its support for vouchers depend on both its income
and the district in which it resides. In general, the median (decisive) voter in the
state differs from that in a district. Nevertheless, the analytical framework in this
paper can still be applied with state-level voucher plans. That is, the analysis can
determine whether a given family will support a voucher, again assuming that each
district school board selects the public education level most preferred by the
decisive voter in its district. This way, it is possible to predict voting equilibrium
on a voucher at the state level.
Fourth, we assumed that families differ only in their incomes, so that the
demand for education increases with income. Although this assumption is common
in the literature, families do differ in other respects and educational quality may be
multidimensional. Then it is quite plausible that some lower income families may
choose private schools while some higher income families remain in public
schools with a voucher plan. With these differences in preferences, the welfare
effects of vouchers will not depend on income alone. Then the fact that families do
not necessarily segregate themselves between public and private schools according
to income may alter the pattern of political support for vouchers.
While these issues indicate some of the limitations of our model, the 1993
voucher proposal in California might indicate some of its value as model of
political support for vouchers. Because California has relatively low public
spending per student ($4921 in 1993–94) and private enrolments approximately at
the U.S. mean (10.5%), the decrease in public school enrolments needed to reduce
taxes was 10.9% for a voucher of $2500 (slightly more for the actual voucher
amount of $2600) well above the national average of 8.4%. The voucher
referendum was opposed by both conservatives and liberals and defeated in
suburbs as well as in central cities.16 If, in fact, the voucher would have raised
taxes, opposition by higher-income conservatives in the suburbs is consistent with
our model’s prediction that for the highest income households the increase in taxes
due to the voucher could exceed the voucher amount. Given that California’s tax
rates are among the most progressive, this makes it all the more possible that a
voucher would lead to a very small increase or possible reduction in the real
income of high-income households.

Acknowledgements

The authors wish to thank two anonymous referees, the co-editor of the journal,
and Thomas A. Downes for helpful comments as well as seminar participants at
the University of Kentucky and the 1997 Winter Econometric Society.

16
We thank a referee for making us aware of this point. See the Daily Report Card, October 22, 1993
(v. 3:101) and Daily Report Card, November 3, 1993 (v. 3:109).
 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228 227

Appendix: Proofs of Propositions 2 and 3 (ii-c)

Proof of Proposition 2: Totally differentiating (3) and (4) with respect to q gives:

≠y * (q,v) / ≠q 5 (1 /A)B 1 y * N( y * ) /Y (A1)

and
≠t(q,v) 1 1
]] 5 ]f(1 2 t)N( y * ) 1 B(q 2 v)n( y * )g]
≠q A Y

F ≠(1 2 N( y * )) 1
5 N( y * ) 2 (q 2 v)]]]] ]
≠q Y G (A2)

where A.0 and B 5 U qe /(U Qx 2 U qx ) . 0. Differentiating (3) and (4) with respect
to v gives

≠y * (q,v) / ≠v 5 (1 /A)y * (1 2 N( y * )) /Y 2 C (A3)

as well as (5). That ≠y * (q,v) / ≠q.0 follows immediately from (A1) as A.0 and
B .0. To sign ≠y * (q,v) / ≠v, note first that
ȳ y*

y * (1 2 N( y * )) 2 Y 5 E ( y* 2 y)n( y)dy 2E yn( y)dy , 0 (A4)

y* y
]

using the definition of Y. This implies that y * (12N( y * )) /Y ,1. Then since C .1
(because U Qx . U qx .0) and since A.0, ≠y * (q,v) / ≠v,0 in (A3). In (A2)
≠(12N( y * )) / ≠q5 2n( y * )(≠y * (q,v) / ≠q),0. Then, since we implicitly assume
q.v (because any sensible v satisfies this, as will be demonstrated), ≠t(q,v) / ≠q.
0.

Proof of Proposition 3 ( ii-c): Using the definition of t in (4),

t(q,v) 2 t(q,0) 5 [(q 2 v)N( y * (q,v)) 1 v 2 qN( y * (q,0))] /Y

, [(q 2 v)N( y * (q,0)) 1 v 2 qN( y * (q,0))] /Y
5 v[1 2 N( y * (q,0))] /Y,

because N( y * (q,v)),N( y * (q,0)) and q.v. Thus, v.y[t(q,v)2t(q,0)] if

v.yv[12N( y * (q,0))] /Y or, equivalently, if

Y . y[1 2 N( y * (q,0))]. (A5)

Since (A4) holds for any v, (A5) holds at y5y * (q,0). Since the right side of (A5)
is continuous at y5y * (q,0), there is some y˜ . y * (q,0) such that (A5) holds and
hence v.y[t(q,v)2t(q,0)] for y[[y*(q,0), y˜ ].
228 W.H. Hoyt, K. Lee / Journal of Public Economics 69 (1998) 211 – 228

References

Brueckner, J.K., Lee, K., 1989. Club theory with a peer-group effect. Regional Science and Urban
Economics. 19, 399–420.
de Bartolome, C.A.M., 1990. Equilibrium and inefficiency in a community model with peer group
effects. Journal of Political Economy. 98, 110–133.
Chubb, J.E., Moe T.M., 1990. Politics, markets, and America’s schools, Brookings Institution,
Washington DC.
Evans, W.N., Wallace, E.O., Schwab, R.M., 1992. Measuring peer group effects: a study of teenage
behavior. Journal of Political Economy 100, 966–991.
Epple, D., Romano, R., 1994. Competition between private and public schools, vouchers, and peer
group effects, unpublished manuscript.
Frey, D.E., 1983. Tuition tax credits for private education: an economic analysis, Iowa State University,
Ames, IA.
Friedman, M., 1962. Capitalism and freedom, University of Chicago, Chicago.
Friedman, M., Friedman, R., 1979. Free to choose, Harcourt, Brace, and Jovanovich, N.Y.
Henderson, V., Mieszkowksi, P., Sauvageau, Y., 1978. Peer group effects and educational production
functions. Journal of Public Economics 10, 97–106.
Hoxby, C., 1994. Do private schools provide competition for public schools? NBER working paper no.
4978, December.
Ireland, N.J., 1990. The mix of social and private provision of goods and services. Journal of Public
Economics 43, 201–219.
Lankford, R.H., 1992. Primary and secondary school choice among public and religious alternatives.
Economics of Education Review 11 (1992), 317–327.
Lankford, R.H., Lee, E.S., Wyckoff, J.H., 1995. An analysis of elementary and secondary school
choice. Journal of Urban Economics 38, 236–254.
Martinello, F., West, E.G., 1988. The optimal size of the tuition tax credit. Public Finance Quarterly 16,
425–438.
Stiglitz, J.E., 1974. The demand for education in public and private school systems. Journal of Public
Economics 3, 349–385.
Westhoff, F., 1977. Existence of equilibria in economics with a local public good. Journal of Economic
Theory 14, 84–112.