Should higher education courses be tax deductible?

The universities are calling for tuition fees to be exempt from the $2,000 maximum tax deduction for self-education.

The low tax deduction plus the more easily-defensible closing off of the voluntary HELP repayment bonus could have major effects on some students.

For a presentation I was doing at Swinburne today I prepared an example using a Swinburne Graduate Certificate of Engineering, a course marketed as professional development and therefore likely to have sufficient link to the student’s current employment to be deductible.

I assumed that the student was currently earning $75,000 a year, giving them a tax rate of 32.5% plus the 1.5% Medicare levy. I assumed they would take out a FEE-HELP loan and then repay it to claim the 5% bonus for voluntary repayments. As figure 1 shows, the two measures substantially reduce the effective cost of the course to the student.

Figure 1: Effective cost of course under current arrangements
swin 1

As figure 2 shows, with just a $2,000 tax deduction and abolition of the repayment bonus the effective cost of the course to the student increases by more than 50%, from $6,600 to $10,100.

Figure 2: Effective cost of course under proposed arrangements
swin 2

There are interesting conceptual issues here. The tax system is already biased against human capital investment, as students cannot claim a tax deduction for their investment in their future salaried earning power, though they could if they bought a range of physical assets to produce trading profits.

For undergraduates, arguably the public subsidy and the HELP loan scheme removes any bias against human capital investment. Most undergraduates cannot get easy access to other forms of capital. But in the largely full-fee postgraduate market many students would have alternative investments for the available cash.

There are complications in the argument. It is not always easy to distinguish ‘consumption’ and ‘investment’ higher education. It doesn’t seem quite right that with tax deductions the effective cost of course is much higher for someone on a 15% marginal tax rate than someone on a 45% tax rate. In a book I wrote a decade ago, I thought that maybe flat-rate subsidies were less distortionary than tax deductions.

I’m still not entirely sure how to deal with this issue. But we should watch enrolments in postgraduate courses very carefully.

  1. Interesting results, Andrew. I agree that it sounds bad that lower income earners pay more for a course than higher income earners after allowing for tax deductions, but that’s the result of our progressive tax schedule. A flat tax would address that concern (although that’s unlikely to ever happen). But I think your suggestion for a flat subsidy is the next best alternative. Perhaps a refundable tax offset of 30% (a bit like the private health insurance tax offset). Of course, this will all be called Middle Class Welfare rather than an appropriate deduction for an investment in one’s human capital!

  2. Jenny McKechnie

    The 5% discount calculation is incorrect. 5% of $10,800 is $540, not $514. The net cost is $6,588.

  3. Andrew Norton

    Jenny – It’s not 5% of $10,800, it’s a 5% bonus on what you pay.

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