Should there be a GST on higher education?

As public sector financial woes get worse, we are hearing more calls to put a GST on education. I’m not convinced this is a good idea. Some of my concerns are specific to higher education, others apply to education more broadly.

1. Conceptually, it’s not clear that it makes sense for the government to tax and subsidise the same commodity. Subsidies are supposed to make education more affordable, while taxes make it less affordable.

2. Education is a mixed economy sector, with subsidised services existing alongside unsubsidised services for largely historical reasons. Putting a GST on the more privately funded part of the sector further distorts the market in favour of the subsidised sector. Originally, the GST was supposed to reduce microeconomic distortions, but in this case it would increase them. Perhaps in phase two of the GST it is purely about revenue. However, in mixed sectors GST fiscal gains are likely to be reduced by shifting demand to the more heavily subsidised sector. These are bigger issues in school and vocational education than higher education, where the private sector is still small.

3. In higher education, about 40 per cent of student fee/contribution revenue comes from international students. Typically, exports are exempt from GST to increase Australia’s international competitiveness (another of the original justifications). The international student market is very competitive globally, so we could exempt international students, but they are an unusual kind of export – many international students pay their fees in Australia at least partly from income they have earned working in Australia. And if we exempt international students, in full-fee markets we could occasionally see the somewhat counter-intuitive outcome of domestic students paying more for a degree from an Australian university that their international student classmates.

4. Most Australian students borrow money under HELP to pay their fees/contributions. This means that any GST would just be added to the already rapidly increasing level of HELP debt. Given HELP’s poor and worsening finances, 20 to 25 per cent of the GST revenue on higher education is likely to have to be written off. And most of the significant cash revenue gains from a GST on higher education would be 15 years away, after people finish paying off what they will owe anyway and start repaying what they borrowed to pay for the GST. HELP’s repayment mechanism also undermines one of the arguments for using a GST rather than income tax, which is that it does not increase marginal tax rates and therefore creates less of a disincentive to work. The HELP repayment thresholds create extremely high marginal tax rates, with evidence that this is causing HELP debtors to hold their income down.

Overall, a GST on higher education would be likely to distort the higher education market, exacerbate existing taxation work disincentives, and raise little revenue in the short to medium term.

(Updated 8/10/15).

  1. It’s an interesting discussion, but doesn’t generally arise in NZ as the GST is comprehensive, only excluding financial charges and residential property/rentals. We did have a debate over whether international education fees should be GST-rated but they are, on the principle that the service is provided in NZ.

    In NZ, GST applies to government charges, including fuel taxes and local government rates.

    In principle though, the GST does inflate the student debt to be later written off, as you note.

  2. There is another reason to question applying GST to education: education (at least to some extent) is investment rather than consumption. If you want the GST only to apply to consumption and not to investment, then it shouldn’t apply to that portion of education that is real investment. Of course, it is pretty hard to determine how much of education is investment and how much is consumption…

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