Monthly Archives: February 2015

Should high university fees be taxed?

If domestic undergraduate fees are deregulated most people, including eminent education economist Bruce Chapman, believe that at least some universities will charge significantly higher fees than now. Chapman has now detailed a proposal to tax excessive fees, to ‘inhibit and limit the extent of price increases’ (number one in this list of Senate inquiry submissions; The Australian‘s version here.)

The basic idea is that the government will establish different bands of fees, which are taxed at different rates – the tax being a reduction in grants that would otherwise be payable to the university. To take an example from Chapman’s paper, fees for humanities up to $6,499 a year (a bit higher than current student contributions) would pay no tax, fees between $6,500 and $11,499 would pay 20% on the margin, fees between $11,500 and $16,499 would pay 60% on the margin, and fees of $16,500 and over would pay 80% on the margin.

The effects of this can be seen in the context of UWA’s plan for a flat $16,000 fee for all undergraduate courses. The tax would be about $1,000 for the $5,000 in the first marginal section, and another $2,700 for the $4,500 up to $16,000. With current subsidies of around $5,500 a year for humanities courses, UWA’s subsidy would be reduced to around $1,800. (For high fees in low subsidy disciplines, the fee tax could mean that the government taxes more than it contributes for that discipline).

Chapman is not endorsing these particular tax rates; they are to illustrate the concept. However, I am not sure that conceptually this is the best way to target the problem of high fees. First, we need to be clear about what the problem is with high fees.

As Chapman says, it is likely that some fees will be well in excess of the costs of teaching. Much of the profit is likely to fund research. There are two public policy problems with this. The first is that students/graduates will incur higher private costs without a commensurate increase in private benefits. The second is that higher fees will generate higher costs for taxpayers, through the interest subsidy on HELP debt and HELP debt that won’t be repaid.

To solve the first problem, the tax policy relies heavily on deterrence. To the extent that universities do charge taxable fees the problem is exacerbated – the money goes to the government, which is even less likely to benefit the student than the university spending money on research. Research spending might at least contribute to the general prestige of the university and the graduate’s qualification.

To solve the second problem, the tax policy is likely to be more effective as it raises revenue that will offset some of HELP’s interest and bad debt costs. However, it means that students who pay upfront are compensating for costs that they won’t generate. Other students who do borrow could over-compensate. Using the tax rates in Chapman’s submission, and a fee of $30,000 for a law student, we estimate a tax of more than $11,000, leading to government savings of $3,000 in excess of the additional HELP costs.

If we are worried about higher private costs without increased private benefits, it might be better to target university spending rather than revenue. In the UK and USA universities report on spending classified according to function (teaching, research etc) that allows us to see the relationship between student-driven funding and spending. If we did that in Australia we could prohibit public universities from moving beyond certain ratios between student funding and spending, and taxing them if they did. That way the student isn’t any worse off than he or she would otherwise have been, since the money wasn’t being spent on them anyway, and it is only the university’s profit being taxed.

For HELP costs, we should tackle HELP’s problems directly rather than focusing on the students paying high fees. Loan fees payable only by those who borrow would assist in dealing with HELP’s costs without hitting the students who pay upfront. Plus there are several other ways of controlling HELP’s costs, as I have pointed out many times before.

Policy considerations aside, this is a complex policy when the government needs a clear, simple and positive case for fee deregulation.

Should we have central allocation of student places for low ATAR students?

Plan B higher education reform ideas are everywhere at the moment. Higher education consultant and former higher education bureaucrat David Phillips has a proposal for the problem of drop-out rates among lower ATAR students. His idea is that rather than these students being included in the demand driven system, places for them should be allocated to universities with good track records in supporting them.

I agree that we have a problem here, but I don’t think this central planning response is the right one.

A minimum ATAR cut-off was one of the ideas circulating in 2013, and something we considered in the review of the demand driven system. We didn’t go with this idea. One of the reasons was the inherent limitations of what central planners can know. While the non-completion rates of lower-ATAR students are too high, based on the historical evidence 50 to 60 per cent of them do finish their qualifications. ATAR breaks down as a predictive tool because a range of other personal and institutional factors are likely to be the difference between completing and dropping out. The knowledge needed to predict is held largely by the prospective student and the higher education provider. This is far too decentralised for a central planner that has to go with clear rules.

There is also a big problem with the large numbers of students admitted to courses via entrance tests, prior vocational education and other alternative measures. For these applicants, we don’t have the ranking of ability provided by ATAR. The capacity of the central planner to say which of these students should be in the demand driven system and which in the allocated system is even weaker than it is for ATAR.

Even if we could determine a fair and efficient cut-off point, there are still other problems. One of the arguments for the demand driven system is that it allows for experiments, innovation and competition. It lets providers think of and try out new ideas for assisting particular student groups. The central planning model of just rewarding institutions with historic success would kill this dynamism.

The other difficulty is the weakness of the Commonwealth as a central planner, which in turn influences the incentives of any of the players. With the existing sub-bachelor allocated places, the rules for allocation changed regularly before the system was effectively frozen due to Budget constraints. This kind of uncertainty works against investment in the field, because arbitrary actions by government could wipe out the financial gains.

We would have to be wildly optimistic to think governmental processes of the future would be better than in the past. Politics is increasingly dysfunctional and the bureaucracy has been weakened by successive ‘efficiency dividends’ and revolving door senior appointments limiting corporate memory. The beauty of the demand driven system is that that they only have to get the broad policy framework right once, and after that the system can adapt on its own, without relying on government.

Should government benefits be increased when university fees go up?

Fairfax has a story this morning on the hidden cost of deregulating university fees. Higher education is included in the bundle of goods and services that make up the consumer price index, which in turn is used to index a wide range of government welfare benefits. So if fees increase the CPI will go up, driving up the cost of the social security system. This was an issue in England when their university fees went up.

I am quoted in the story as saying that the government could exclude university fees from the index. I was challenged on Twitter about this.

The CPI is based on a basket of goods and services consumed by households, with the primary input being the ABS Household Expenditure Survey. A well-known criticism of this is that consumption patterns vary significantly between household types. For this reason, the ABS also calculates a range of other indexes for different household types, especially different categories of government beneficiaries. An aged pensioner index has been used, but only when it is more than CPI.

Given that the purpose of indexation is to maintain the real purchasing power of benefits, it is not clear why people should be compensated for an increase in prices in a commodity few of them other than Youth Allowance recipients are likely to consume. This is a general point about the choice of indexation methods, not one just restricted to this particular issue. But there could be special legislation to at least avoid the once-off major spike in prices after the system changes increasing government expenditure on welfare benefits.

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Update: Some of my economist colleagues are more sceptical of the inflationary effects. They argue that the Reserve Bank has an inflation target and they take policy action to keep CPI within it, even though it is common for there to be price spikes in particular services or commodities. So while the cost of higher education would go up, this could be offset by price stability or reductions elsewhere.

Pyne package linking domestic and international charges is about subsidies more than fees

When announcing its higher education reform package, the government said that international student fees would be a cap on domestic fees. This idea has been criticised regularly since, including today by Gavin Moodie who notes that such a rule could easily be gamed.

But the draft guidelines released with the reform bill version 2 last December show that legislation is not mainly about capping total fee levels, but trying to ensure students benefit from tuition subsidies.

The problem here is not that domestic students are likely to be charged more than international students. At Grattan we have collected fee information for both domestic and international students for hundreds of courses where there is no regulation requiring domestic students to be charged less than internationals – for postgraduates in public universities, and in all full-fee courses in non-university higher education providers. There is not a single case where domestic students are charged more than internationals, and only a handful where they are charged the same. Presumably a mix of underlying cost differences, market forces, and mission considerations mean that domestic students are not charged more.

There is no practical need to cap domestic fees with international fees, and that isn’t what the government is trying to do. Rather, it is trying to ensure that its tuition subsidies benefit students instead of providing super-profits to universities. So what the guidelines say is that tuition fees for non-Commonwealth supported students (which includes internationals) must be at least the student contribution plus the Commonwealth contribution, in some disciplines a much bigger number than just the student contribution.* It is phrased as a floor price for international/other full-fee students rather than a maximum fee for domestic students.

Take an engineering degree at a Group of Eight university, where we calculate that the average annual international student fee was $33,000 in 2014. If the rule just said that international student fees were the cap for domestic fees, a university could in theory charge a domestic student $32,900 and then add the $12,000 tuition subsidy, giving them revenue per student of $44,900, way more than they get for an international student. Even if we assume a more moderate domestic fee of say $26,000, with the tuition subsidy added that still leaves the university with revenue of $38,000 per student, $5,000 more than for an international student.

However, under the rule as drafted the university could not get domestic fee revenue of $38,000 ($12,000 subsidy plus $26,000 fee) per student without lifting international student fees to $38,100, which might price them out of that market. A university might be prepared to take that loss in courses where there are few international students. But in courses where there are significant numbers of internationals the rule will ensure that domestic students benefit from the tuition subsidy bringing down the fees they pay, rather than delivering windfall gain revenue to the university.

The proposed rule on fees for full-fee students has weaknesses as a guard against excess fee charging. But I think it is at least interesting in thinking about what subsidies are for in a fee deregulated system. It takes international student fees as a rough guide to the true market worth of a course, and then tries to ensure that the tuition subsidy brings down the price to domestic students.

* The legislation uses the term tuition fee rather than student contribution now, but I will keep the old language to separate the concepts more clearly.