Category Archives: Tax and spend

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).

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.

An electorate than thinks government does too much, except for all the areas in which it does too little

Today’s Essential Research poll highlights the perils of trying to draw any specific policy conclusions from public opinion on high-level questions.

First, its respondents were asked about the size of government, and the answer suggested that perhaps a large number of voters had suddenly converted to classical liberalism:

But more specific questions suggest that the vague feeling that governments are too big does not translate into wanting government to do less in key areas of activity. In every proposition put to the Essential respondents, a plurality wanted the government to do more, and in most clear majorities wanted the government to do more. The 44% of respondents who earlier in the survey had thought government did too much shrank to a constituency of between 1% and 10%.

This is why governments have so much trouble cutting spending, and why genuine ‘tough budgets’ are very rare.

What drives tax and spend opinion?

The latest ANU Poll finds, like all such polls in recent years, that given a choice between reduced taxes and increased spending on services, most people would go for the latter. Report author Professor Ian McAllister observes:

Public opinion on government spending tends to be both secular – in that it is largely unrelated to
partisan debates and changes in government – and cyclical – in that it is responsive to broader
economic conditions. For example, on the latter point, it has often been observed that national
electorates are more likely to favour spending on social services and welfare when economic conditions
are benign, and to favour reduced taxes when economic conditions become harsh.

I agree, having argued for this interpretation in a 2004 paper. But a few years ago Professor McAllister thought that other factors were at work. In a newspaper report on the 2007 version of the tax and spend question, he was reported as saying that: Read more »