A new model for financing higher education Tim Curtin. Origins of this paper.
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J. S. Mill (1848): “the intervention of government [in education] is justifiable, because …the supply of [students] called forth by the demand of the market will be anything but what is really required”. In 1848 there was no state education, not even at the primary level, nor very much taxation. Had there been Mill would have seen that state intervention could BEST be accomplished by my model’s combining privatisation with state support via tax credits.
Milton “vouchers” Friedman also missed an opportunity – this model is preferable because it more closely approximates the competitive solution by allowing fee flexibility.
Grant all universities complete financial autonomy, with freedom to set and collect fees from students;
Abolish HECS and allow all paying fees up-front an equivalent tax credit against their tax liabilities;
Place onus on government to address its equity objectives by providing non-refundable grants to those unable to pay fees, defined by means testing, relying only on the general tax system to recoup the cost of subsidies from enhanced future earnings of recipients.
With at least 40 universities in the sector, there would be more competition than in many Australian industries (eg banks, insurance, cars, petrol, media) and therefore cartelised fee rigging would be unlikely;
But to guard against fee rigging, the higher education sector could be made subject to the ACCC (Australian Competition and Consumers Commission).
No other regulation would be necessary apart from quality assurance (AUQA) and accreditation.
Some of my critics have suggested many perhaps all universities would take advantage of the tax crediting of fees to push up fees in a rent seeking exercise, knowing that the government not parents would bear the cost through lower tax collections.
There is enough competition to make this unlikely across the board, and universities would have to be precise about their demand curves lest they achieve only net loss, because fees of say $20000 eliminate 90 per cent of parents if no carry forward of tax credits is allowed
Although HECS notionally a fee It does not free universities from often arbitrary fee rates, allocations, and other interference by government in what is taught and to whom (eg speculative manpower planning – guesses, e.g. how many nurses, IT and maths teachers are needed?) Do mortgage lenders dictate how one uses houses?
It has its origins in deeply flawed claims of the Wran Committee whose members invented HECS in 1988; any system based on their misleading economics and statistics is unlikely to be optimal.
Although HECS formally just a loan with repayments through tax system, in cash flow terms it is a tax. For a considerable period it amounts to double taxation of the extra income on which graduates already pay higher income taxes by virtue of their enhanced earnings;
HECS also taxes what governments claim to want to encourage, not discourage, like smoking via tobacco taxes; and it compounds discrimination of the tax system against human capital formation when added to the disallowance of spending on fees as tax deductible like other investments.
Andrews (HLR 1972) explains taxation as the mechanism for transferring resources from private to public purposes;
If higher education is privatised then that means it ceases to be a public purpose and revenues previously raised thereto should be transferred back to the first instance financiers (via tax credits) as should have happened with HECS.
Note that charitable donations are already tax deductible, so in principle “donations” of fees on behalf of offspring should also be acceptable, but as credits.
ABS data on income distribution show that 85 per cent of Australian taxpayers have income above $30,000 a year, liable for gross income tax of at least $7,000 a year (ATO). For all these paying fees of c$7-10,000 per student would result in zero taxes for at least the three years of offspring study.
Tax credits in excess of annual tax liability could be carried forward, so at least 90% of parents of HE students would be eligible for tax credits
The 2001 Census (ABS 2002) indicates there were 7 million Australians aged 35-64 (ages of most parents of students) of whom 48% had incomes of over $31,148 a year. But a higher proportion of families had incomes in excess of $31,148 – in fact 60% of “income units” (households) had average incomes > $28,000 in 1999-2000 (ABS 2001).
But only 11.5 per cent of units in the lower two quintiles were couples with dependent children – and only 10.3 per cent of all couples with dependent children had incomes in the lower two quintiles.
Yes, in the sense that all paying fees will be eligible to claim equal tax credits on their ATO tax returns;
No, in the sense that a farmer’s tractor is not free even though he can claim a tax deduction – the fee is still paid in cash to the university, for which it is real income (unlike HECS repayments); the fee and credit are a real transfer of resources, but from parents to universities not government.
HECS repayments accrue only to consolidated revenue and have no impact at all on the level of government’s operating grants paid to universities.
Claiming that free tuition prior to HECS somehow perpetuated inadequate access of the under-privileged to higher education, and therefore introduction of fees paid through a graduate tax like HECS would have no impact on enrolments of the under-privileged.
Claiming that although graduates soon find themselves in the top 22 per cent of all income recipients, they “contribute very little directly to the costs of provision”.
Participation of upper socio-economic groups prior to Wran was indeed out of line with their share of the population of university age - but NOT hugely out of line with their share of Y12 completers.
Although manual groups’ participation in HE was less than their shares of the population and of Y 12 completers in 1980, the disproportion fell by 1989, then widened to much worse by 1999 than in 1980.
For BOTH manual and non-manual, not just the former, HECS has led to falling participation between 1994 and 1999, back to LESS than it was in 1980 (see Fig 1).
Martin and Karmel (DEST 2003) concluded that participation at “university in terms of proportion of a cohort going to university peaked in 1996”, and showed (Fig.3) that participation declined by nearly 10 per cent after 1996 for all students, although less markedly for students aged 20 and under (Fig.4).
Data in my own charts also confirmed by press reports on 21st August 2003 of a fall in applications for entrance to universities for the SECOND year in a row.
“a no charge public university system (that is, financed by all taxpayers) is regressive” (Chapman & Ryan 2002, p.14) because graduates become well-off “at the expense of most taxpayers who are not graduates”. But: The overall tax system is progressive, and graduates’ taxation even more so, because they are mostly in upper reaches of the income distribution (see Charts)
The bottom 50 per cent of households pay no net taxes at all (they receive instead net cash benefits), and graduates are predominantly in the top 50% of all tax payers who alone pay net tax.
Above all the tax creditable fee means that taxpayers not using HE do not contribute to costs.
Wran and authors like Barr (1998) Chapman (1997) Greenaway (2003) agree that HE creates social benefits but claim these are non-quantifiable, and pale beside enormous exclusively private benefits of graduates, but
They completely ignore the very quantifiable TAXES payable on those private benefits that constitute enormous social CASH benefits to government and society.
Graduates’ income taxes alone in Australia run at c$25 billion a year, FIVE times more than public spending on HE tuition (Table 3 in my paper).
Those believing that primary IRR higher than tertiary IRR proposed closing down universities in 3rd World countries, as the World Bank successfully insisted for many years, but have no understanding of calculus – and have contributed to the many failed states in Africa and the Pacific
In effect they believe we should all drive our cars always in first gear, where the rate of acceleration is ALWAYS higher than in top gear (read tertiary).
If the day ever dawns when academic economists working on the economics of education understand the basics of the tax system and cost-benefit analysis, then the New Model presented here will surely be adopted.
But do not hold your breath! See my website
for my paper submitted to the Economic Journal explaining these last points in more detail.