Taxation and Investment in Skills - Carolina Torres


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  • Also important to be aware of impacts of taxes to make sure that tax policy changes don’t undermine skills policies
  • Countries that do not provide any PIT relief related to education and training expenses tend to be those where the direct costs of formal education are negligible. For example, in Spain, vocational training and adult education are free of charge at all publicly funded institutions. In Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) as well as the Czech Republic and Mexico, public institutions do not charge tuition fees for tertiary education. In Ireland, the government pays directly for the tuition fees charged by public institutions to full-time undergraduate students from the European Union.
  • Intro: 3 core elements of PIT that affect return to education.
  • Mention limited research findings even though canvassed all OECD member countries.Note: Foregone earnings are deductible by nature, since they are reduced by the amount of tax that would have been paid on them.If the direct costs of education are deductible, they are deducted at the rate at which income during the study period is taxed. PIT relief: Design: Refundable/transferable tax credits vs. standard tax deductions. Eligibility: education-related expenses vs. general cost of livingScope: education as investment vs. education as consumptionTurner:The analysis covers the (non-itemized) Tuition Deduction, the Lifetime Learning Tax Credit and the Hope Tax Credit (a credit available for the first two years of undergraduate education which preceded the American Opportunity Tax Credit), which are described in table 1. Using data from 1996 to 2003. …. . In contrast, the tax relief measures do not appear to affect part-time enrolment in the first two years of college. Lalumia: Among adults aged 33 to 41, Lalumia (2010) found that eligibility for one of these three tax provisions increased the probability of college enrolment for people whose educational attainment expectations as teenagers had not been previously met.
  • Intro:Co-operation from institutions is necessary to administer and deliver tax relief for costs of education successfuly
  • Need for dialogue between tax policy makers, education policy makers and education institutions to ensure that skills-related policies are embraced by all.
  • Taxation and Investment in Skills - Carolina Torres

    1. 1. Taxation and Investment in Skills OECD Centre for Tax Policy and Administration 18 September 2012
    2. 2. Why do Taxes Matter?• Economic returns influence individuals’ decisions to invest in education and training beyond compulsory schooling.• By affecting the costs and financial benefits of education, taxes help shape the net return to human capital investments. This affects: – The choice between working and studying – The choice between alternative capital investments 2
    3. 3. How do Taxes Matter?• Human capital investments costs directly influenced by: – The deductibility or non-deductibility of tuition fees, registration fees, etc. from taxable income – How foregone earnings would have been taxed – The taxation of income used to pay for the costs of education• Human capital investment returns directly influenced by: – The taxation of the earnings premium resulting from the human capital investment. – Tax relief provided upon completion of an educational program – Tax incentives to attract foreign skilled workers• In addition, there are indirect impacts: – Influence of taxes on labour participation and migration – Taxation of alternative capital investments 3
    4. 4. Limitations of Tax Policy• An unfavourable tax treatment of human capital does not preclude investment: – Direct public subsidies may offset tax disincentives. – Non-pecuniary benefits may motivate learning despite financial (e.g. tax) disincentives.• A neutral (or favourable) taxation of human capital does not guarantee investment: – Other barriers may discourage learning. For example: • Lack of access to credit and imperfect credit markets • Risk and missing insurance markets – The minimum return (earnings premium) required to break even may be unattainable (e.g. too close to retirement). – Positive spillovers may result in suboptimal investment.• However, the tax system can influence human capital 4 investment decisions.
    5. 5. What are Countries Doing? Key Trends in 20111Tax ProgressivityPIT systems in all OECD countries have one or more structural elements that createprogressivity, such as zero-rate bands, basic exemptions and graduated tax rate schedulesTax Relief for the Direct Costs of Education and Training 2 PIT – higher education PIT – adult training VATOECD countries 11*+ India 16 29 + India + South Africa* Includes Spain, where tax relief is provided at the regional level in the Canary IslandsPersonal Tax Relief for the Sources of Finance of Education and Training 2 Scholarships Debt Savings Employer-financedOECD countries 25 + India 13 + India 5 31 + India + South Africa1 The 31 OECD countries considered here are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, Germany,Greece, Hungary, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia,Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.2 See details in the Appendix. 5
    6. 6. Tax Progressivity• Tax progressivity = average tax rate increases with income• Insofar as human capital translates into higher earnings, tax progressivity means that the earnings premium resulting from skills investments is taxed at a higher rate than foregone earnings during the study period.• By reducing the benefit proportionately more than the cost of education, this creates a disincentive to study.• Reducing the overall progressivity of the tax system could improve the financial incentive to invest in human capital but : – Higher after-tax income inequality – Possible revenue losses – If revenue-neutral, work disincentives for lower income tax filers – Windfall gains in the short-run for many high income tax filers 6
    7. 7. Tax Relief for the Direct Costs of Education• When the costs of human capital investments are not fully deductible for personal tax purposes, the tax system reduces the returns proportionately more than the costs, creating a disincentive to study. – Important if tuition fees are high or subject to increase.• Allowing tax filers to fully deduct the private direct costs of education (tuition fees, registration fees, etc.) could improve the incentive to invest in human capital. – Turner (2011): US personal tax relief increased full-time enrolment of 18-19 year olds in the first 2 years of college by 7%; enrolment up by 0.3 pctg. points for every USD 100 of tax relief. – Lalumia (2010): US personal tax relief increased college enrolment of 33-41 year olds IF their educational attainment expectations not previously met. 7
    8. 8. Other Targeted Tax Relief for EducationExamples:• Tax Relief for interest paid on student debt• Tax-favoured education savings accounts• Tax exemptions for scholarship and grant income, student employment income, etc.Issues:• Tax advantage for particular sources of finance over others (e.g. debt over savings)• Tax relief for some students but not for others• Tax relief not well targeted at sources of underinvestment (e.g. lack of access to credit)• May result in double tax relief 8
    9. 9. Education Institutions as PartnersTax Administration:  Verification of student statusVerification of costs claimed bystudents on tax return Promotion of awareness of taxrelief available to students+ Potential role in tax relief delivery (e.g. advance payments) 9
    10. 10. Education Institutions as Partners (Cont’d)Tax and Skills Policy:• Institutions may capture part of the benefits of tax relief to students by: – Raising tuition fees (Long, 2004) – Reducing grant funding to students (Turner, 2012)• Possible rationale: – Perception that students don’t need tax relief – Inadequate public funding to respond to growth in enrolment demand – Institutions could potentially devote the captured resources to increase education quality or redistribute financial aid to students who are ineligible for tax relief 10
    11. 11. Conclusions• The tax system could potentially be relied upon to improve the incentive to learn through tax relief for the costs of education.• Education finance policy and tax policy should not be developed in isolation – Whole of government approach: • Together, public funding for education and the tax treatment of human capital determine the net fiscal incentive to invest in human capital – Education policy makers as liaison between education institutions and tax policy makers – Partnership with education institutions necessary for tax policy to succeed 11
    12. 12. THANK 12
    13. 13. Appendix – What are Countries Doing?Tax Relief for the Direct Costs of Education and Training PIT – higher PIT – adult training VAT educationCountries CAN; CZE; EST; AUS; AUT; BEL; CAN; FIN; EU members; JAP; GER; GRE; ITA; GER; ISR; LUX; NET; ISR; MEX; NOR; NET; POR; SPA*; NOR; POR; SWE; SWI; SWI; TUR; INDIA TUR; US; INDIA TUR; UK; US SOUTH AFRICA* Tax relief is provided at the regional level in the Canary IslandsPersonal Tax Relief for the Sources of Finance of Education and Training Scholarships Debt Savings Employer-financedCountries AUS; AUT; CAN; AUS#; BEL¤; CAN; GER; All countries in this CZE; DNK; EST; CAN¤; ISR; MEX; report: FIN; GRE; HUN; DNK¤; FIN¤; US AUS; AUT; BEL; CAN; CHL; CZE; DNK; EST; FIN; GER; IRE; ISR; ITA; LUX; HUN ; GRE; HUN; IRE; ISR; ITA; NET; NZL; NOR; NOR¤#; JAP; LUX; MEX; NET; NZL; POL; POR; SLK; POL# SWE¤; NOR; POL; POR; SLK; SLV; SPA; SWE; SWI; TUR; US; SLV; SPA; SWE; SPA¤*; US¤#; UK; INDIA; SOUTH AFRICA SWI; US; INDIA INDIA¤# The value of deb t forgiveness is exempt from tax. The benefit from subsidized interest rates is exempt from tax. ¤ Tax relief for interest onstudent debt. * This tax relief is provided at the regional level in Catalonia.In addition, in Italy, student loans from financial institutions are subject to a reduced financial transaction tax rate 13
    14. 14. References• Lalumia, S. (2010), “Tax Preferences for Higher Education and Adult College Enrollment”, Department of Economics Working Papers, 2010-11, Department of Economics, Williams College, Williamstown.• Long, B.T. (2004), “The Impact of Federal Tax Credits for Higher Education Expenses”, in C.M. Hoxby (ed.), College Choices: The Economics of Where to Go, When to Go, and How to Pay for It, University of Chicago Press.• Torres, C. (2012), “Taxation and Investment in Skills,” OECD Taxation Working Papers, No. 13, OECD publishing.• Turner, N. (2011), “The effect of tax-based federal student aid on college enrollment”, National Tax Journal, Vol. 64, pp. 839-61.• Turner, N (2012). “Who Benefits from Student Aid? The Economic Incidence of Tax- Based Federal Student Aid,” Economics of Education Review, Vol.31, No. 4, pp. 463- 481. 14