Contrary to theoretical predictions, I find no significant evidence that more
generous [educational] subsidies or lower tax rates on the rich have the effect of raising educational participation.
The economics of human capital provide the contradicted theories. Human capital economics assumes that the decisions of potential students are sensitive to the private financial benefits of investing in education. If these benefits are made higher, then all other things being equal we will see more people invest in education.
One way of increasing private benefits is to offer subsidies, or more subsidies where they exist already. If part of the cost of education is met by subsidies (mostly from the taxpayer, but also from private philanthropy) lower future private financial benefits will be needed to earn an adequate rate of return on the educational investment. The justification for this is that there are positive ‘externalities’, or spin-off benefits, from having more educated people.
Another way of increasing private benefits is to have low(er) tax rates, so that people who acquire education keep more of its financial benefits. To take an extreme example, if in a highly egalitarian society graduates were taxed 98% of their higher incomes the private benefits of further education would be low, and on the human capital theory we would expect to see low enrolments.
Though all wealthy countries have education subsdies, as I observed in my paper on the Bradley report (pp.12-13), countries with relatively low taxes have high tuition fees by OECD standards, and countries with relatively high taxes have low (often zero) tuition fees by OECD standards.
To greatly over-simplify Andrew L’s analysis, in the OECD which of these policy models is adopted has little obvious effect on tertiary education participation.
One of the difficulties of comparative analysis like this is that it is hard to take into account the many other policy differences between countries. One problem – which is true of Australia – is that we cannot fully infer demand from observed supply. In the absence of coercion in the post-school education demand must be at least at observed supply, but it can, and has been here, higher than supply.
In state-controlled education systems, higher per-student subsidy rates could increase demand but reduce educational participation, because governments deal with their financial constraints by limiting the number of places on offer. HECS was introduced in part to finance an expansion of the higher education system, but despite increased supply demand for HECS places has always exceeded supply, perhaps because the remaining subsidies help make university cheap compared to the average benefits. However governments have been unwilling, until the demand-driven system due in 2012, to let supply meet demand.
Where there are supply constraints imposed by government, low tax rates will also fail to increase educational participation. There may be higher demand for education, but it will convert into ‘unmet demand’ rather than into higher numbers of education places.
Postgraduate coursework places in Australia provide a case study of the negative effects of subsidy and other government interventions on educational participation. Especially in the earlier years of the Howard government, subsidies for many postgraduate coursework places were abolished. On the human capital theory described above, this should have caused enrolments to decrease. Instead, enrolments surged because in the replacement deregulated market there were no supply constraints from government and fees gave universities an incentive to produce more places. To a more limited extent, we saw the same thing when full-fee undergraduate places were allowed in addition to the state-controlled Commonwealth-supported places between 1998 and 2008.
For a country like Australia, if educational particpation is the goal then spreading lower subsidies over a larger number of people will be a more robust policy than Scandinavian-style full subsidies.