Among the Australian Industry Group’s suggestions for spending $1 billion on skills (pdf) was one that gets surprisingly little discussion in the education sector: tax deductibility for education expenses.

The current rule is that you can claim self-education expenses related to your current job, but not for future jobs you might hope to get on the strength of new qualifications. According to an ABS survey (table 4) of reasons for study, that disqualifies most people from a deduction, even though three-quarters have at least some vocational rationale for their study. The AIG thinks that you should be able to deduct from current income for a future job.

The logic of tax deductibility for education is that otherwise the tax system is biased against spending on human capital. If you buy a physical asset you can normally depreciate it over time and claim the annual amount of depreciation as a tax deduction. Arguably, vocational knowledge is quite similar; it is an asset that helps you earn your income, but one that fades in value over time as technology, techniques and circumstances change. Yet unless you happen to be already working in your field of study, the tax system won’t recognise your spending as an expense involved in earning your income.

Like most aspects of education finance, these rules seem to reflect a past time. When education was free, obviously its tax status was irrelevant; similarly where there are significant subsidies it is hard to say that the government is creating a bias against human capital investment. And writing off the whole lot in one year looks like an accounting convenience from an era when education expenses rarely amounted to significant sums – just short training courses and the like, and not multi-year degrees.

When I wrote my book on higher education policy, which was published in 2002, I was sceptical of the tax deductibility idea. This was partly because I thought the progressive tax system introduced distortions of its own, as those on high tax rates would effectively pay less for their education than those on low tax rates. But the way the tax system has been reformed since reduces the impact of progressive tax, with people earning less than $75,000 a year paying 30c in the dollar. Back when I wrote the book the 30c rate ended at $50,000. With an average bachelor degree holder working full-time earning $64,000 a year, most of them will fall below the 40% tax rate, greatly reducing the potential distortions caused by the tax system.

If deductions were to occur, they should be depreciated, instead of the current – and AIG favoured – all in one year claim. The logic of human capital is that it is an asset that will earn income in the future, and therefore it should be deducted against that future income. From the prospective student’s perspective, if they plan to study full-time they probably won’t have any significant income during the study period, and so a one-off tax deduction is of no use.

The microeconomic attraction of deductibility is that directly tax-financed education is, for political reasons, bogged down in price control and Soviet-style allocation of places. By further facilitating the full-fee market through tax deductibility, more students could bypass the dysfunctional state sector and make a more appropriate investment in their human capital. In some disciplines, like law and commerce, the subsidies are down to such low levels anyway that most students would probably be better off paying full-fees in market rather than state-oriented faculties and deducting the cost later on. There are a lot of details that would need to be worked out – for example, how many years should depreciation be spread over, and its interaction with student loans schemes. But conceptually I think there is more to this idea than I did back in 2002.