How education subsidies can reduce educational participation

In a paper for the Henry tax review on the impact of the tax-transfer system on education and skills, Andrew Leigh concludes:

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. Continue reading “How education subsidies can reduce educational participation”