Finally had a moment to publicly record the debate I've been having with Tim Curtin on higher education funding. This  was based on my comment on Milton Friedman, and started before Andrew Norton's recent paper was published (for those not in Australia, please see this). I've got no time to extract from the email debate (which was my intention), so I'll publish the entire debate to date, "as is", and then respond in a separate blog post.

I do not debate one-on-one on policy issues, since a number of other people can benefit from these discussions, particularly FTI members.

==THE DISCUSSION SO FAR===

Tim Curtin

Sanjeev, you disappoint me, especially as we agree on most other issues, but you are quite wrong about funding of higher education being by the poor for the rich. The truth is that the poor, especially in India, pay no income tax, nor much of any other taxation, precisely because they are poor and have little to spend on goods subject to sales taxes and the like. In Australia the top 10% of income recipients (incomes of more than $71,200 in 2003-4) account for over 45% of all income taxation, and the bottom 10% account for just 0.6% of income taxation. So how do the poor here get to pay for "the rich" at our universities?

However it is also worth noting that here many of the current poor 10% may already be at university and will in due course move into the top 10%.

Then there is the undeniable fact, embodied by yourself and me, that graduates earn much more than non-graduates and thereby pay more tax than non-graduates (unless they are adept at evasion, for which there are easy solutions). Not only that, as the only public service that graduates obtain that non-graduates do not is of course HE, which means that the incremental taxation accruing from graduates vis a vis non-graduates is attributable to whatever public funding there was of their HE, which is why as I have shown repeatedly* (and even some at Uni Melbourne) public funding of HE is such a good investment for the government.

Moreover the top 10% are very likely to send their kids to private schools, here and no doubt in India, at a considerable saving to state governments, and to use private health services, another saving for governments..

* see my many papers and my book showing how in effect all taxes are graduate taxes, given their much higher incomes and spending than those of 90% of non-graduates, many of my papers are available at my website www.timcurtin.com.

My response

Dear Tim, let me quote from BFN:
===
No one can demand that every tennis player should be allowed to play in the Wimbledon tournament. It is one thing to provide a level playing field for people to develop their talent and quite another to demand entry to the highest levels of human activity. There is a thing called justice, by which only the best person, who not only has the talent but who has put in the necessary hard work, must win entry to the portals of higher competition. Entry into a portal of higher education is similarly a privilege, contingent upon significant hard work. It has nothing to do with providing anyone a level playing field.

Another reason why my government will not fund anyone’s higher education is because it would mean the poor would subsidize the rich. Tertiary institutions are ‘fishing nets’ to catch the society’s most talented people. Those who successfully complete tertiary education earn, on average, significantly more than those who are unable to gain admission to these institutions. The benefits of higher education are captured almost entirely by these people in exchange for services they provide when they join the workforce. Students going to tertiary institutes therefore will become much richer, on average, than the average taxpayer. If the average taxpayer were to subsidize their education it would amount to the poor subsidizing the (future) rich. There does remain the question of ensuring that all those who obtain admission to institutions of higher education are able to raise sufficient money to attend the courses. That can be easily resolved.

Details are in BFN.
====
Basic point: the lifetime income of those who get higher education is FAR HIGHER than those who don’t. In that sense they are rich. They are therefore capable of paying for themselves (through loans: income smoothing/permanent income hypothesis). There is NO justification for others (which will include those who don’t get higher education, being 75 per cent of the population or more) to pay for these 10-25 per cent. These people can pay for themselves through subsidised loans on the line of HECS/HELP.

Tim's response

Sanjeev, I am surprised you think that graduates by virtue of their higher earnings vis a vis non-graduates do not thereby pay far more in additional taxes than non-graduates. What happens to that additional tax revenue?

In Australia it pays for sitdown money and other handouts to the “poor”.

Did you read my paper in Project Appraisal at my website, which shows in detail how UK graduates pay far more in extra tax both than non-graduates and than was ever spent by government on their degrees? Apparently not. But then to this day the architects of HECS, ANU’s ineffable Bob Gregory and Bruce Chapman (both also climate warmists) refuse to admit that graduates pay any taxes at all here. Sadly, I myself pay more income tax than 80% of Australians solely by virtue of my M.Sc (Econ.).

Tim
www.timcurtin.com

My response:

Tim, re: "graduates by virtue of their higher earnings vis a vis non-graduates do not thereby pay far more in additional taxes than non-graduates"

I have no doubt that they pay more tax. I've never suggested that they pay less tax. Indeed they do pay more tax.

But I'm opposed to their education being funded by the 75 per cent of the societys' poorer people who won't go to university. That's the key point about income transfer. The rich can comfortably afford their own education (since they get most of its benefits) and of course, then they'll also pay more taxes. That's perfectly consistent with the modest progressivity of the tax system that I recommend.

Tim's response

Sanjeev:

How many poor Indians paid enough tax to cover the costs of your HE?  And having done that, how many other graduates were funded by those same poor?

This whole charade that the poor  pay for the HE of those who will become rich but never pay any taxes began with Mark Blaug (RIP, he died a few months ago) in the book (Causes of Graduate Unemployment in India) he co-authored with the severely intellectually retarded Maureen Woodhall (I’ve debated with her at the WB in Washington) and the serially dishonest Richard Layard (now a labour Lord  and I doubt you would agree with him on any topic).

Their book on higher education in India began with the assumption that all matriculants would be deemed by them to be “graduates”, so that they could determine that there was massive “graduate” unemployment in India, when, buried deep in the book it was clear that there was virtually no actual gradual unemployment in India, and the only largely unemployed “graduates” were those matriculants who did not get to university (which you like them seem to think was and is a good thing).

Seriously, on this subject you are even worse than Quiggin, and I beg you to rethink, check the stats on earnings and taxes by level of education, and apologise for your wholly incorrect rant.

All the best!
Tim
www.timcurtin.com

My response

Dear Tim

First the substantive question: "How many poor Indians paid enough tax to cover the costs of your HE"

I don't know but of the set of taxpayers (and that includes all kinds of tax, not just income tax), subtract all those who received higher education. In India probably not more than 3 per cent got higher education in my days, so 97 per cent of Indians paid to get me educated. Of these, there were those who were desperately poor (but whose consumption was taxed in various ways) who, too, paid for my education.

The point is not whether these poor paid "enough" taxes for my education. Of course they did not. Most taxes come from the wealthier sections of society, but that they paid anything at all.

Second, the question of source of this argument. My original source of this line of thinking is not Blaug/Woodhall (never heard of Woodhall before) but Friedman's Freedom and Capitalism. And indeed, he explains this well on in his video which I only recently came across.

Tim's response:

Dear Sanjeev

I still do not agree that the poor ever pay enough in all taxes to cover even the cost of the public benefits they receive themselves let alone pay for anybody’s education including their own. Friedman never did any research into this, he’s all a priori.

Tim

My response:

Thanks, Tim. I don't think the poor should pay at all. In my view, they should by paid by the society.

The key is that those who are fit to qualify for university education are the rich (regardless of their present income level). Therefore they should pay for their own education. That's only fair. They can't make demands (even for a tiny subsidy) from anyone, least of all from those who did not qualify to go to university.

This is an a priori analysis, but it backed solidly by facts.  I know how terribly regressive consumption taxes are in India, and I oppose consumption taxes tooth and nail (even GST in Australia). To take ANY money from the desperately poor is no less than a moral crime.

Tim's response:

Sanjeev, I am not aware of many countries that obtain more tax from the poor than the poor receive in state benefits, although anything is possible in India! Certainly in Australia only about the top 20% of income earners pay net tax. (after taking into account welfare benefits – in 2003-04 only those earning more than $49,000 paid as much as $1000 in net income tax and most of those paying less than $1000 would have received  public benefits worth more than they paid in net tax).

My response:

Dear Tim

I'm not comparing tax outflows vs. inflows It is possible that some poor people may pay 10 units in tax and get back 20 units. (This doesn't happen in India for the most part since very few poor people receive welfare benefits, while excise/consumption taxes apply to everyone). My issue relates to the poor paying even 10 units in tax. Let them just receive the 10 (net) units of negative income tax (NIT), and not be asked to pay 10 units of tax to fund higher education (say) for the rich; and then (after administrative churn) be paid 20 units separately in negative income tax.

In brief, we need a simple system. The poor are paid NIT (including for school education) by the rich. The rich pay for their own higher education and for other public goods in society. That's simple and clean.

Regards

Tim's response:

Dear Sanjeev

AS someone who worked in various Treasuries/Depts of Finance I am well aware of the difficulty of devising a tax system to exempt “the poor” from paying any taxes at all, unless one is going to rely only on income taxes to finance public spending.

And “the rich” already pay “for their own higher education and for other public goods in society” – including education and health for the poor as I do – while the poor here make no net contribution to the country’s public services and financing thereof.

Did you see the articles in today’s Oz reporting the bizarre very right wing views of Andrew Norton and Bruce Chapman on HE funding?

The reporter, Julie Hare, begins by correctly stating that “Not only will a graduate earn [over lifetime] on average $1 million more than a Year 12 school leaver, the $300,000 in additional tax, along with better health outcomes, higher rates of volunteering and civic engagement and lower crime rates lead to a more robust and tolerant community. Add to that high level thinking and communication skills, adaptability and persistence and a university education is a good investment for any government.”

But then she quotes Norton as saying “there is too much in the way of private benefit and not enough public benefit to justify subsidies of university fees. Unless public benefit exceeds the subsidy of fees, it's "just a transfer of wealth from taxpayers to students and graduates".

I have argued with Norton before both at ANU and by email, and he has forgotten the basic facts.  The extra tax of $300,000 payable by graduates vis a vis that of non-graduates on their lower incomes yields a very competitive rate of return to the government, when it has paid only $60,000 for a science graduate’s degree, or $100,000 for doctors’ (and the tax it gets back from most medics will be more than $300,000), while for economists and lawyers and accountants the government contributes less than $6,000.  So how do those figures amount to a transfer of wealth from taxpayers (the biggest income tax payers are almost all graduates) to graduates?

Median lifetime income

Then Norton in wrong to argue “students are not price sensitive because the fairness of the HECS system means they only repay their debt once they earn a minimum salary of $49,000 and then up to a maximum of 8 per cent of their annual salary”, as he like Chapman cannot grasp the inequity between the poor undergraduate being saddled with a HECS loan and its repayment with interest, unlike Johnny with his rich parents who pay his fees for him up front, so he is not saddled with a HECS debt. See the graphs below showing the eventual effects of HECS on HE enrolments of students from manual workers’ families.

The effective average rate of tax for a HECS recipient when they started repaying (in 2003-04 data from AT0) was over 30% on an income of $49,000 against 22% for rich parents’ Johnny.

BTW, not a single member of this socialist government left University with a HECS debt, certainly neither Kevin nor Julia, while Abbott cost the government nix for his Rhodes scholarship to Oxford – and Tony is more likely than the former given time to scrap the inequitable HECS.

Can I suggest you post your own take on Norton – and then add mine as a comment? That would be great. The graphs below are from a lecture I gave in 2003 to the ANU’s Emeritus Faculty (attended by Chapman, but all too obviously over his rather thick head).

All the best
Tim
www.timcurtin.com

Images attached:

My response:

I'll provide a response in a separate blog post, time permitting.

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