Saturday, February 09, 2013

Should college be subsidized?

Mark Thoma has a very nice piece today about how Cal State-Chico changed his life.  One of the reasons it changed his life is that he could afford it--it cost $100 per semester when he went there.  The story is heartwarming, to say the least.

I have always struggled with how much college should be subsidized.  People who go to college almost certainly create positive externalities, and so Pigou would say there should be some subsidy.  But people who go to college also earn substantially more over their lifetimes than those who don't.  Low income people who pay state sales taxes thus subsidize high income people.  Hence the idea that people graduate with debt seems reasonable to me, because the value they get from college far exceeds what they need to invest in college, and it means they are reducing the tax burden of those who don't go to college [I should note that I was among the lucky people whose parents paid for college, so perhaps I am in no position to comment].  On the other hand, if high prices keep 18 year olds from going to college, one of the most important routes to social mobility is blocked.

In any event, a government economist friend of mine has the obvious solution to the problem of the regressive nature of subsidizing college: progressive taxes.  


David Barker said...

Taxation to subsidize colleges would be a good solution if high incomes were all due to higher education. But the best businesspeople I know did not acquire their entrepreneurial talents in college.

Taxes take wind from the sails of entrepreneurs. Labor supply is less elastic than the supply of capital and entrepreneurial effort, and labor compensation depends more on subsidized education. Perhaps there is a case for progressive labor income taxation, but progressive taxes on investment income are disastrous.

Nate O said...

In Germany, higher-ed students just pay fees, not tuition. It's usually 300-500 euros a year.

If it's true that college grads are the engine of the future, then whoever has the most will win. If we don't subsidize them, other countries will, and we'll be left behind.

rich solomon said...

Hi Richard, a good question to gather opinions on--hope a lot of people respond.
I think it is important to make a distinction between public colleges and universities and private institutions when considering subsidies. Public institutions provide advancement opportunities to large numbers of people. This is a benefit to all of society, not just those who attend classes, or the smaller number who go on to earn good incomes. If the cost of education at these schools is not affordable to most of the public, including debt paid back later on, why should taxpayers want to fund them at all?
Private schools do not necessarily have this social contract. There should be no argument in a time of pressure to contain public spending whether private higher education should be publicly subsidized: it clearly should not.
The debt loads being assumed by students today will be a real problem in the near future. What to do about it is an important question. Thank you for asking it.

derrida derider said...

Your economist friend is right - every marginal dollar a college graduate gets because of her education is taxed at her MARGINAL tax rate. Given a highly progressive tax system then simple calculations based on common estimates of private returns to college education and plausible government borrowing rates show taxpayer-funded college education is a bargain for other taxpayers.

But that aint so if your tax system is not progressive.