Education or tax cut

Spend on education or business tax cut - June 2016

Australia will receive a bigger economic growth dividend in the long-run by spending on education than offering an equivalent amount of money on a tax cut to business.

Overview of poll results by Dr Buly Cardak

Of the 30 respondents more than 60% either agreed or strongly agree with the statement. Less than 23% of respondents either disagreed or strongly disagreed, with the remaining 12.9% responding that they were uncertain.

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In the media: Education spending beats company tax cuts, say economists (Sydney Morning Herald) (22 June 2016)

Poll responses

ESA Forum - Poll 8

ESA Forum Poll 8

Name Response Confidence Comment
Gary Barrett
Agree 8 The social return to the investment in human capital I would expect to be greater. The specific details of the 2 policy options would clearly be important; the potential return on investment in schooling at early stages of the life-cycle are very high.
Harry Bloch
BLOCH, Harry
Agree 8 In the intermediate run, the relative impact on growth of education spending and tax cuts depends on their respective impact on productivity. Education increases the ability of the future labour force to function effectively in the workplace and, critically, to imagine better ways of doing things (innovation). Tax cuts may stimulate more investment, which can expand production and increase the effectiveness of labour. Given that we have experienced a long period in which human ingenuity has apparently contributed more to economic growth than accumulation of machines, my bet is on a smarter population rather than more machines. The long run is not a particularly useful concept for policy analysis as by the time it arrives the world will be fundamentally different than what was expected. Hence, Keynes' famous comment that in the long run we are all dead.
Matthew ButlinBUTLIN, MatthewAgree6 
Lisa Cameron
Strongly agree 9 Future economic growth will depend to a large extent on Australia's ability to innovate and develop high tech services and manufacturing. Investing in education, particularly maths and sciences, is essential in this respect and Australia's declining educational performance jeopardises our ability to compete internationally in these sectors. Any increased educational expenditure also needs to address the unacceptably high and increasing educational inequality in this country. High inequality  serves as a brake on economic growth. In contrast to investing in education, tax cuts to business have a very uncertain economic impact.
Fabrizio CarmignaniCARMIGNANI, Fabrizio Agree 9 One thing about the premise of the question: spending on education and cutting business taxes do not have to be mutually exclusive. They become mutually exclusive only if take the view that fiscal policy is about minimizing government and stabilizing the budget at every single point in time. If instead we acknowledge that the ultimate purpose of fiscal policy is to increase the welfare of the community, then the trade-off between spending on public goods and supporting businesses disappears.

Having said that, if hypothetically we had to make a choice between the two, then it seems to me that the empirical evidence is quite clear. Expenditure in education has a larger payoff (in fact, the empirical evidence on the growth and welfare benefits of cutting business taxes is very weak). More and better public education fosters the process of innovation (which drives economic growth in the long term) and leads to a dynamically efficient redistribution of opportunities (which guarantees that growth is inclusive).
Bruce Chapman

Strongly agree 8 Recent work by Eric Hanushek and Lugar Woessmann supports strongly the view that literacy and numeracy skills of the population are the most important contributors to long-run growth. So long as the additional education contributes importantly to these capacities there should be little doubt that expenditure in this area is of the most critical significance.
Deborah Cobb-Clark
Uncertain (neither agree nor disagree) 9  
Lin Crase
Uncertain (neither agree nor disagree) 9 Education adds to productivity (amongst others) but that doesn't automatically arise from an increase in spending on education by government. Clearly, it depends on how the money is spent. The same caveat applies to tax cuts - i.e. the basis and criteria for the cuts will determine their impact.
Kevin DavisDAVIS, Kevin Strongly agree 8 Apart from the Keynesian perspective on relative size of multipliers (which is short term anyway), the need for improved human capital is a major investment requirement which education spending helps, as also it helps potential labour force flexibility to cope with changing economy. Also benefits of corporate tax cuts under an imputation tax system go primarily to foreign owned firms.
Brian Dollery
Disagree 8 Empirical work has shown a weak relationship between education expenditure and growth-enhancing human capital acquisition and there are not thus strong grounds for assuming education expenditure will boost growth.

Uwe Dulleck

Agree 4 This is a difficult question and I guess personal beliefs will play a bigger role than what economics can tell us. I do believe that investment in education has very high returns and I believe where Australian business currently sits (the still existing focus on resources) the payoffs from good investments in education are likely to outperform the effect of additional incentives in the form of low taxes for companies.
Chris EdmondEDMOND, ChrisStrongly agree9According to the modelling commissioned by the Commonwealth Treasury for the government's company tax changes, the predicted change in the level of real GDP is about 1.2% over a long horizon. Not only is this a very small effect given the size of the changes in company tax, it's also a "one-off" level effect and so has no long-run growth dividend at all! (as Chris Murphy's modelling for the Treasury makes very clear for anyone who cares to look). By contrast, an equivalent spend on education, by supporting human capital accumulation, has a very real prospect of increasing the growth rate of real GDP over an extended period. Even a small permanent increase in the growth rate of real GDP will dominate the level effect from changing company tax.
Saul EslakeESLAKE, Saul Uncertain (neither agree nor disagree) 7 I think there will be a small 'dividend' from cutting the company tax rate, although the 'dividend' IS small, and takes a long time to become evident - and neither the size of that 'dividend' nor the timing of it is enhanced by preferencing 'small' businesses over other ones (contrary to Coalition assertions, small business is not, in general, a major 'driver' of growth. There is also likely to be some 'dividend' from more spending on education, although I think we would get a larger 'payoff' from spending what we spend on education more efficiently and equitably, rather than simply spending more in the same way that we have spent what we've spent over the past decade.
Allan Fels
FELS, Allan
Agree 7  
Gigi Foster
Agree 7 In the long run, the engine of economic growth is not the dissemination of existing knowledge but the discovery of new knowledge. The judgement that education investments are more likely than business tax cuts to lead to innovation assumes that some of the proposed education spending will flow to the university system, where much new knowledge generation occurs; it also assumes that businesses' elasticity of knowledge generation with respect to tax obligations is small, which is the case if the proposed tax breaks mainly increase profits or salaries without spurring knowledge-discovery investments. This is likely to be true in many of Australia's oligopolistic industries. Further, preserving a healthy state is essential for long-run growth, and investments into training the next generation of Australian citizens are more likely to maintain a healthy state than reductions in the funding provided to the state by the businesses that benefit from its present institutions.
Paul Fritjers

Agree 7 In the long-run we are all dead, but within a few decades or so, I do expect investments in higher educational standards and higher teacher-pay to improve the GDP of Australia. Lower taxes on small human-capital based internationally competitive businesses should help, but lower taxes on most other businesses (which are the majority) won't, so on balance I particular investments in education over general reductions in business taxation.
Lata Gangadharan
Agree 7  
Stephen KingKING, StephenUncertain (neither agree nor disagree)9Unfortunately, this question is simply too vague to answer with a firm view.

What would the education spending be on? We know that smaller class sizes are not well related to educational outcomes. So money spent further lowering class sizes is probably money wasted. But funding more one-on-one help for students who are falling behind (particularly at early school and pre-school levels) could be money well spent.

What about a business tax cut? Well, what businesses? Are we talking small businesses (under $10m turnover per year) or large businesses with significant foreign shareholdings? Or are we talking all businesses? And is it a cut in income taxes or some of the inefficient state taxes that affect businesses? So depending on the exact policy details, either option could be better for growth.

Hence I am very sure that this question has no unambiguous answer because the question just does not have enough detail!
Geoff Kingston
KINGSTON, Geoffrey
Disagree 7 Over the last decade, public spending on education seems to have been largely captured by vested producer interests, without creating a higher stock of human capital in Australia.
Ireland has done well out of cutting company tax to 12.5 per cent, notwithstanding the setback of the global financial crisis, which saw the Euro rise strongly against the pound sterling--the currency of Ireland's biggest export market. Likewise, New Zealand has done well out of cutting company taxes to 28 per cent. For example, a number of businesses have shifted head offices to NZ.
Accordingly, the better option is a cut in company tax, financed either by higher personal income tax or a rise in the GST.
Michael KnoxKNOX, Michael Disagree 9 We tested the hypothesis that tax cuts would generate a large increase to GDP by testing data for real corporate after tax earnings of listed companies against Real GDP. We found than a five percent cut in company tax rate would increase GDP by 1.1 percent. The P statistic of the relationship was 13 chances in 1000.
Rodney Maddock
Strongly disagree 7 There has been no payoff from the very large increase in spending on education over recent decades. Putting more money into the system will not change that. I do not expect any payoff from increased educational spending unless there are very significant reforms to the system. By contrast, tax cuts to business are likely to have some impact on investment and growth though not a particularly large one - even in the absence of any other policy changes.
Tony Makin
Disagree 7 Cutting company tax is unequivocally expansionary in the long run. Lower company taxes, now high by international, especially Asian trading partner standards, would make domestic enterprises more globally competitive, encourage more domestic and foreign investment, and allow for higher wages and living standards.

Presumably the increased education spending is for schools rather than universities. To the extent this extra spending improved literacy and numeracy, enhancing human capital this way would also yield higher long run growth. However simply increasing government spending on schools is not necessarily the best way to achieve this.

Over past decades increased education spending has not correlated with better literacy and numeracy. Moreover, if the increased spending is to be funded by higher personal income taxes, the deadweight loss of the tax hike should be subtracted from future income gains attributable to that spending.
Doug McTaggart McTAGGART, Doug Disagree 8 I am assuming the question is referring to spending "more" money on education, compared to spending money in terms of foregone revenue from a tax cut.

Spending more money on education is a vexed question.  We have spent considerably more on schooling in recent years for worse outcomes.  It is not clear spending more today, without improving how and on what we spend existing money, will improve matters. This is also likely true for tertiary education. In pre-schooling, rationalising the mish-mash of what the Commonwealth and the States spend could deliver vastly improved outcomes.

While the benefits of a cut in the company tax rate have been debated, on balance any cut seems likely to deliver some benefits.
Menezes photo Flavio Menezes
Agree 7 It seems well-understood that the impact of reducing corporate tax rates on growth is likely to be small. Importantly, there are other corporate tax relief options (e.g., an allowance for corporate equity) that could potentially have a much higher impact on investment (and jobs) than a reduction in the corporate tax rate. I have written about this elsewhere and will not repeat the arguments here. The key mechanism through which education impacts on growth is also well-understood -- through improvements in human capital. The extent of such impact is, however, an empirical question and there is a wide range of estimates in the literature.
James MorleyMORLEY, James Strongly agree 8 Estimates on returns to education are larger and more precise than estimates on the effects of tax cuts on investment and long-run growth.
Adrian PaganPAGAN, Adrian Agree 7  
Rana Roy
ROY, Rana
Strongly agree 9 An affirmative answer to this question does not require a complex debate on the relative impacts of education spending versus business tax cuts. It only requires us to recognise that, given Australia’s system of dividend imputation, a change to the company-tax rate will generate little change in incentives for Australian investors. Treasury’s own modelling suggests that the proposed cut in the company-tax rate will yield only a modest increase in GDP “over the medium term” (c. 0.1 per cent per year). And an important paper by Dixon and Nassios at CoPS suggests that, under plausible assumptions, the modest increase in GDP would be accompanied by a fall in national income – by far the more relevant measure. We also need to consider a critical variable briefly flagged in the Dixon-Nassios paper: the current and prospective tax treatment of foreign-sourced income by tax authorities in the United States and other source-countries of foreign investment in Australia. Under plausible assumptions, it is entirely possible that a company-tax cut in Australia will yield little change in incentives for US and other foreign investors, and therefore little change in economic outcomes in Australia, but will represent rather a gift of tax revenues from the Australian Treasury to the US Treasury and those of other foreign governments – doubtless, a generous and high-minded thing to do but not exactly what is being sold to the Australian electorate. In contrast, all serious estimates of the impacts of increased spending on education, including recently by the OECD, suggests the likelihood of an above-zero return.
John Quiggin
Strongly agree 9 Another way to state the point is that social and private returns to education are  higher than marginal returns to business investment. There is ample empirical evidence to support this statement.
Jeffrey SheenSHEEN, Jeffrey Strongly agree 7 In general, appropriate expenditure on education will deliver and has delivered significant technological improvements that enhances long run economic growth and the standard of living. Corporate tax cuts will stimulate capital accumulation and output growth, but are likely to have a minimal effect on long run growth.
Joaquin VespignaniVESPIGNANI, Joaquin Strongly agree 10 I agree with view that technological progress is a major source of long term economic growth and education is the main input of technological progress.