Taxes, to Support Education

Societal agencies must decide who should pay for the resources (e.g., teachers, buildings, equipment, materials) required for schooling. One criterion for payment is benefits received. Who benefits from education? Certainly, the students benefit because education provides them with skills and knowledge that will improve their intellectual facility and cultural appreciation and by increasing their human capital and, thus, their social status, earnings, and access to opportunities. To that extent, students or their families should bear some of the costs of education.

At the same time, however, schooling has considerable benefits for society as a whole. Education can be a powerful force for socialization. Education provides society with a common language and set of values. Educated citizens better understand and more readily accept their governments, thereby enhancing political stability. In our democratic republic, education prepares citizens to be more effective participants in self-government.

In most societies, the majority view holds that elementary and most secondary education provides social benefits of such magnitude as to justify public financing and provision. The question then arises as to what type of tax system is best to support public elementary and secondary schools. The design of a tax system generally rests upon three principles: taxpayer equity, revenue stability, and economic efficiency.

In general, there are two concepts of taxpayer equity that might be considered: benefits received and ability to pay. Because of the considerable social benefits of education, the benefits received approach provides little guidance for designing a tax system to support elementary and secondary education.

The ability-to-pay principle holds that individuals with greater ability to pay taxes, generally those with greater income and wealth, should pay more tax than those with less ability. This rule rests upon two related assumptions: first, that the generation of any given level of tax revenue should entail the minimum sacrifice of social welfare and, second, that this sacrifice is minimized when the rich pay more taxes than the poor. Thus, the ability-to-pay principle requires that the economic burden, or incidence, of a tax rises with income. By this principle, a tax is characterized as progressive, proportional, or regressive. These concepts are best defined in terms of the average tax rate, or ratio of taxes paid to income. If the average tax rate increases with income, the tax is progressive. If it falls, the tax is regressive. If it remains constant regardless of income, the tax is proportional.

Efficiency in taxation refers to the effects of the tax system on the economy and the costs of collection and compliance associated with raising any given level of revenue. If one believes that the workings of a freemarket economy result in the most efficient allocation of resources, then the imposition of a tax should alter resource allocation decisions as little as possible. For firms, such decisions would concern what to produce and what resources to employ. For consumers, these decisions would include what to buy and how much to work. To the extent a tax does distort economic decisions, it creates an excess burden; that is, a loss of welfare over and above the revenue collected. Excess burden is sometimes referred to as “welfare cost” or “deadweight loss.” The only tax that does not entail an excess burden is a lump sum tax, a certain amount that must be paid regardless of the taxpayer's behavior (e.g., decisions regarding work, consumption). There is nothing a taxpayer can do to avoid a lump sum tax. Such a tax is efficient but inequitable and rarely invoked. With this exception, taxes generally impose some measure of excess burden.

...