Arnold Kling  

Progressive Taxation is Anti-Education?

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Barone on the Kling Scenario... Hanson on Hanson...

Gary Becker and Kevin Murphy make the case.


For many, the solution to an increase in inequality is to make the tax structure more progressive—raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same indi­viduals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.

Commenting on their article, Will Wilkinson, guest-blogging for The Economist, writes,

Bryan [Caplan] argues that university diplomas mostly function to signal prior competence, and that time and money spent in school is largely wasted. If he's right, Becker and Murphy's emphasis may be misguided, and I suspect Bryan may in fact be right, despite the fact that he's never won a Nobel or Clark prize and wears shorts in the winter. In which case it strikes me that there is a huge entrepreneurial opportunity for whomever can come up with an alternative scheme of credible human capital certification.

Read Will's whole post.

My views on these topics:

1. If all of the "college premium" represented a return to the investment that students make in going to college, then progressive taxation would indeed be perverse. It would indeed be a signal from government that you should not invest in yourself.

2. If all of the "college premium" represented a return to ability, rather than a return to investment, then someone wishing to play God might favor progressive taxes. In fact, one might favor especially high income tax rates for college graduates, just as one might favor higher income tax rates for tall people.

3. I don't believe the signalling story, because of the point Wilkinson makes. If it costs $200,000 for a person to go to an elite private school, and this does nothing other than provide a signal of the individual's ability, then there is a whale of an unexploited profit opportunity sitting out there.

My current view of college is that it is a bundle of services that is fairly difficult to unbundle. Some of it is education. Some of it is selection/signalling. A lot of it is social--people aged 18-22 clustering together.

Mostly, though, I think of going to college as a cultural ritual, like a Bar Mitzvah, a confirmation, or a wedding. These rituals allow parents to impart tribal values and tribal loyalty to their children. Participating in the ritual reinforces your membership in the upper and/or upper-middle class tribe. With all of these rituals, including college, it is the parents, even more than the children, who are focused on conformity to peer expectations.


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TRACKBACKS (6 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/699
The author at Modeled Behavior in a related article titled Signal to Noise Ratio writes:
    Will Wilkinson takes a walk on the dark side. He agrees with Bryan Caplan that education is mostly just a signal that you are already talented and suggests that there is “a huge entrepreneurial opportunity for whomever can come up with an alternative... [Tracked on May 8, 2007 11:29 AM]
The author at Ben Casnocha: The Blog in a related article titled The Costs and Benefits of Going to College - Is It Worth It? writes:
    Bryan Caplan, Arnold Kling, and Will Wilkinson have been discussing why people go to college, and whether it's actually worth the exorbitant cost (for private colleges at least). The conversation started with Gary Becker's and Kevin Murphy's article in... [Tracked on May 8, 2007 10:54 PM]
COMMENTS (6 to date)
jp writes:

OT, but I can't resist pointing out that the apparent misunderstanding of the rules governing who and whom by someone as smart as Wilkinson shows how fouled-up our educational system has been since the 1970s.

Floccina writes:

Call me crazy but I see anti-poverty programs as anti-education. IMO poor people often show signs of having too much money and too much economic security.

Heather writes:

The difference between making the tax structure more progressive and taxing people who go to college is that in one case you are taxing realized gains, while in the other you are taxing unrealized gains. We do not currently tax unrealized gains in stocks, but we do tax realized gains. Thus, the analogy is inappropriate and unconvincing.

Matt writes:

If we're playing God, shouldn't we tax unproductive behavior? Switching to a consumption tax would give poor people incentives to save and would deter people from going into debt to purchase "worthless" (if it's just signaling) degrees.

As for replacing degrees, the military seems to do pretty well with IQ tests— although they do require officers to get college degrees.

Bob writes:

Heather makes a good point on realized and unrealized, but it's only relevant as an "equity" point: taxing realized gains discourages capital formation, just not as much as taxing unrealized gains would. And Heather's analogy would work better if we had a consumption tax instead of an income tax.

Bob writes:

I love Arnold's comparison to weddings et al. Think about the numbers - how much does an upper middle class family spend on right-of-passage events? Suddenly $200k looks a lot like a bundle of expensive (but comparable) services, say $50k each for four years of basic living expenses, some socialization (right-of-passage), some education, and a credential.

LOVE IT!

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