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The Economics of Higher Education: An Analysis of Taxes Versus Fees.

The potential purchaser of this volume, who may believe that the "economics of higher education" covers a comprehensive set of topics, ought to take the subtitle very seriously. The volume is limited exclusively to modelling the choice between taxes and fees in paying for higher education. Nor does the book examine all aspects of taxes and fees as alternative revenue sources; it deals solely with the determination of the division of costs between the public (taxes) and the student (fees), and with closely related outcomes such as the proportion of the population enrolling as a result of the division chosen. Indeed, the book is essentially an exercise in public-economics modelling, with higher education serving as a convenient example.

Having sounded this note of caution, however, a review ought to judge the volume on the basis of its own goals. Specifically, the author sets out a rigorous median-voter model to explain the rate at which a government will choose to subsidize higher education. The central question is why the majority of the population that does not invest in higher education would support any subsidy for those who do. This is solved by assuming that higher education externalities in production accrue to all. Thus, non-investors in higher education will be willing to subsidize education to the point that on the margin the externality-induced gain in their own incomes will equal the increased tax bite. That a majority does not invest guarantees that the median voter is a non-investor, a group whose pattern of preferences allows for a majority-vote equilibrium.

The model, of course, contains other key elements. Among them is that the ability to convert higher education to higher income is distributed unequally through the population. Thus, the privately borne share of costs of higher education, in conjunction with one's location on the frequency distribution, determines whether one will choose to go to university. Another key element is that any subsidy is covered fully by a flat-rate income tax with or without personal exemption. A third major assumption is that voters seek to maximize income over two periods, one during which education occurs (for those who invest) and another during which increased incomes are earned (for both investors and non-investors). Because the most general version of the model produces few unambiguous results, the author also must choose specific functions to impose enough structure to obtain clear results. Among these specifications, income-earning ability is assumed to be log-normally distributed and the magnitude of the education externality is made to vary in a very particular way with the percentage educated.

Many of the comparative-static results are what one would expect from a neoclassical model. An increase in the externality enjoyed by non-investors induces them to increase the subsidy. An increase in the cost of higher education reduces the proportion choosing more education as well as inducing the majority to support a smaller percentage subsidy. An increase in the education subsidy raises both the average income as well as the degree of income inequality.

While many of the results are predictable, some less obvious insights also are gained; and this is the real justification for what could otherwise become a sterile exercise. For example, it turns out that an increase in non-education taxes will actually increase voter support for the higher education subsidy, implying acceptance of even higher taxes; the logic is that the first-round tax increase reduces the payoff to education, so reducing the proportion choosing education, and thereby raising the marginal benefit of the education externality to all voters.

An important sub-theme of this volume is the relationship between the education subsidy and income inequality. The author deviates from the majority-voting framework to a social-welfare-function framework at one point in order to consider the tradeoff between income growth and income inequality caused by the education subsidy. As might be expected from a model in which higher education is converted to higher incomes at different rates by different people, thereby increasing inequality, social welfare functions with high degrees of aversion to income inequality favor smaller education subsidies. A particularly interesting conclusion is that majority voting produces a subsidy level consistent with a high degree of aversion to income inequality in the social-welfare-function model. Equally important is that more progressivity in the tax system leads to the favoring of larger subsidies. The book concludes with two chapters that examine the effects on support for higher-education subsidies of several income-equalizing strategies such as transfer payments, means testing the education subsidy, and tax surcharges on beneficiaries of the subsidy.

A very positive feature of this volume is the detail provided as to the precise construction and solution of the model as well as the simulations performed; it would be a useful guide to those engaged in similar exercises. The rich detail allows the reader to understand subtle interrelationships among variables that might otherwise be missed. The clear explanations of the major results are also very helpful. Most readers probably will not work through all the mathematics, but with a little effort can obtain a good sense of the way the model works and its key features. In this reviewer's opinion, a major weakness of the book is that it attempts no empirical tests of the hypotheses generated by the model; as such, the book does not leave the realm of neoclassical abstraction. And it is important to close with the opinion stated at the outset: this volume seems more appropriate for collections in public economics, and related fields, than for collections in the economics of education, the title notwithstanding.

Donald E. Frey Wake Forest University
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Author:Frey, Donald E.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jan 1, 1996
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