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«Financing lifelong learning Hessel Oosterbeeka, Harry Anthony Patrinosb,∗ a Universiteit van Amsterdam School of Economics b World Bank Abstract ...»

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On the other hand, the estimate from the reform method is interpreted as the joint effect of tax deductibility of direct training expenditures and tax deductibility of opportunity costs. The underlying economic model assumes that an individual’s opportunity costs of an hour spent on training changes abruptly if this person’s taxable income passes a kink in the tax schedule. For people who work full-time (as most people with incomes at least just below the first kink will do) and have little scope to adapt their working hours marginally, this assumption implies that these persons experience an abrupt change in the valuation of their leisure. To the extent that one is unwilling to believe this, a larger share of the effect estimate from the reform approach is attributable to the tax deductibility of direct training expenditures.

The reported effect sizes are evaluated at an average marginal tax rate equal to

0.4. If it is assumed that effects are constant over tax rates the low estimate of 0.3 percentage points change in training participation per 10 percentage point change in deductibility rate, suggests that abolishing the tax deductibility of direct training expenditures reduces the share of individuals who spend money on training for career purposes by almost one half: from 3 percent to 1.7 percent. Using the high estimate of 0.8 percentage points change in training participation per 10 percentage point change in deductibility rate, even suggests that without tax deductibility of direct training expenditures no one would spend money on training for career purposes. In any case, tax deductibility of direct training expenditures appears to be an effective instrument to enhance human capital accumulation. At a marginal tax rate of 0.4, every Euro invested by the government in the form of a tax deduction, leads to 0.75 to 1.5 euros of private expenditures on training investments.

4. Summary and Conclusions

This paper provides a fresh attempt to take stock of the available knowledge and insights regarding schemes to finance lifelong learning. The financial arrangements considered include instruments to stimulate successful learning and incentives for students. We also cover aid schemes such as income contingent loans and graduate taxes and subsidization mechanisms such as vouchers, scholarships and tax rebates.

We applied the standard normative framework of welfare economics that emphasizes the importance of efficiency and equity. In addition, we include discussions of relevant empirical findings where we focus on findings that pass the test of being based on a research design that includes a proper control group. Doing so reveals that much more is known about the effects of some instrument than others. This identifies gaps in our knowledge, summarized in Table 1.

The education finance literature has traditionally paid much attention to financial aid for students. A standard economic analysis of capital market failures provides reasons for government intervention. According to such an analysis the favored form of financial aid is through income contingent loans. Such loans solve the capital marker inefficiency and at the same time confront students with the (marginal) costs Financing lifelong learning 39 of their choices. Moreover such loans can also serve equity goals quite well.

Despite the almost universal enthusiasm about income contingent loans among economists, practical experience with such schemes is very limited. Only a few countries have actually implemented such schemes, the best-documented example being Australia. It is often claimed that the introduction of income contingent loan schemes in Australia did not harm the accessibility of higher education for students from low-income families. This claim is probably too optimistic because it is based on comparisons of attendance of these students before and after the introduction of income contingent loans and not on an estimate of what attendance of these students in the period after the introduction would have been in the absence of the income contingent loans.

Another noticeable finding is the recent indications of debt aversion among students at elite universities. Debt aversion refers to disutility of carrying debt over and above the effects of debt on lifetime consumption patterns. If student at elite universities are debt averse, it is very likely that students from poorer social backgrounds are also debt averse. The presence of debt aversion restricts the potential for income contingent loans.

Two Dutch experiments on the role of financial incentives for students show two interesting results. In one experiment students were given incentives in the form of piece rates. While students belonging to the top half of the ability distribution responded to this by collecting more credit points, students belonging to the bottom half of the ability distribution responded by collecting fewer credit points. An explanation for this is that explicit financial incentives have crowded out intrinsic motivation resulting in lower performance. It is useful to know that financial incentives can have such perverse effects. In the other experiment students were given incentives in the form of a tournament. The interesting finding from this study is that students only responded to the incentive in the initial decision making stage.

Lifelong learning activities can be subsidized in various ways. Providing scholarships to those enrolled is heavily used in many education systems. Such subsidies confront students with prices that do not reflect the true marginal costs of their activities. From an efficiency perspective this is only justified if the social marginal returns of their activities exceed the private marginal returns. The mixed evidence on the relevance of externalities casts doubt on the validity of this argument. A vast number of studies indicate that student enrollment in higher education is responsive to changes in prices. A $1,000 change in tuition fees changes enrollments rates by 4 to 6 percentage points. Results for other countries suggest that students in these countries are less responsive to price changes. This is probably because tuition levels in these countries are below United States levels.

To stimulate lifelong learning activities of adult workers, it is often believed that simply making such activities available below marginal costs provides insufficient incentives. Instruments such as vouchers, entitlements and individual learning accounts give potential learners a very explicit confirmation of their increased purchasing power. This should strengthen people’s awareness of the availability and 40 H. Oosterbeek and H. A. Patrinos importance of learning activities. The available evidence regarding the effects of these subsidy forms is rather limited.

A less explicit way of subsidizing learning activities is in the form of tax deductions. Existing evidence is restricted to one country. An age dependent tax deduction for firms appears to have led to postponement of training activities rather than to an increase. An income tax deduction for individuals appears to have substantially positive effects on training participation.

There remain significant knowledge gaps on the effects of financing lifelong learning. The emphasis in some studies on the advantages of income contingent loan schemes is at odds with the lack of convincing empirical studies. Too little is known about the impacts of vouchers, entitlements and individual learning accounts.

It would be worthwhile to undertake well-designed field experiments to study such schemes. It would also be useful if the limited evidence about the impacts of tax deductions were supplemented with other studies.

In recent years some progress has been made. Some programs have been implemented in ways that allow for solid impact evaluations. Much can be gained by following the same strategy for other financial arrangements. The details of such arrangements should be adjusted to local specificities and needs. An experimental setup with randomized assignment to treatment and control groups may be the gold standard. However, other approaches may also be used, some of which may be more appropriate. In natural or quasi-experiments, researchers exploit circumstances in which comparable observations are treated differently. In the ideal situation, subjects cannot affect their treatment status. The challenge is to find a source of exogenous variation that affects treatment and has at the same time no direct effect on outcomes of interest.

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