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I came across this in the Economic Times this morning:

 

The government has been asked by a parliamentary panel to consider the possibility of levying an ‘exit tax’ on graduates from the “premier institutions which are run on massive state subsidies”

The panel is of the view that money spent on those who work outside the country doesn’t benefit India. Hence they should be taxed for the same.

 

The report states that experts who appeared before the committee felt that when Indian students go overseas to work after receiving education at leading institutes, which are subsidised by the exchequer, the country gets no return for the expenditure incurred on these students. “The committee is of the view that students passing out from premier government institutions get the best education on payment of nominal fees. In the event of their leaving the country for good, imposition of exit tax on them must be considered,” it said.

But how will they impose this tax? If I am working in the UK and paying tax there, the government would find it difficult to get me to repatriate tax back to India unless it worked out a policy with other countries- a sticky proposition. An alternative method It could to tax my employer at the time of hiring (the employer may in turn deduct it from my salary) or make all entrants to institutes sign bonds that should they get a dollar job, they would repay their fees (with interest?) over time.

 

I want to take this argument further and argue that the government should consider removing subsidies from higher education.

 

The government in India today subsidises university education to a great extent. I remember paying Rs. 1500 (under $40) a year in annual fees at college- I spent more commuting to and fro from college to home.

 

During my MBA at an Indian Institute of Management (IIM), I paid Rs. 1,20,000 ($3,000) in annual fees when the actual spend for the government may have been higher by a factor of three of four.

 

The average salary for a graduate from an IIM is over Rs. 7,00,000 (nearly 6 times the annual fees paid by him for his degree). Similar proportions may be appropriate for colleges across the country.

 

Reading Atanu’s blog a few months ago, I learnt about 3 kinds of losses relevant to this scenario:

 

When an educated person leaves India, there is a first-order loss to the economy if the education was publicly funded. There is no comparable first-order loss if private resources were involved in the training. But in either case, the economy loses the life-time stream of economic contributions that the migrant would have made. This is a second-order loss. There is what can be considered a third-order loss that is harder to estimate but whose impact may be the most damaging in the long run. This arises from publicly subsidizing higher education at the expense of primary education.

Think of it. For every student subsidised at an IIM (a subsidy of 4-5 lakhs a year) over 25 -50 students can be comfortably educated in a government primary school. These students may not be able to pay the few hundred rupees as fees every month and in absence of government funding, may never go to primary school.

 

The Higher-education student, on the other hand can pay for himself. The most efficient way to make him do so is:

 

1. Give him a government loan to study at University

 

2. Upon Graduation and employment, tax him at a higher rate depending on salary and area of work. So, an Individual employed in a private sector firm earning in the top quartile of country’s income may be taxed at the prevailing tax rate + 5%. Another individual who earns the median wage may be taxed at base rate + 2%. These taxes hold till the student pay off the government loan + accrued interest. The idea behind the higher slabs for higher earners is improving the cash-flow of the government higher education subsidy kitty. A student employed in the civil services, government organisations, non-profit or development sector organisations may receive a fee-waiver.

 

In this manner student who have the capability to pay do so while government expenditure becomes more equitable and efficient. Incidentally, s similar taxation scheme is prevalent in Australia and a similar loan programme can be availed at leading US universities, most notably at Stanford.

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