PDF The Benefits to Taxpayers from Increases in Students Educational Attainment

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For example, math and science teachers at private schools typically earn 8 percent more than colleagues with similar experience. Teacher scores on tests of verbal ability correlate with student performance, as do the number of math and science courses taken by math and science teachers. Existing evidence suggests that variations in teacher quality account for 7—9 percent of the total variation in student achievement. But if high-quality teachers are defined as those whose students attain higher-than-expected grades, data from individual schools in the United States suggest that five years of having a teacher at the eighty-fourth quality percentile rather than at the fiftieth would completely eliminate the performance gap between poor and nonpoor children.

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Many K—12 reformers seek to remedy the lack of accountability in government-funded schools by emphasizing parental choice via charter schools and voucher programs. Growing evidence suggests that competition does increase public-school quality. The introduction of charter schools in North Carolina apparently increased achievement in nearby public schools by about 1 percent, more than half of the recorded student achievement gain for — Unfortunately, the American experience with voucher funding in higher education bodes ill for the long-term success of voucher funding.

Grants and loans that follow students to the college of their choice, a wide choice of colleges, and providers with flexible salary schedules and the ability to hire and fire at will have not saved American higher education from recent problems with exploding costs and declining quality.

The National Association of Scholars documented the dissolution of general education requirements at the university level from to Government funding of colleges was originally limited to producing better-educated grade school teachers. As science became more important in business and agriculture, state funding was expanded to produce technically trained graduates of benefit to local business interests. Between and , the research university blossomed, average enrollments ballooned, and the market share of private colleges declined.

In , almost 30 percent of all students in the public universities were in engineering programs. By , public engineering enrollment was no more than 5 percent. Most of the money went directly to the institutions themselves. Nearly two-fifths of the total revenue received by public colleges came from state appropriations. Private institutions received roughly half of their revenues from tuition income. Within this category, institutions with extensive doctoral degree programs depended on government for 28 percent of revenues, and schools offering only a baccalaureate depended on taxpayers for only 6 percent of revenues.

In return for their taxpayer funding, state college and university systems are expected to charge lower tuition. Because students forgo state in-kind aid if they attend a private college, giving money to state colleges in return for low tuition biases students toward state institutions.

In , about 22 percent of higher-education students were enrolled in government-controlled institutions; in the number was 55 percent. By , 68 percent of students enrolled in four-year programs were in government-supported colleges. As is the case in K—12 education, subsidizing institutions directly may have unintended consequences.

Subsidies to individual students also have unintended consequences. In the United States, mass federal subsidies for college students began in , when the Higher Education Act created grants and campus programs to help poor students attend college and a loan program for middle-class students. As one would expect, federal subsidies have been systematically expanded over the last forty years in an effort to appeal to middle-class voters.

More than 75 percent of federal aid to postsecondary students now underwrites loans, which appeal most strongly to middle- and upper-income students. As federal subsidies to students have grown, American colleges have adopted pricing schemes that maximize the revenue they receive from each student. Colleges have little incentive to cut their costs and actively lobby government for more institutional funding and more student aid.

They did not increase postsecondary enrollment.


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Aid is so generous that taxpayers are even required to subsidize child care for parents attending college. Because federal and state regulations invariably follow government funds, subsidies also increase operating costs. American colleges that admit students with federal funding are required to fulfill federal requirements on everything from reporting campus crime to meeting gender quotas in athletics. In spite of their role in raising the cost of college, advocates of increased subsidies for higher education claim they are essential to ensuring equal access for everyone to the higher incomes generally associated with a college degree.

Standard estimates of the rate of return to additional years of education range from 5 to 15 percent. Unfortunately, the data on average earnings from college graduation mask the fact that those earnings disproportionately accrue to people who enter college with superior cognitive skills, particularly in mathematics.

Despite lavish subsidies, only about a quarter of the U. Taxpayer subsidies for higher education generally transfer income from people with lower incomes to middle-class college students.


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The students capture most of the gains from attending college via higher lifetime incomes. Whether such policies are fair or desirable will likely continue to provoke intense debate. Linda Gorman is a senior fellow at the Independence Institute, a state-based free-market think tank in Golden, Colorado. She writes frequently on education.

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Owner-occupied home purchases and the local services that support those transactions are almost entirely local. Other big local expenditures include utilities and restaurants or bars. Highly educated households spend much more on the local economy than their less educated peers.

It is not that highly educated households concentrate a higher share of their spending on local goods and services, but their gross spending power is so much greater that graduate degree earners spend more than twice as much on local goods and services as high school graduates. Tax expenditure flows to state and local governments, which are largely based on property, sales, and income taxes , rise sharply as household education increases.

Over the course of a lifetime, these annual differences in consumption and taxes add up to very large amounts. I use the average share of income consumed by education and hold that constant over the lifetime, but allow income to rise and fall by age separately for each education group. Future spending flows are then discounted using a 3 percent interest rate, which affectively shrinks the value of future income to what it would be worth at age The state and local tax estimates here should be regarded as incomplete for a number of reasons.

These estimates do not consider the reduction in government spending as a result of education e. For any given place, the estimates of state and local benefits are also affected by whether or not alumni remain in the area. To the extent that the area is a net loser in the migration of college attendees, local and state benefits will dissipate accordingly and be captured by the areas where the alumni relocate.

Using data from LinkedIn alumni profiles, my colleague Sid Kulkarni and I were able to calculate the percentage of alumni from roughly colleges who work in the same metropolitan area as their college. Overall, 68 percent of two-year attendees remain in the same area after graduating, compared to 42 percent of four-year attendees. I consider these shares below in estimating how the quality of colleges affects the local benefits to a particular place.

The above calculations assume all colleges are of the same quality, but alumni earnings differ dramatically by institution, even after accounting for student family income and other demographic characteristics.


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My recent research on the value-added of specific colleges reports these data. Thus, enhancing the quality of colleges with respect to earnings is another important way to increase the local economic benefits of colleges. To quantify quality, I first distinguish high- and low-value added colleges based on those that are one standard deviation above and one standard deviation below the mean, respectively, using my recent research.

Then I calculate the average dollar amount added to alumni salaries for high- and low-value added schools on a per student basis. An alternative approach would simply distinguish colleges by the earnings of their alumni, and for local tax accounting that is more relevant. However, from a national public policy perspective differentiating whether a college benefits an area because it is drawing in top students from other areas thus depriving those areas of high-potential earners or generating higher than expected benefits for less advantaged students as well as the affluent is more valuable.

The amount colleges add to the value of alumni earnings can be applied to mean earnings from the Consumer Expenditure Survey to get a sense of what earnings look like in these two groups compared to the mean Table 4. Roughly half of that spending will go toward local economies. These estimates imply that states and local economies with high value-added quality colleges enjoy massive economic and tax benefits.

It turns out that the benefits of higher-value added colleges do not come with higher costs. Tuition is also slightly less at high value-added two-year colleges. Alumni from high-earning schools vary greatly in their propensity to stay in an area. Sixty-four percent of graduates from the University of Washington in Seattle stay in the Seattle area, and 57 percent of alumni from the Illinois Institute of Technology work in or around Chicago.

At the metropolitan scale, retention rates differ considerably and are modestly correlated with size and measures of worker productivity. The New York City area exhibits one of the highest retention rates with 70 percent of four-year college attendees remaining in the area. Detroit, Houston, Chicago, San Jose, and Atlanta also retain at least 65 percent of attendees from four-year schools. On the other hand, Boston retains just over half 53 percent , and the Washington D.

While most policy leaders and voters might assume that more education is better for the economy, the empirical relationship between economic growth and a highly educated population has been unclear. This report aims to simplify that relationship by understanding one direct channel through which education boosts the level of economic activity in an area: consumption.

This should by no means be regarded as a comprehensive assessment of the public benefits to the economy of education. I have not attempted to consider how education affects government savings, through channels such as criminal behavior or health. I have also not attempted to estimate the role of education in entrepreneurship and innovation, which is likely very large and valuable. Nonetheless, these estimates provide some sense of a minimum benchmark for how education affects a local economy, and they are non-trivial in magnitude even with these caveats.

This analysis also shows that college quality has major implications for the extent to which higher education boosts economic activity. Thus states and their voters have a very clear incentive to raise the quality of their colleges, with respect to how they affect earnings. In my previous work , I discussed ways of doing that—through increasing the market value of course content and skills taught; investing in a high quality teaching staff, offering financial aid, and implementing programs that will boost retention and graduation.