Why Education Tax is Unjust

Introduction

Taxing independent education, via VAT and business rates, is an extremely bad idea for two reasons. First, it is simply a bad idea in principle. Second, as expected by parents, schools, and industry commentators, it is causing harm to children and in doing so raising less net tax revenue than the Government claimed it would.

This short paper focusses on the first reason. Taxing education is a bad idea in principle because it discourages two substantial social benefits:

educating children delivers social benefit (regardless who pays), and
educating children out of families’ after-tax income saves the taxpayer significant money, worth £8.6k per year in 2026-27, for a total estimated in 2022 as £4.5bn per year and now likely to exceed £5bn

We’ll explain the injustice of taxing education, with a focus on these two social benefits, and present additional social benefits of independent education at the end.

We’ll refer to a well-known and uncontroversial economic framework of horizontal and vertical justice. In tax theory, it’s horizontally unjust to tax people of similar means in very different ways. In a progressive tax system we might want higher earners to pay higher rates of tax, but it would then be vertically unjust if we apply such differential rates in an incoherent way. It’s also desirable to avoid distortions; we prefer to apply taxes consistently in general, only making exceptions where there is social benefit. Finally, we should treat taxes (and benefits, and spending) as a system, in which we don’t need every tax to be “progressive” as long as the whole system does what we want.

Horizontal injustice

In taxing feepaying education for Family A, while providing it “free” at taxpayers’ expense to Family B, we are treating them differently. If families A and B have the same household income and the same number (let’s say two) children, then (pre-VAT) Family A was already saving the state £17k per year (at £8.6k each).

At any income level, Family A is a substantially greater contributor to the public finances than Family B.

If these families are in the top third or so by household income, Family B has substantial extra disposable income left over. They can invest in property, turn the heating up, buy tutoring, spend more on food, or invest in ISAs and pensions. None of these result in them paying 20pc VAT. Or, they can spend money on luxuries, incurring 20pc VAT.

It is unjust that the state demands Family A pay significantly more tax than Family B.

Vertical injustice

The argument for a progressive tax system is based on the view that those able to pay more, should contribute more.

A tax on education, widely sold as a tax on “the rich” does not take account of ability to pay. It is true that “the rich” are more likely to pay school fees, but not as much as you might think. In fact, the Government was forced in court to disclose its own advice that 25pc of families affected by VAT are from below-median incomes.

Based simply on any measure of after-tax income, it is not “progressive” to apply a differential tax based on choices. Once taking into account the expense of school fees, it is even worse: families paying school fees do not have greater ability to pay more, than families receiving “free” education.

According to UCL, even of the top 1pc of households, by income, only half are feepaying families. The other half have disposable income worth several tens of thousands of pounds; they are being taxed more lightly than feepaying families on middle incomes who, almost by definition, never had the money to spare.

As the Adam Smith Institute rightly said :

“if the tax is considered to be a proxy for “taxing the rich”, it would be simpler, less harmful and more effective to “tax the rich”, operating within much smaller margins of extremely well-researched tax levers with existing collection and enforcement mechanisms”

Social benefits – human capital.

We can also see the harmful effects of taxing education if we consider what education is for.

Education is, to a substantial degree, an investment in productive human capital. We can consider this in two ways, but they point in the same direction:

Market production where better educated people can produce more output and compete for top jobs in a globally-competitive labour market;
Non-market production where better educated people participate in society culturally, charitably and democratically

It is normal to tax the market output of investments. If you build a factory, you do not pay VAT on the factory. You pay a range of taxes on the value you receive when you sell your wares; or, your workforce pays taxes on the proportion of the value they receive as wages.

Historically, education was VAT-exempt at the point of purchase because its market output would eventually be taxable via payroll taxes, or (for entrepreneurs and capitalists) via business taxes and wealth taxes like those on capital gains, inheritance and dividends.

Educating children has social benefit because it builds human capital. This is why the state bothers to provide education and why taxpayers are, broadly, content to fund that provision. Taxing education reduces that social benefit. This is why other countries do not tax education.

Other social benefits

The UK’s independent schools also provide numerous subordinate, but nonetheless important, social benefits. Some, but not all, are specific to schools that are also charities. The following is an indicative list:

Bursaries providing for education of less affluent children
Partnerships providing reduced-cost or “free” support for state schools and local communities
Community Service where schools encourage or require children to support the local community
Charitable hubs where schools, children and families fundraise and support other charities beyond the school gates
Commercial lettings where communities benefit from school facilities, at some agreeable price, that otherwise might not exist
Heritage assets where schools are the custodian of historic buildings and often make them accessible to the public
Culture where schools support, for example, cathedral choirs

Conclusion

We have briefly reviewed the main ways in which education delivers significant social benefit, which is why it should never be taxed. Independent education has particular social benefit in that it saves money in state education, which can be directed towards the education of the genuinely poor (although noting that the vast majority of the genuinely rich receive “free” education that they could afford to pay for, but choose not to).

For these reasons, taxing education is fundamentally unjust and economically irrational. This is true regardless of revenue outcomes. Taxing education is wrong at any price:

Wrong as children are harmed and less revenue is raised than the government forecast
Wrong even on the government’s optimistic forecasts
Wrong even if no children were displaced