Sunday, March 25, 2012

Is college worth it?

Governments are big winners from college degrees

Politicians are always in favor of more education. The chart below explains why.  A college graduate pays more than twice as much income tax as a high school graduate,  while a professional degree holder is four times as valuable.

(Chart note: I'm counting social security taxes as well as federal and state income taxes )

Notice that while the states bear much of the burden of financing education, the big winner on tax day is the federal government. However, looking at income taxes captures only part of the additional tax revenues from the well educated. Higher earners spend more and buy bigger homes, so they pay more sales and property tax.

Taxes significantly reduce the return on education to students

While college graduates earn more than high school graduates, 36% of the college premium goes to the government in tax. This has to be paid before the student pays for the cost of the degree itself.

For people going on to grad school, 42% of the premium over a BA degree holder goes in tax.

When people in education and the media promote the benefits of a degree, they invariably ignore the fact that a significant fraction of those benefits disappears in tax. And much of the cost of that education has to be paid for out of after tax earnings, reducing the true benefits of college still further.

Relative to other business investments, educational investments are uniquely tax disadvantaged. If a self-employed person invests in a truck for their business, they can reclaim the capital costs of the vehicle out of before tax income. However the cost of investments in education and training have to be paid for out of after tax income.

Government loses when students can't afford college

For every student who doesn't graduate college due to financial reasons, the Federal government will lose up to $6000/year in tax revenue, or up to $240,000 over a working life. For a government who is currently able to borrow extremely cheaply, this is a tremendous missed opportunity. There are powerful social justice arguments for making it possible for people from all social backgrounds to attend college. Even when those are ignored, the prospect for higher future tax revenues justifies financial aid to students who otherwise can't afford college. This is true as long as the students in question are likely to graduate. Government should avoid giving financial aid to students who lack the aptitude for academic work.

This study provides evidence that many academically gifted students from poor families do not complete college. Of students who scored highly on math tests, only 29% achieved a college degree if their family was poor.  High scoring students from wealthy families achieved degrees at a 74% rate.

Further reading:
Reproduction of privilege
Pell grants cover fewer costs
Statistics from the College Board


  1. The difference is that those organizations that lobby for protections of rights and social justices that are in place or should be in place are not motivated by greed. The heavy hitters on the right commit fraud by influencing lawmakers through political donations, promises of lucrative board positions and outright bribery. Congress is never truly in session any more. Our elected representatives have become lazy and corrupt. Recent tax policy is a good example. Most are wealthy and subsequently vote for bills that are crafted to benefit the rich. No more inheritance tax and unjust tax rate for capital gains with glaring loopholes. Insider trading is rampant among our elected officials. The more money you make the more disposable income you have. This is the reasoning behind placing a higher tax burden on those that can afford it (along with the fact that in most cases use of public infrastructure and
    marketing the masses enabled their wealth).

  2. 'The more money you make the more disposable income you have.'

    That's not necessarily true if student loan repayments are eating up your income. Of course, if the government funded higher education, then it would be perfectly fair to reclaim that through higher income taxes on graduates.