The Labour party plans to end charitable status for private schools, applying 20% VAT and business taxes to raise £1.7 billion and help improve social mobility via the state education system. Conservative Chancellor Jeremy Hunt showed only lukewarm opposition in his Autumn Statement, appearing substantially to accept Labour’s calculation (incidentally, HMT confirmed in response to a FoI inquiry that they had no supporting analysis regarding VAT and school fees). Meanwhile Darren Jones MP (Labour) says it’s a bad idea and won’t raise money anyway. What to make of this?
I wrote to Shadow Education Secretary Bridget Phillipson – personally and via my MP – asking for Labour’s business case, and have been looking forward to a reply for several months. So neither Labour nor the Treasury has actually published any assumptions or cost/benefit. I was excited when the Institute for Fiscal Studies published a review. According to one of the IFS founders, “never again should a government, regardless of its political colour and intentions, introduce far-reaching tax legislation without the benefit of deep and thorough analysis of second- and third-order effects”. That sounds sensible.
Disclosure – I’m a private school parent. But I’m also a taxpayer and an economist, of sorts, and I care very much about the state education that taxpayers buy for other children. I can also see the logic in robbing Peter to pay Paul, even when I oppose it. But when Labour wants to rob Peter to punch Paul in the kidneys, we’d all really rather they didn’t. Surely, I thought, the IFS will go into all the unintended consequences and provide us with the clarity that is missing?
Disappointingly, the IFS recites Labour’s lines. Its headline is Labour is basically right – the 20% effective fee increase will cause only a small migration to state schools, which won’t cost much, and everyone else will suck it up and pay, so that there is “net gain to public finances of £1.3 to £1.5 billion”, only just shy of Labour’s £1.7 billion. It only briefly mentions risks, but they are buried deep in the report and omitted from the press release, which is probably the only bit journalists will read. It certainly doesn’t quantify them as in “…and if we are wrong, the net tax impact could be neutral or strongly negative”, which is ironic given the power of the “worst-case scenario” in climate and lockdown politics.
I remain convinced this policy is crackers. It is more likely to lose billions than raise them and it will harm not help state schools (as well as harming or closing private schools). We should expect the departure of significant numbers of children from private schools and their (disgruntled) arrival in the state sector, demanding places that are not funded and that physically do not exist; the “second- and third-order effects” that I indicate here are strongly tax-negative and remain ignored.
I don’t know many people who think Labour can be dissuaded from their crackpot policy. I’m more optimistic. I believe (1) it’s a rich political vein for Conservative and Lib Dems; (2) there’s mileage in simply demanding Labour publish their working; and (3) the Treasury will, in time, conduct proper cost-benefit analysis and it will be published. I’ll keep asking. For now I’ve written to the IFS author, Luke Sibieta, raising my questions as an economist, and await his response.
Here are the highlights from my letter.
Elasticity of Demand (how demand responds to effective price changes)
Mr. Sibieta states his “best judgment” that VAT on school fees will lead to a 3-7% reduction in private school attendance. His justification is to assert that “the effects of fee rises are quite weak” based on observations since 2010. Essentially, the rich will pay, they always do. But an economist of Mr. Sibieta’s standing ought to recognise that:
- In general, we can’t predict the future based on the past. Specifically, predictive analysis can be quite accurate for markets with easy switching, frequent purchases, large but divisible quantities, and well-observed historical price shifts, such as groceries or forecourt petrol. It is “unusual” to rely on it where switching is costly, there are long-term relationships, decisions are binary, and where the main substitute is perceived (rightly or wrongly) as vastly inferior.
- The link between past and present is completely broken given changes in the macroeconomy. Mr. Sibieta makes no mention of house prices, interest rates, earnings, core inflation, aging relatives, pensions or the tax increases which all parties agree should “fall on the broadest shoulders”, as if private school affordability is unaffected by these tectonic shifts.
- Price elasticity is not (as Mr. Sibieta assumes) constant. Just because I accept a hike this time, doesn’t mean I will accept another hike next time. There is a risk of a ‘last straw’ effect.
- Disposable income, and its distribution, is of greater importance than Mr. Sibieta’s blanket observation that “15-20% of household income goes on private school fees”. It is not even clear if Mr. Sibieta is referring to post-tax income; he should certainly deduct core expenditure, mortgages and pensions, and should review the distribution – because it is the families “at the margin” that drive elasticity of demand, not the existence of a few billionaires at our more famous schools.
School Closures or Contractions
Mr. Sibieta appears to assume no schools will close following the loss of 3-7% of pupils (let alone, as I believe, many more); for those schools surviving under reduced demand, he does not consider they will be forced to cut costs. In either case, Mr. Sibieta does not consider any effect on:
- Lost VAT receipts and state school costs from pupils forced out of private schools not by affordability, but school closures.
- Income tax and NICs; benefit claims if redundant staff are unemployed.
- Payments to suppliers – and their income tax, NICs, corporation taxes, and benefit claims if they make redundancies that conclude with unemployment.
- Tertiary impact of a+b+c via multiplier – in other words, the loss of (taxable) economic activity that those various firms and employees no longer generate from their own expenditure.
Labour Supply
One cheer for Mr. Sibieta who does at least mention “potential reductions in labour supply” as a risk, albeit not in the press release. He doesn’t explore the issue further – and it’s a big one, potentially costing the taxman some billions of pounds via secondary and tertiary effects:
- People become high earners/wealthy mostly via some combination of hard work, personal sacrifice and ambition. “Top earners afford private school” is half-true, the other half being “people wanting private school become top-earners”.
- For those at the margin – earning, let’s say, £150k across both parents, which covers mortgage, bills, groceries and two average day-school fees, leaving about enough for one elderly car and one holiday a year – for such people, life is not luxurious. If they are doing it on two full-time jobs, it’s genuinely hard. It’s not the same ‘hard’ as struggling on benefits as a single parent – but it’s hard.
- If those families leave private school for the state sector, it’s like becoming £300,000-£500,000 richer (based on 10-13 years at a school for two kids, average fee estimates ranging from 15-17.5k, never mind more expensive schools at double that price or more), raising a significant chance they quit, work less, or retire earlier. Or, if you’re a younger family, making career choices to become a high earner and afford private school… well, perhaps you just won’t bother.
- The motivation to reduce work could also be associated with (a) childcare issues (state school hours being less than private school hours); (b) wanting to manage extracurricular activities no longer provided at school; and (c) wanting to provide parental tutoring to support what may be seen (rightly or wrongly) as inadequate academic provision.
- It doesn’t take many top taxpayers reducing or quitting work (or younger people choosing not to adopt high-paying career paths) before the consequences for NICs and income tax alone reach some £billions, and Labour’s policy is blown away…
- …and that’s before considering the tertiary losses. At the risk of sounding repetitive, it’s the lost (taxable) value-add to those higher-earners’ employees, employers and customers (doctors, anyone?); it’s the lost (taxable) employment of armies of cleaners and gardeners who serve the time-poor, and otherwise risk claiming benefits; it’s the multiplier effect of all those people’s reduced (taxable) economic activity downstream… etc. ad nauseam.
Mr. Chips is a pseudonym for an employee of a private school.
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Expurgated version of the headline
“Labour Hasn’t Done its Homework”
The policy may well be “crackers” but it plays well to the audience Labour plays to. But I don’t much care whether it is crackers or not, I just think it’s wrong because it is a politically motivated attack on people exercising their free choice to opt out of the state indoctrination camps.
Well said – this is the heart of the matter. Not only do private schools enable people to escape indoctrination, they supply employment to a tranche of the educated class – like the author – who in one way, shape or form object to overweening state power. The left longs to impoverish such heretics. Finally, as bastions of high standards and free thought (now somewhat compromised), private institutions doubly expose the abysmal failure of the comprehensive dump. With Stalinist tenacity and no care at all for real world fallout, the malignant, oppressive goons of the left want to stamp them out. The darkness, in matters of schooling, policing, health, banking, foreign policy (the long kow-tow to red Beijing), the church, the media, the arts, journalism, has never been more Stygian in my lifetime.
Indeed – I would not want to work in any school (and few schools would have me, as I am Literally Hitler) but if I had to then an independent school could be an option, if it had the right leadership.
I went to a local boys’ private school as a day pupil back in the 1980s on an assisted place. My parents were both working and, with a lot of sacrifices, were able to send my brother and me to the school. When my Mum lost her job at our local TV station as a result of the 1990s’ ITV franchise war closing many TV stations around the country, I left the school because I wasn’t happy there and restarted my A Levels at a further education college. My brother left when he finished his GCSEs.
Now, there’d be no possibility of people like my brother and me ever going there in the first place. A VAT increase would wipe out even more pupils and close many. I can imagine all the schools are looking to the super-rich from abroad, the same as the universities.
From what I understand, my old school is a co-educational school now – I haven’t been involved with old boys’ clubs or anything. It’s likely woke as hell, doing everything the leftists want.
My conclusion is that the wealthy leftists who now run much of the left in this country want these schools for their children and no one else’s. We’re in the odd situation here – one that’s happened with Democrats in the USA – where the left are run by the super-rich and the right of centre, usually self-made, are less rich.
I live in an area of north London where the private schools have been taking unfair advantage of their privileged tax status in engaging in extremely expensive luxurious development projects to the detriment of their resident neighbours. These projects are driven by the headmater wanting to create a legacy but primarily in trying to cater nowadays for an extremely wealthy international clientele rather than as used to be local children. Private schools and universities too need to go back to looking after the locals not foreigners, otherwise privately educated people like me, will also question why they should be having these tax advantages.
Well that may be the case for the schools you have in mind and possibly others, but it’s surely not the case for all of them. You could also argue that people sending their kids to those schools are saving taxpayer’s money so why not reward that in part?
I think universities are a different case as they are effectively subsidised by the taxpayer because student “loans” are not loans and are underwritten by the government. You could also argue that charging foreign students/pupils lots of money subsidises it for the locals.
Why are they not loans? Interest is charged and they are repayable (unless you can’t afford to repay them) – you can’t just walk away from them if you earn sufficient income over many years.
It’s a graduate tax, not a loan. What other “loan” products are simply forgiven if you “don’t have enough money” to pay them back? When you take out a loan, both parties risk something – the lender risks not getting their money back, the lendee risks a CCJ and ruined credit score, or bankrupty. Students loans are risk-free for students and universities. The effect has been to subsidise a huge increase in people going to university partly from those who graduate and earn decent money, which I don’t think completely unreasonable, and partly from general taxation because such a high % of “loans” are likely to be defaulted on.
I could equally ask what tax are you aware of that is calculated by reference to a principal advanced and and annual interest rate. It feels like a blend of the two, possibly.
None that I am aware of but calling it a loan was political theatre so they had to dress it up, though to be fair it’s capped in terms of the total amount paid which is unusual for a tax
I’ve always found the charitable status odd. Are the ‘fees’ in effect a donation to a charity? The private school I went to had a lot of rundown areas, substandard desks and the lockers were rusty, battered and falling to bits. When I was at the end of my first year there, loads of posh new lockers got put in the entry hall, covered in plastic wrapping. Great! I thought. We’ll have those next year. I forgot about them over the summer holiday.
In the sixth form, the school’s fortunes had turned somewhat. The yearly intake had dropped by 25 per cent and half my year group quit after GCSEs to do A Levels elsewhere, which was a shock to the school. I left at the end of the first year sixth form. One time, I was in the school basement in the only year I did in the sixth form, helping a porter with move some tables. Those hundreds of ‘new’ lockers were all down there, still wrapped in plastic. They’d used the money from the likes of my parents and the state to buy new gear to keep for future generations, long after I was gone. I felt somewhat aggrieved about that, given the state of the lockers being used the whole time I was there. The school went fully co-ed a couple of years after I left. When I was there the sixth form, the school had quite a few girls, but they managed a paltry eight when I was in the sixth form.
Apparently lots of ex-pupils still hang out together at the school’s old boys’ club. I couldn’t imagine doing that. I got the hell out of there and never went back. Never really saw anyone from there again unless I bumped into them by chance. Lots went to the further education college. I had nothing in common with them anyway, being an assisted place pupil.
That said, parents who use private health and send their kids to private school should be able to get significant tax relief for taking the burden off the state system.
I think the schools qualify as “charities” if they meet certain criteria, such as offering x assisted places or having their pupils doing local community work (helping old folks, teaching reading in schools, etc) or allowing local residents access to sports facilities.
Hello, Chips here, there are not “tax advantages”. There would be “tax advantages” if other people were paying for Education and it was taxed. But they aren’t. 93pc of the market is provided via a state-run, state-funded near monopoly. The VAT-free status of top schools is not far off equivalent, per pupil, to the tax-paid expense in the state sector.
Nobody pays VAT on education. Some people get their education for “free”. Those that pay handsomely are not using the “free” education they are entitled to, they are instead paying quantities of income tax etc to buy education a second time.
I’m pretty convinced that nobody in Labour cares about arcane stuff like second- and third-order effects. They simply need money. And hence, they’re looking for a way to raise indirect taxes people cannot avoid by clever tax evasion schemes. They’re going to raise whatever can be raised and find then out what the outcome will be.
Indeed – and if they can do that by taxing the “rich” then so much the better.
And ‘rich’, in the left’s view, means ‘middle class’. ‘Super rich’ don’t count as they’re the Labour donor class.
Indeed. Most people I know are middle class but are well off enough to live in areas with reasonable state schools, so they will be happy to continue voting Labour, as most of them already do.
There is the conundrum in Labour. From their ivory towers, their six figure salaries and plush lives, I doubt if any Labour politician even knows any poor people anymore (Maybe a cleaner or their gardener). They have no connection with the granite of our nation and cannot grasp the obvious truth that the ONLY people who are taxed in our country are the rich. The only way to make more taxes is to MAKE MORE PEOPLE RICH.
Its the age old story of the guy driving past the bus queue in his Rolls Royce. The Free marketeer will say. ‘Gosh, If I work hard, I might have one of those one day’, and the Socialist will say ‘Look at him, Why doesn’t he catch the bus like us.?’. C’est la vie comrade.
They have no connection with the granite of our nation and cannot grasp the obvious truth that the ONLY people who are taxed in our country are the rich.
That’s obviously wrong because there are plenty of indirect taxes on all kinds of things (and probably second-order indirect taxes, too, eg, assuming someone buys a beer, that someone pays alcohol duty on the price of the beer and VAT on the price of the beer plus alcohol duty — at least, that’s how it works in Germany) and these not only affect everyone, they also affect poorer people disproportionally because these have to spend a higher part of their income which is thus subject to such taxation.
I’m also pretty certain that I’m being taxed and while I earn enough to make savings, I’m far from rich. Rich people own property and can thus make handy amounts of money without working (I’m meanwhile paying £1000 per month as rent for a pretty run-down and chronically mould-infested flat which cannot really be heated in winter, at least not to temperatures people apparently take for granted, ie, something in excess of 15 degrees centigrade [probably less — occasional chattering of teeth on colder days is a regular occurence]).
Fair comment. I had income taxes in my mind when I was typing
.
Hello, Chips here. If Labour don’t care about the effects, which are not “arcane” they are the reality of people’s lives, they must not form a government.
I wonder what is your point….do you agree with me they won’t raise any tax, and will probably cost more, therefore it’s a terrible policy? Or do you instead believe it will raise £1.5bn or whatever, in which case please explain why my reasoning is wrong? Or do you think it’s OK for Labour to wage class war and never mind the cost….that harming posh people is a pleasure not a chore, even if poor people suffer in the process?
As I have done my best to explain in the article, it’s not a particularly “clever” tax evasion, to withdraw kids from private school, then quit work (or go part-time, or retire early); and it certainly isn’t “clever” if schools are forced to cut costs and in the process of destroying taxable activity, less tax is raised.
That’s genrally the route that the ‘politics of envy’ follow. My only concern would be that those hypocritical members of the Labour party, who decry private education but ensure their childen get the benefot from it, will have to get the same crap state education as us proles get.
The kind of people affected by this policy are not stupid.
There are many options open to them.
Many of their older offspring already now avoid swingeing university fees by studying overseas for a great deal less.
It is no surprise that the private tutor market is booming. By the way, what is the difference between private tutors and private education?
It is also no surprise that property prices continue to boom in the vicinity of the many outstanding state schools that do exist.
But the continued obsession of the labour party to reduce choice, diversity, in this country is a reaffirmation of their commitment to totalitarian socialism.
Therein lies the Conservative route back to power if only they were not so hopelessly dim……
Absolutely. There are burgeoning “British private schools” in Portugal at half the price. South Africa is an option too. As is home school.
Which is all part of why there is no money in this policy.
Many parents scarpe by to fund private education. If the cost increases they may send their children to state schools or they may reduce their expenditure on other things. The latter would reduce the tax take from (eg) home improvements, meals out and holiday spending.
Just as with private medical choice, this would make private choices more elitist which would no doubt be welcomed by Pimlico Plumbers, Blair and others who have managed to geta great deal of money for doing not much.
That’s a good point. In the UK private schools tend to be thought of as something for rich families but in low-income countries even very poor parents send their children to private schools, run on a shoestring budget, just to get better tuition. In the UK there may be at least some private schools that are not targeted at wealthy families – out of hours supplementary schools for cultural minorities come to mind.
These days, going to an elite private school makes it very difficult to get into Oxford or Cambridge, not that one would want to.
Labour fail to do their due diligence once again
it is not because we have money we send our children to independent schools but because the safeguarding failures and harmful curriculum within the state system.
Remove the VAT relief and those that are able to will sacrifice even more than they already have to keep their precious children from the State sponsored bricks and mortar schools. For those that would be unable to meet the cost increase we’ll not roll over and send them back to the cesspits but would find an alternative way be that online schooling, home-ed etc.
Thank you, I agree
Ironically, all that Labour’s policy will achieve is the closure of a large number of “lower grade” and therefore lower priced private schools ….. leaving a small number of extremely expensive, elitist institutions – stuffed with the children of the mega-wealthy.
That smaller number of extremely expensive, elitist institutions will continue to dominate the governmental (in the widest sense) Old Boy’s Club which is destroying this country …. with an even more concentrated Group-Think of individuals completely detached from the lives/life experiences of the vast majority of the population.
And State schools, which will have to cope with an influx of pupils forced out of the private sector, won’t have their standards raised; they’ll be lowered as the former private pupils will be a small minority. It is quite likely that the lefty teachers will actively discriminate against them.
State Education – already pretty bad – will sink to the levels of the Socialist NHS.
Thank you, yes I also doubt that State Schools are capable of absorbing an influx. Many have physical constraints. They don’t have the organisation in place. And the inflx won’t be evenly spread, it will be some schools with dozens or hundreds of ex-private school children at the gates.
Even if there was extra money (which there won’t be) the expansion programme will need to be driven by LEAs, and there’s no way they can deliver anything without swallowing half the expense in their own bureaucracy
There are at least two unintended tax consequence here.
My own observation over many years is that a significant subsidy to school fees is made by grandparents. If, in order to meet increased fees, grandparents increase that subsidy then the likelihood is that Inheritance Tax down the line will be reduced – assuming IHT still exists of course.
In addition, I’d like to see the exact calculations on an example school. VAT is a complex tax and having done some work in the past on VAT exemption for education, the outcomes of the application of VAT on fees and the consequential ability to reclaim VAT on purchases will create some unexpected consequences and anomalies, with no two schools being the same.
At the very least I would expect a blanket application of VAT on school fees to trigger a large raft of complex, expensive and time-consuming tax tribunal cases as each school makes a case for its own VAT treatment.
As always, Labour is looking through the wrong end of the telescope. Outside of the super rich, us ordinary folks choose a private education for our kids because the state system is genrally poor. If the state system was improved, the demand for private education would fall away.But that will never happen as the Labour supporting teaching unions don’t believe in excellenc, or even improving people.