OECD Tax Policy Studies

English
ISSN: 
1990-0538 (online)
ISSN: 
1990-0546 (print)
DOI: 
10.1787/19900538
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This series consists of studies analysing the effects of tax policies that have occurred in the past or might be considered for the future. Its primary purpose is to assist policy makers in designing tax policies that are suited to their objectives.

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Taxation and Skills

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Author(s):
OECD
06 Apr 2017
Pages:
240
ISBN:
9789264269385 (PDF) ; 9789264269392 (EPUB) ;9789264269378(print)
DOI: 
10.1787/9789264269385-en

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This Tax Policy Study on Taxation and Skills examines how tax policy can encourage skills development in OECD countries. This study also assesses the returns to tertiary and adult education and examines how these returns are shared between governments and students. The study builds indicators that examine incentives for individuals and governments to invest in education. These indicators take into account the various financial costs of skills investments for individuals such as foregone after-tax earnings and tuition fees, as well as whether investments are financed with savings or with student loans. Costs borne by governments such as grants, scholarships, lost taxes, and skills tax expenditures are also accounted for. The indicators also incorporate the returns to skills investments for individuals and governments through higher after-tax wages and higher tax revenues respectively.

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  • Foreword

    Higher skill levels lead to higher wages and better employment prospects for individuals, higher productivity and profits for businesses, and higher growth rates and tax revenues for governments. While there is broad consensus about the importance of skills for inclusive growth, sharing the costs of skills investments equitably and efficiently between governments, individuals, and businesses is a matter of continued debate. This report analyses how taxes impact the costs and returns of skills investments. The tax system is a key means through which the returns and the costs of skills are shared between governments and students.

  • Abbreviations and acronyms
  • Executive summary

    Ensuring that all individuals can develop the skills needed to productively participate in the economy is necessary for inclusive economic growth. Investing in skills can expand the productive capacity of the economy and at the same time reduce inequality by ensuring that all members of society have the opportunity to fulfil their productive and creative potential. Improving the level of skills across the economy has positive impacts for individuals and society as a whole. For many individuals, human capital represents the most valuable asset they will possess in their lifetime.

  • Introduction

    This chapter places this study in the context of OECD work on productivity and inclusive growth, as well as the broader literature on the public finance of education. The importance of skills for growth and productivity, as well as for equality and inclusive growth are all discussed. The impact of the tax system on skills is briefly summarised, and an outline of the study is also provided.

  • Tax and skills policies in OECD economies

    This chapter outlines the specific tax expenditures aimed at encouraging skills investment in OECD countries. Four main kinds of skills tax expenditures are considered, tax allowances and credits to reduce tax liability based on skills expenditure, reduced tax rates for scholarship income, interest deduction of student debt, and reduced tax or social contribution rates on student income.

  • Methodological approach to tax and skills statistics

    This chapter outlines an approach to estimating the financial incentives for individuals and governments to invest in individuals’ skills, and the effect of the tax system on these incentives. Specifically, it outlines the key indicators developed to examine the impact of the tax system on skills. These indicators include Marginal Effective Tax Rates (METRs) and Average Effective Tax Rates (AETRs) on Human Capital Investment, as well as Marginal Returns to Costs Ratios (MRCRs) and Average Returns to Costs Ratios (ARCRs) of Government Investment in Human Capital. The chapter cites the data sources used to develop results for these indicators, and explains how the results presented in of the study should be interpreted.

  • Tax and skills statistics: Effective tax rates and returns to costs ratios

    This chapter presents the main results for the indicators surrounding the financial incentives to invest in skills discussed in this tax policy study. The key indicators are the Breakeven Earnings Increment (BEI), the Marginal Effective Tax Rate on Skills (METR), the Average Effective Tax Rate on Skills (AETR), the Marginal Returns to Costs Ratio for Governments (MRCR), and the Average Returns to Costs Ratio for Governments (ARCR). The chapter presents results for four stylised education, scenarios: a 17-year-old student undertaking a four-year degree, a 27 year-old undertaking a one-year degree, a 32-year old undertaking a short course of job-related training, and a 50-year old undertaking a one-year degree. The chapter also examines the impact of the form of financing of education on indicator outcomes, as well as the way the results vary by gender.

  • Tax and non-tax financial incentives to support skills investments

    This chapter analyses the costs and impact of specific tax expenditures aimed at encouraging skills investment. The chapter discusses tax expenditures targeted at tertiary education and lifelong earnings separately. The impacts on skills development are discussed, as well as the equity implications of the tax expenditures. Tax and non-tax approaches to encouraging skills investment are compared and analysed. The chapter concludes with a discussion of optimal policy mixes from a skills perspective.

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  • Expand / Collapse Hide / Show all Abstracts Annexes

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    • Technical approach to calculating tax and skills indicators

      This annex outlines an approach to estimating the financial incentives for individuals and governments to invest in individuals’ skills, and the effect of the tax system on these incentives. Specifically, the annex derives Marginal Effective Tax Rates (METRs) and Average Effective Tax Rates (AETRs) on Human Capital Investment, as well as Marginal Returns to Costs Ratios (MRCRs) and Average Returns to Costs Ratios (ARCRs) of Government Investment in Human Capital. The annex also explains how these measures relate to each other, and outlines the effect of government taxes and spending on incentives to invest in skills.

    • Comparative Tables

      The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

    • Country Tables

      This annex provides country tables which detail the main results from as well as the variables that lie behind these results. As with results are given for a variety of different assumptions about age, income, student debt levels, and length of education. The results correspond to the different stylised education scenarios discussed in of this study.

    • Country Details

      This discussion outlines specific skills tax expenditures (STEs) that have been added to the personal income tax (PIT) and Social Security Contribution (SSC) systems of each country’s Taxing Wages model for 2011. Details of these models can be found in OECD Taxing Wages (OECD, 2014). These STEs largely offset the costs of skills investments through the PIT system. A more detailed discussion of the STEs affecting skills investments are contained in Torres (2012).

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