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.

Understanding the role of the tax system in the investment in human capital is important for both tax and skills policy makers. The impact of the tax system on physical capital is extensively studied and can be a significant factor in shaping tax policy reform. Similar consideration should be given to the impact of taxes on human capital. This study provides insights into the influence of tax systems on skills in 29 OECD countries: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Iceland, Ireland, Israel, Italy, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, and the United Kingdom.

Taxation and Skills finds that for a typical 17-year-old individual in OECD countries, a tertiary education is one of the best investments available. A tertiary degree more than pays for itself in terms of future expected after-tax income even before accounting for additional employment, health and well-being benefits. On average, a student’s earnings after education must rise by 15% to break even on the costs of education. In fact, they rise by 48% on average. Governments generally recoup the costs of their investment in tertiary education through higher income tax revenue. Estimates suggest that, on average, the extra income tax revenue gained from educating a typical student at the tertiary level amounts to 118% of government education costs across the OECD. This does not incorporate the wide variety of other returns to skills investments for governments.

Tax expenditures that encourage skills investments exist in many OECD countries. However, they may be poorly designed, regressive, and can have mixed impacts on education outcomes. Direct support for skills and financing through student loans encourages skills investments by both targeting support to those who need it most, while at the same time mitigating the risk of skills investments by providing a form of insurance against such risk.

Creating incentives to invest in skills across society is a key component in lifting wage and productivity levels across OECD economies, and in ensuring that growth in the coming years is inclusive and sustainable. Taxation and Skills demonstrates that tax and spending policies need to be designed in a coherent manner in order to encourage skills investments. The analysis contained in this report can help policy makers to compare their countries with other OECD countries, to design effective skills policies and to create inclusive growth across the OECD.