Chapter 2. Tax and skills policies in OECD economies1
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.
2.1. Introduction
This chapter outlines skills tax expenditures (STEs) designed to increase investment in skills modelled in this Tax Policy Study. The chapter is based on the information in Torres (2012) which is in turn based on a survey of OECD delegates carried out in 2011. Individuals’ decisions to invest in skills are based on a wide variety of financial incentives and other factors. Factors impacting skills investment decisions include the direct costs of education, the lost earnings in the labour market while studying, the cost of financing, and the available returns in the labour market for those with high skill levels. The tax system has an impact on all of these factors either through the general personal income tax (PIT) and social security contribution (SSC) system or because of specific STEs in the tax system. This chapter reviews the specific STEs designed to encourage skills investments that can be found in 30 OECD countries.
In addition to specific STEs, the impact of the tax system on incentives to invest in skills also depends on the overall level, general characteristics and progressivity of the PIT and SSC systems. The overall tax system governs the extent to which the returns to skills are taxed away, a key component of the indicators developed in this study. In addition, the tax system reduces the cost of making a skills investment by reducing pre-tax foregone earnings. Information on the general PIT and SSC systems is not included here but can be found in the OECD Taxing Wages report (OECD, 2016).
The tax system also impacts incentives to invest in skills through a wide variety of other measures outside of the PIT and SSC systems, which are not included in the calculations underlying this Tax Policy Study. Investments by firms in the skills of their employees are often deductible from the corporate income tax base and some countries implement R&D tax provisions linked to the researchers wage bill, for example. Some countries implement special STEs to stimulate savings for future skills investments. General tax rules on savings, which have an impact on the after-tax opportunity return for an investment in skills, are not covered. Skills investments are often exempt from VAT, and sometimes are zero-rated. Universities and other educational institutions may also benefit from reduced property taxation.
For the purposes of this study, specific ‘tax and skills’ policies that are modelled are only those policies in the PIT and SSC systems that partially or fully offset the costs of investing in skills. OECD countries do not implement specific tax rules beyond the standard progressive PIT rate schedule, such as graduate taxes, that increase the tax burden on the return on skills.
As mentioned previously, a wide variety of other drivers beyond the tax system impact individuals and firms decisions to investment in skills, as well as influencing the decisions of firms and other organisations to supply training and education, and the decisions of banks and other institutions to aid in financing skills investments. The other impacts of the tax system on financial incentives to invest in skills are treated as beyond the scope of this study; which confines itself to the individual’s financial incentives.
This chapter proceeds as follows. Section 2.2 discusses tax allowances that allow the costs of skills to be deducted from taxable income. It also discusses tax credits that allow the costs of skills to offset tax payable. Section 2.3 discusses policies that reduce the taxation of scholarship and grant income. Section 2.4 discusses polices that allow the cost of student debt to reduce a student’s tax liability. Section 2.5 discusses STEs that reduce the taxation of the labour income of students. A summary of the tax and skills policies available in each country is provided Table 2.1. A country-by-country outline of the STEs available can be found in SectionAustria of Annex D.
2.2. Tax treatment of educational spending
In most OECD countries, some part of an individual’s direct spending on skills investment can be used to reduce tax liability. This is true of 25 of the 30 countries discussed in this Tax Policy Study. The exceptions are Hungary, New Zealand, Poland, Slovenia, and Spain. For Spain, some tax reliefs for the direct costs of skills investments exist at the regional level, but not at the national level.
Tax allowances
For most of the countries that do provide tax relief for the direct costs of skills investments, the relief comes in the form of tax allowances (i.e. deductions from taxable income) for skills spending.2 21 of the 30 countries in this study have such provisions, including Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Estonia, Finland, Greece, Iceland, Israel, Luxembourg, Mexico, the Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.3 In most of these countries, the deduction is only available where the training concerned is related to, or even necessary for a worker’s current employment; this is the case for 19 of the 21 countries listed. The exceptions are the Czech Republic and the Netherlands. The stringency of these provisions differs; in some countries training need only be ‘related’ to current employment to be eligible for a tax deduction, in some countries such as the United Kingdom the training must be necessary for the worker’s current employment for the worker to be eligible for a tax allowance.
In 7 of the 21 countries with tax allowances for skills expenditures, caps exist which limit the amount of skills expenditure that can be deducted from taxable income. In Estonia, the cap is set at EUR 1 920 (USD 2 670). In Greece, the deductibility is limited to EUR 100 (USD 72). In Mexico, this cap depends on the kind of training the worker is engaged in. In this study, the cap used is that for technical professional education, which is set at MXN 17 100 (USD 2 229). In the Netherlands, deduction of skills expenses cannot exceed EUR 15 000 (USD 18 036). In Portugal, the cap is set at 3% of 12 times the SBI (an indexed minimum wage). For 2011, this value was equal to EUR 171 (USD 272).4 In Turkey, the maximum deductible amount is 10% of declared income of the taxpayer. While in Turkey the cap is defined with respect to the income of the taxpayer, other OECD countries implement a deduction which is a lump-sum amount or a fraction of the costs of a skills investment. Finally, for the United States, the maximum eligible amount of the deduction is the lesser of qualifying expenses less related scholarships and a fixed threshold. This threshold is USD 4 000 when taxpayers have incomes of USD 65 000 or less (USD 130 000 for married filing jointly). The threshold is USD 2 000 if income does not exceed USD 80 000 (USD 160 000 if married filing jointly).
In 2 of the 21 countries with tax allowances for skills expenditures, thresholds also exist below which skills expenditures cannot be deducted from taxable income. In Denmark, a minimum threshold of DKR 5 500 (USD 931) is required. In the Netherlands, this threshold is EUR 500 (USD 695).
Certain other restrictions on the use of skills deductibility also exist in some OECD countries. In both the Czech Republic and in Estonia, the deduction is only available for taxpayers 26 years old or younger.5 In Sweden a taxpayer is required to be receiving full or close-to-full payment from their employer during periods of education to be eligible for deductibility of training costs.
Tax credits
The second way in which expenditure on skills can be used to reduce tax liability is through tax credits. Seven countries in the sample examined in this study have such credits. These countries are Canada, Ireland, Israel, Italy, Portugal, and the United States.6 These STEs vary in their targeting, and tend to be used to offset the costs of university or basic education more than they are used to reduce the costs of career-related education.
In Canada, 15% of the cost of tuition is creditable against tax payable. In Ireland, a tax credit is offered at the lower marginal tax rate of 20%. In Israel the credit is limited to a fixed value of ILS 2 508 (USD 700). In Italy, a 19% credit is offered for the costs of education. In Portugal a credit is offered for 30% for education and training expenses. In the Slovak Republic the credit has a fixed value of EUR 243.18.
As with tax allowances, a variety of thresholds and caps apply to the available tax credits. A limit on the value of education tax credits is set in Ireland and Portugal. In 2011, this limit was set at EUR 7 000 (USD 9 736) in Ireland; in Portugal it was EUR 475 (USD 661) in 2011. Thresholds also apply. In Canada, claims must be higher than CAD 100 (USD 101). In Ireland, claimed relief is only available for fees above a threshold. In 2011, this threshold was EUR 2 000 (USD 2 782) for full-time students and EUR 1 000 for part-time students (USD 1 391).7
In the United States, the eligibility for tax credits depends on a taxpayer’s income; above a certain threshold, the size of the available credit begins to shrink; high income taxpayers become ineligible (see Annex D for further details). These thresholds vary depending on the credit and family status of the taxpayer concerned.
A key difference between tax credits and tax allowances is that tax credits can be more readily made non-wastable, so that taxpayers who do not have sufficient tax liability to exhaust the full value of a tax provision can receive a refund. This can help increase the value of these STEs to taxpayers on low incomes. Skills tax credits are non-wastable in full or in part only in the United States; they are wastable in Ireland, Israel, Italy, and Portugal; Canada allows the value of credits to be transferred (up to a dollar limit) to a supporting individual such as a parent, and/or carried forward for use in subsequent years. Taxpayers in these latter countries who do not have sufficient tax liability to exhaust the value of the credit will pay no tax, but will not receive a refund. This is discussed further in Chapter 5 of this study. Key differences between tax credits and tax allowances are also discussed further in OECD (2011).
2.3. Tax treatment of scholarship income and grants
In most OECD countries, scholarship income and grants are subject to some form of tax relief. Of the 30 countries discussed in this study, tax relief is available in 28 of them. The exceptions are Denmark and Iceland, where this income is treated as ordinary income. In general, the tax relief in these countries comes in the form of a straightforward exemption from taxation, subject to various restrictions.
There are exceptions to this. In Italy, scholarship income is exempt from PIT but not from SSCs; it is subject to a reduced SSC schedule but not exempted entirely. In Finland, scholarship income is exempted (up to a cap) from PIT and from some SSCs, but a health insurance contribution is still payable.
In most OECD countries an unlimited amount of scholarship income can be exempted from taxation if the income qualifies for exemption. However in some countries a cap on the amount of income that can be exempted exists. In Canada, the amount is limited to the value of tuition and other programme costs if the student follows part-time education. In Finland, a tax allowance is granted for student grant income, but this allowance is capped at EUR 2 600 (USD 3 616). In Israel, the cap is ILS 92 000 (USD 25 713). In Mexico a ceiling of MXN 148 344 (USD 11 941) exists on the amount of scholarship income that is exempt from taxation. In Slovenia, scholarship income is tax exempt up to EUR 8 977 (USD 12 485), the level of the minimum wage. In Spain, the cap is EUR 3 000 (USD 4 172), for undergraduate education, and EUR 15 000 (USD 20 833) for graduate education. In the remaining 20 countries, no caps exist. These countries include Australia, Austria, Belgium, Chile, the Czech Republic, Estonia, Greece, Hungary, Ireland, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Sweden, Switzerland and Turkey. In the United Kingdom, no caps exist except where the scholarship is paid by an employer to an employee.8
Other restrictions are placed on the tax exempt status of scholarship income besides caps on the amount that can be exempted. In general, scholarship income eligible for an exemption from taxation must not be related to a student’s current job (if the student has one). In Australia, the exemption does not apply to payments received by a student on condition that the student will become or continue to be an employee of the payer.
Other restrictions also exist. In the Czech Republic, the exemption applies only to the scholarships received from the state budget. In the Netherlands, scholarships are given as loans conditional on timely completion of university education. They are tax exempt if a course of study is completed on time. In the Slovak Republic, only public scholarships are exempt. In Turkey, scholarship income is exempt except where this income is earned by apprentices. In the United States, scholarship income that is not a payment for research or teaching is normally taxed as ordinary income, with two exceptions for degree candidates, including where the income is used to support studies abroad, and where it is spent on documented educational expenses such as tuition fees and books and materials.
2.4. Tax treatment of student debt
The most common provision in the tax systems with respect to student debt is the tax deductibility of interest payments on student debt. This is similar to the tax deductibility of business interest income, and is particularly important where debt-financed education is widespread. Interest deductibility on student loans is available in five OECD countries: Belgium, Denmark, Finland, Norway, and the United States.
In the United States there is a cap on this interest deductibility of USD 2 500 per year. As with the tax credits to offset direct costs of education, there are also phase-out provisions; the interest deduction are not available when a taxpayer’s annual income passes over a certain threshold. This is discussed in more detail in Annex D.
Two countries offer relief for student debt that does not come in the form of interest deductibility. In Canada, interest paid on student loans approved under the Canada Student Loans Program and similar provincial or territorial programs is eligible for a 15% non-refundable tax credit. Australia has a system of income contingent loans. Students can borrow to finance the cost of their education. Students below a specific threshold (USD 51 309 in 2011) do not have to repay the balance of their loan, or pay any interest, though their loan is indexed by CPI each year. Students above this threshold begin to repay.
2.5. Tax treatment of student income
Finally, some countries allow students to reduce their foregone earnings during educational periods by reducing the tax burden on student income. Three countries provide these STEs. In Belgium, students who work less than 23 days per year are subject to reduced SSC rates. In Hungary, employers SSC rates are reduced when a worker is below 25 years of age. In Poland, income from contracts of mandate – commonly used by students – are exempt from social contributions where the student’s age is less than 26.
References
OECD (2011), Taxation and Employment, OECD Tax Policy Study, No. 21, OECD Publishing, Paris, https://doi.org/10.1787/9789264120808-en.
OECD (2016), Taxing Wages 2016, OECD Publishing, Paris, https://doi.org/10.1787/tax_wages-2016-en.
Notes
← 1. 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.
← 2. The provisions by which the tax system offsets the costs of skills investments are also discussed elsewhere in this study. They are briefly discussed as a component of the overall costs of a skills investment in Chapter 3. Chapter 5 discusses STEs from efficiency and equity perspectives. In Annex A, these policies are summarised as the parameter χ. In Annex B, the tables of country results, these effects are summarised as the “Value of Education Tax Credits % of Direct Costs”.
← 3. Canada predominantly provides tax assistance for expenses related to post-secondary education and skills training through tax credits. Where a deduction is available, it is generally with respect to financial assistance provided to the unemployed for the purpose of skills training. As discussed in the Annex, this deduction is not modelled for Canada.
← 4. In 2013 onwards, this deduction was abolished from the PIT system.
← 5. In the Czech Republic, this threshold is 28 in the case of PhD students.
← 6. Certain other countries, such as the Slovak Republic, have tax credits that reduce parent’s tax liability for their children’s education, but these are not modelled in this study. Further discussion of these provisions can be found in Torres (2012).
← 7. This threshold has been increased steadily: in 2016 it was available for EUR 3 000 (USD 4 173) for full-time students and EUR 1 500 for part-time students (USD 2 086.5).
← 8. Where a scholarship is paid by an employer to an employee, and certain conditions are met, a cap of GBP 15 480 applies in the United Kingdom.