Pascal Saint-Amans, Director, OECD Centre for Tax Policy and Administration and Andreas Schleicher, Director, OECD Directorate of Education and Skills. Today’s post is also being published on the OECD Education and Skills Today blog
Investing in skills is crucial for fostering inclusive economic growth and creating strong societies. In an increasingly connected world, skills are particularly important for citizens to get the most out of new forms of capital, such as big data and robotics. More and more, policy makers are recognising that rapid change in technologies and work practices mean that people will have to continually upgrade their skills throughout their lives.
This new reality raises many questions for governments, firms and individuals, including: who is to pay for all these skills investments? In many OECD countries, student debt is rising, and in many others, public debts are persistently high. How can policy makers decide on the right financing mix for students and governments?
This is where taxes have an important role to play. In a nutshell, delivering educational services will depend on taxes, and good tax income will depend on good educational services. A new OECD Tax Policy Study, Taxation and Skills, released today, highlights the role of the tax system in ensuring that the right financial incentives are provided for investments in skills. This means making sure that governments, individuals and firms all share the costs and the benefits of better skills.
In addition to raising the revenue to finance government spending on skills, every OECD country uses the tax system to provide support for skills investments. Provisions such as tax credits, tax deductions and reduced tax rates on student income help governments support skills investments both early on and later in life. Sharing the costs in this way can make investing in skills more affordable, although these tax provisions need to be well-designed.
Besides helping share costs, the tax system divides the returns to skills between governments and students. When investments in skills yield returns, it means that individuals get higher wages, and governments get more tax revenue.
The results published today show that these returns to skills are substantial. In almost every country examined, both students and governments earn a sound return on skills investments. In some countries, however, policies could be improved to better share the returns to skills between individuals, firms and governments. Rising earnings premiums paid to skilled workers across OECD countries means that the returns to skills may grow into the future. This means better wages for individuals, more profits for firms and more sustainable public finances for governments, a win all around.
In spite of these high returns, many workers do not have the right financial incentives to make the necessary investments in their skills to succeed throughout their lives. Unlike physical assets, like property and equipment, human capital cannot be used as collateral for borrowing to finance investments. This impedes access to credit for individuals’ skills investments. Firms may also underinvest in skills because they worry that newly skilled workers may be poached by competitors. Often, individuals and firms do not have access to the right information to make informed choices about how they can invest in their skills.
Designing tax and spending policies to encourage skills investments is crucial. Useful policy approaches can include refundable tax credits for lifelong learning, income-contingent loans for tertiary education, or extra tax deductions for firms that invest in their workers’ skills.
OECD governments are increasingly looking at how policies can be designed to raise productivity, innovation and growth. We hear a lot about how tax systems can encourage investments in physical capital and innovative technologies through R&D tax credits and other measures. The report released today shows the importance of tax policies that are equally geared towards incentivising investments in human capital.