There is no such thing as “free” when it comes to government spending. Every dollar spent is paid for by the taxpayers, resulting in heavy public scrutiny of any government spending. Because of that, it is easier to spout on about programs that drain resources without a viable return, but harder to speak on an expansion of the role of government without drawing a large amount of backlash and criticism. So how can taxpayers determine whether or not a policy initiative is wasteful or useful? From an economic standpoint, government spending is a good idea if it prevents more expensive costs in the future or creates expanded tax revenue and economic growth. In the latter, the government program is an investment to create more revenue than the cost. Therefore, to examine whether or not it is an economically sound idea for the government to pay for higher education tuition, the relationship between the costs of different educational levels, as well as the additional tax revenue created by those levels of education, must be examined.
Discovering the additional tax revenue generated by every activity from an educated workforce is a complex task that can be skewed in different directions depending on the savings rate, cost of living increases, debt financing, among other factors. This study will focus on federal income tax revenue generated by the income by an individual at each level of education.The individual will be represented by a person with the median income in each category. In this sense, if the income tax generated at the individual level outweighs the cost of the education attained, then government sponsored higher education would unquestionably be an economically sound investment.
To examine the effects on income in an empirical way, the additional education will be categorized as High-School only, associate’s degrees, or bachelor’s degrees. By examining each level of education, assessing the costs and benefits of each one, and finding a true return on investment, it can be determined whether or not state funded tuition at that level would be an investment that would return a tax-positive benefit. The formula will be as follows:
y=Income (Median 2009 Income by Education Level)
SD=2009 IRS Standard Deduction ($5,700)
PE=2009 IRS Personal Exemption ($3,650)
MT=2009 IRS Previous Marginal Tax Bracket2
Tr=2009 IRS Tax Rate2
The controls will be that the person has a 40 year career, subtracting the typical time spent in school, pays taxes as a single filer, all wages are adjusted to 2009 dollars to control for inflation, and all income taxes are filed using standard deduction and personal exemption.
At a high school education level, the additional cost to society is null. Since the state already provides public education through high school, it is a baseline from which to gauge all other levels of education. The median earnings of a high-school graduate are $32,600/year or $1,304,000 over a 40 year career in 2009 dollars.1
This formula gives us yearly federal income tax revenue of $3,070 in 2009 dollars. Plugging the yearly wage into the formula and then multiplying the result over a 40 year career will give the inflation adjusted real tax revenue generated by that worker over their career. That 40 year federal income tax revenue is equal to $122,800. This means that with a $0 additional cost to the state, a high school graduate with a median salary will return $122,800 in income tax revenue to the federal government.
At an associate’s degree level, the average cost for tuition and fees for a community college in 2009 dollars is $2,285 per year,3 or $4,570 total cost over two years. To make this a worthwhile investment for the government, they would have to see more than a $4,570 increase in federal income tax revenue over a high-school graduate in order to justify the expense. The median earnings of a person whose highest education level is that of an associate’s degree are $43,200/year.1
This formula gives us yearly federal income tax revenue of $4,660 in 2009 dollars. Since the first two years of their 40 year career are spent in school, this income will be extrapolated over 38 years with $4,570 being subtracted from their total tax contributions. That 38 year federal income tax revenue is equal to $177,080. This means that with a $4,570 additional cost to the state, a graduate with an associate’s degree with a median salary will return $172,510 in income tax revenue to the federal government.
At a bachelor’s degree level, the average cost for tuition, fees, and books for a public, in-state university in 2009 dollars is $6,695 per year,3 or $26,780 over four years. To make this a worthwhile investment for the government, they would have to see more than a $26,780 increase in federal income tax revenue over a high-school graduate in order to justify the expense. The median earnings of a person whose highest education level is that of a bachelor’s degree will be $56,700/year.1
This formula gives us yearly federal income tax revenue of $8,025 in 2009 dollars. Since the first four years of their 40 year career are spent in school, this income will be extrapolated over 36 years with $26,780 being subtracted from their total tax contributions. That 36 year federal income tax revenue is equal to $288,900. This means that with a $26,780 additional cost to the state, a graduate with a bachelor’s degree with a median salary will return $262,120 in income tax revenue to the federal government.
Looking at the effect education has on income and therefore tax revenue, the data strongly supports the case for state funded education as an investment worth making. In a capitalist global society, the increase in competitiveness created by a more skilled American workforce would pay dividends beyond just an increase in income tax revenue. Since this more educated and richer workforce would then turn around and spend more of that money on goods and services, people in every industry would see a bump in revenue.
An argument against this idea would be that it unfairly discriminates against people who do not want a university education and instead would like to go to vocational or trade school. It is difficult to assess the monetary value of a vocational education since there is not enough data available to distinguish between conventional levels of education and vocational education, especially if the person in question has gone to both college and vocational school. With these blurred lines in mind, it is clear that the data would support the idea that a skilled job is more valuable than an unskilled job. Because of this, it would be prudent for the federal government to include vocational school as an available option for federally funded education.
Another argument would be that income level is not linear and rather can be all over the spectrum no matter the level of education. It is true that there is much overlap when looking at a plot of incomes of people with the different levels of education. A person with less education is not doomed to a less successful life. Education provides a means to gain knowledge and skills in a controlled environment, and then displays a level of proof to an employer that the person who has gained that degree is at some level competent in their chosen major or field.
Because income rises and falls throughout one’s career, the lines shown in the graph do not show a perfect representation of income tax revenue on a per-year basis. At the end of the 40 years, however, the end result would be the same. The low salaries of beginning employees, the high salaries of people in the middle of their career, and the waning salaries of older people slowing down and coming closer to retirement all balance out towards the median. Because of this, the data presented is a valid gauge of income tax revenue in a time series problem presented over 40 years.
An educated and highly skilled workforce is key to having a competitive global economic presence. To keep the people of the United States on a trajectory towards continued economic growth and maintaining a strong middle class, the federal government should step in and invest in the education of its workforce. By doing this, they will see a return on their investment in the form of additional income tax revenue and continued long-term economic growth. Conservatives and liberals alike should be excited about the prospect of improving the lives of their constituents in the form of easier access to higher paying jobs whilst also increasing the tax revenue of the federal government. Easier said than done.
1. Carnevale, A. P., Rose, S. J., & Cheah, B. (2011). The College Payoff – Education, Occupations, Lifetime Earnings. THE GEORGETOWN UNIVERSITY CENTER ON EDUCATION AND THE WORKFORCE, 1-36. Retrieved April 21, 2017, from https://www2.ed.gov/policy/highered/reg/hearulemaking/2011/collegepayoff.pdf
2. United States of America, Department of the Treasury, Internal Revenue Service. (n.d.). 1040 Instructions 2009. Retrieved April 21, 2017, from https://www.irs.gov/pub/irs-prior/i1040–2009.pdf
3. United States of America, Department of Education, National Center for Educational Statistics. (n.d.). Average undergraduate tuition and fees and room and board rates charged for full-time students in degree-granting institutions, by type and control of institution and state or jurisdiction: 2008-09 and 2009-10. Retrieved April 21, 2017, from https://nces.ed.gov/programs/digest/d10/tables/dt10_346.asp