UG economist reflects on VAT on private education

Mar 01, 2017 Letters

Dear Editor,
Minister Jordan, in his letter to the Editor rebutting the Stabroek News’ Editorial of February 17, 2017, opened up the possibility for the legal incidence of the 14% VAT on private education to be assumed by either the private provider or by ‘the consumer.’ His advice that private schools could ‘absorb’ the tax reminded me immediately of the flawed arguments in the Rudisa Beverages & Juices NV, Caribbean International Distributors, Inc., vs. The State of Guyana case. As I pointed out in my occasional Blog “Economics and Development: An Insider’s View” at http://guyana-economics.blogspot.com/) Guyana’s mistake was that it did not invoke the distinction, elementary in public finance, between the legal and economic incidence of a tax.
While the legal incidence of a tax is about ‘where the revenue is collected’ or who is legally liable for the tax, the economic incidence of the tax refers to ‘who really pays the tax.’ In the case at hand, this would depend inter alia on people’s preferences for private versus public education; the relative affordability of private and public education to various categories of users; the availability of substitutes; the cost of inputs such as teachers; and the relative (financial and other) capacities of the public and private education systems on the other; and so on. For example, if public education were a poor substitute for private education; if parents of children now attending private schools had a strong preference for privately provided education; if the public education system were too stretched to accommodate more students, then more of the economic incidence or burden of the tax would fall on those who pay to attend private schools – even if the latter were to ‘absorb’ the tax. The legal and economic incidence of the tax would diverge substantially.
With full absorption by the private schools, parents and the wider society would still end up bearing (part of) the burden of the new 14% tax. Will such full absorption, even if the tax is an allowable expense as is being suggested by the Minister, private schools would be less able to re-invest in improving the quality of the service they offer. The very assertion that parents have a choice also implies that the tax will distort that choice, creating a so-called deadweight loss or excess burden because parents would have to accept the lower quality and range of education services in the private sector or experience the angst of having to rely on a public system out of which they had opted as a matter of preference.(Note that this feeling of angst might have nothing to do with the relative quality of education; it is just about preferences and psychological make-up).
It bears pointing out as well that the very parents and private providers who have to bear the burden of this new tax have themselves been paying for public education, either by paying taxes, or by having to compensate for the challenges and deficiencies of the latter, or both. Additionally, many parents use both the private and public system, contributing in many ways to both. But the 14% tax is a tax on private initiative in education. Is it being suggested, in the spirit of the nationalisation of schools in the 1980s, that there is a policy-level disenchantment with privately provided education? Wouldn’t it then be better to extend the inspectorate division of the Ministry of Education to cover (some) private schools, in return for the increased burden on the parents?
Thomas B. Singh
Senior Lecturer
Dept. of Economics
University of Guyana

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