His lips are moving

For good reasons, nobody taxes education; Labour's 20pc hike enters uncharted waters and either Keir Starmer doesn't know it, or he's fibbing

The Labour Party says it will remove “unfair tax breaks” on independent schools, raising £1.6bn in VAT and £0.1bn in business rates, which it will spend on improving state schools. They seem to be coy about sharing their fag-packet business case (I’ve asked, no answer); the only way to reach those numbers is by assuming (1) the schools pass virtually all the tax onto parents’ bills and (2) virtually no families present-or-future migrate towards the state sector despite a resulting fee hike. If many families do migrate, as some reports indicate they will, it rapidly becomes expensive for the taxman and blows a proverbial ill wind towards state schools and the public finances.

Keir Starmer has spoken on Radio 4 of “stress-tests” proving his business case. Interviewers should be all over this: What test? What method? Who did it? Who audited it? What are the risks if you’re wrong? And most importantly “why won’t you publish the whole lot?” If only our journalists, and the Conservative Party, were more inquisitive.

Most recently he told LBC radio that

“We have obviously looked at reports on this and all the reports show that it’s unlikely that parents will take their children out of schools…I have looked at this question of will it lead to children leaving private schools and going to state schools and the answer to that, on all the evidence I’ve seen, is no that it won’t.”

There’s not much evidence. Neither we, nor any country in the world, has ever slapped a 20pc tax on school for the excellent reasons that (1) education creates significant social benefit and (2) private education saves the taxpayer a heap of cash. Such “evidence” as exists is pretty speculative …and it all indicates that some parents will become unwilling or unable to keep paying independent school fees.

I’m not aware of a single report that justifies Sir Keir’s LBC remarks.

Baines Cutler

I’d be surprised if nobody has shown him this Baines Cutler report ; we know that Shadow Education Secretary Bridget Phillipson is aware of it. Either Sir Keir needs to read more widely, or he’s being economical with the truth. In the executive summary you can read the stern warning:

“Changing this to make school fees liable to VAT would have a very considerable impact on the independent schools’ sector, ranging (on a school-by-school basis) from tough, to catastrophic”

The warnings continue of school closures, strains on the taxpayer-funded sector, operational challenges in the latter, and the unpredictability of distribution of the demand switch (it will fall unevenly and nobody knows where). The headline “drop-off” rate they predict is 25%.

EDSK

This EDSK report explores the fiscal consequence of pupil migration using both a 5% and 25% scenario. Quite reasonably, they do not commit to an unknowable migration forecast, but they do conclude (referring to Baines Cutler) at the 25% level the VAT measure raises zero net revenue (allowing for less VAT revenue than forecast and for extra state school expense). That’s extremely generous to Labour since it assumes no school closures or cost-cutting (which hit payroll taxes and supplier VAT) and assumes parents continue working and paying tax themselves, even as they start receiving their education for free at taxpayers’ expense.

The payroll taxes alone on earning school fees amount to around £10bn (assuming 40pc taxpayers) so this is a major omission from the debate. 25% migration equates to £2.5bn at risk, plus the lost value-add to parents’ customers, employers and employees, most of which is taxable in some form. Taking that into account, my fag-packet suggests the policy raises zero net revenue somewhere between the 5% and 15% level - I'm making big guesses whether migrating families continue working hard for luxuries, or instead choose more leisure, but so is everyone else.

Experts?

A valid criticism is that Baines Cutler was funded by the Independent Schools Council and rested heavily on a “stated preferences” survey of motivated parents and independent schools. We’d much rather rely on “observed behaviour”, but we’re talking entirely uncharted waters. So do we, or don’t we, rely on experts? Who is more expert on independent schools’ customer dynamics than the schools and their customers?

[Brief digression, relevance to follow]

Perhaps we should ask Francis Green of the Private Education Policy Forum, author of Engines of Privilege, who wants private schools to be abolished. Without irony, Professor Green complains about independent schools’ institutional weight while calling to expand the state from his state-funded job and state-funded research budget. Professor Green, natch, took advantage of taxpayer funding to send his own children to grammar school, so no privilege there.

If we’re wary of bias from the ISC, we should treat Professor Green’s input with similar circumspection.

Before we look at Luke Sibieta’s Nuffield Foundation-funded IFS report on the expected effect of VAT, let’s note that Luke Sibieta has previous with Professor Green. They worked together on this previous Nuffield-funded Institute for Fiscal Studies report, to tell us plenty about inequality and rather less about quality in education.

Luke Sibieta studied at UCL. Professor Green’s at UCL. I’m sure it’s all perfectly objective.

The IFS report

Back to Keir Starmer and the likelihood of pupil withdrawals. The IFS “best judgment” was that 3-7% of pupils could be expected to migrate to taxpayer-funded schools and that the net tax revenue raised would therefore be more like £1.3-1.5bn than the £1.6bn claimed by Labour so again, either Sir Keir needs to read it or he’s being economical with the truth. And that’s his most supportive evidence.

I’ve explored the IFS report before on Daily Sceptic and here on my blog: it misrepresents some very thin and very old data ; it extrapolates into the future ignoring macroeconomic changes and disposable income; it arbitrarily holds expenditure constant thus taking for granted tax receipts on families’ labour supply; and it assumes no schools will close or cut costs even facing 3-7pc pupil withdrawals.

Most importantly, as I (and EDSK, and the originators of the IFS’ source material on price elasticity) have said, this stuff is tremendously hard to predict. The IFS buries uncertainty deep in the report and omits it entirely from its press releases and Paul Johnson's tail-wagging 90-second video.

Nobody knows how today’s or tomorrow’s parents will react to a large and unprecedented price hike, amid a cost-of-living and housing affordability crisis, while being the “broad shoulders” that already carry the increasing tax burden by cross-party consensus. Saying “here’s the one true scenario” for families’ reaction to an unprecedented hike doesn’t cut it.

We could call it a “reverse Ferguson” by the IFS. Publish just one best-case scenario while burying the downside risks deep in the report. A responsible balance would be e.g., “here’s a worse/worst-case fiscal outcome if there’s more pupil migration than we expect”. Apparently the “plausible worst case” is worth fixating on when it’s climate and Covid science, but we can don our rose-tinted spectacles when the state wants to rinse hard-working parents doing their best for children.

Can schools absorb the VAT?

Sir Keir goes on to say that schools can themselves absorb the VAT.

This is the VAT paid by schools, they don’t have to pass this onto the parents, they can do it in other ways

I’ve covered this claim here and it’s not quite the pretty get-out he implies. I figured Labour end up with about half the VAT expected, with significant risks to the downside. Unlike Labour, I shared my fag-packet.

Most obviously, if the VAT sits within, not on top of, the parental budget, it’s going to be smaller. Also obviously, the school’s going to have to make some savings on payroll and other expenditure, hitting income tax and NICs. Less obviously, there are downstream losses on taxation from those employees and suppliers' reduced spending in the broader economy; at worst, they’re on benefits. There’s a risk families withdraw to the state sector anyway due to reduced quality (having lost, say, 15% of school workforce) - independent schools have to be much better than free taxpayer-funded schools. There’s also a risk schools become unable to cover or adjust their fixed costs and are therefore forced to close. There’s a near-certainty schools reduce their bursary provision and partnership activities (they might be under heavy pressure from parents to do so) both of which negatively affect the state sector.

Conclusions

We’re all poorly-placed to make firm predictions about an unprecedented tax hike. There’s not much evidence out there….and all the reports indicate some migration around 5 to 25pc, which are the scenarios explored by EDSK. There’s not a single report that supports Keir Starmer’s position, and the more optimistic IFS coverage needs treating with much more caution.

Even if schools carry the VAT by cutting costs elsewhere, it’s still a drastic economic contraction resulting in far lower tax receipts than Labour claim. Voters, journalists and Conservatives must hold Labour accountable when they assert what ain’t so.