Creating a virtuous circle between better education and a more sustainable tax system
By Michelle Harding
Head of the Tax Data and Statistical Analysis Unit, OECD Centre for Tax Policy and Administration
And Michael Ward
Senior Policy Analyst, OECD PISA for Development programme
Quality education for all, one of the Sustainable Development Goals (SDGs) agreed by the United Nations in 2015, is central to achieving the 2030 Agenda for Sustainable Development, especially in these times of global health and economic crisis when societies worldwide are seeking to navigate the social and economic impacts of the coronavirus (COVID-19) pandemic.
It improves health outcomes (SDG 3), equips people with the competences to secure decent jobs (SDG 8), the knowledge and skills to take action to combat climate change (SDG 13), and the values to build more inclusive and peaceful societies (SDG 16). It also has the potential to reduce inequalities, which is particularly important given that inclusion and equity stand at the heart of all policies (SDG 16) and the absence of which has been amplified by the current COVID-19 pandemic.
Improved education outcomes contribute directly to higher incomes and to improvements in living standards. They are therefore one factor that contributes to higher tax revenues in the medium-long term, alongside other factors such as employment opportunities. The impact of education on tax revenues occurs via two main avenues:
- First, through the higher incomes that result from improved education outcomes. Higher per-capita incomes expand the taxable base within an economy, increasing the overall level of taxes that can be raised from that economy, particularly from direct taxes on income. Analyses of the link between tax revenues and per capita incomes support this, as they demonstrate that countries with high levels of per capita income also typically have higher levels of tax revenues as a share of GDP.
- Second, improving the quality of education can also help to increase taxes thanks to higher levels of tax morale. Tax morale, generally defined as the intrinsic motivation to pay taxes, is a vital aspect of the tax system, as most tax systems rely on the voluntary compliance of taxpayers for the bulk of their revenues. Recent OECD work uses public opinion surveys to better understand the drivers of tax morale, identifying two channels by which better education can increase tax morale. The first is a direct effect, as individuals that are more educated tend to justify less cheating on taxes. The second effect is indirect, as the provision of more and better education from public authorities increases trust and satisfaction with governments, which in turn improves tax morale.
Taken together, these effects also offer an opportunity for governments to reform further their tax policy and administration to increase domestic revenues. This is particularly important for low- and middle-income countries where public resources are constrained, especially at the current time when so many countries are experiencing recessions brought on by the COVID-19 crisis.
As illustrated in the figure above, improved education outcomes contribute to per capita income growth that, in turn, increases the potential to raise tax revenues within an economy. With careful policy and administrative choices, this potential can be translated into increased tax revenues. Many studies find that there is a positive and significant relationship between per capita income growth and tax revenues. Increased domestic resources provide governments with more resources, part of which can be allocated to education in line with international benchmarks. Spent wisely and well, these resources could further improve education outcomes and complete a virtuous circle that helps achieve SDG 4 and other SDGs.
Education investment should be a priority at the centre of any economic and social strategy for recovery post-COVID-19.
This virtuous circle will be even more important as we address the COVID-19 pandemic, which has already changed education, with school closures and the increasing provision of online education. Ensuring that these changes do not negatively affect students will be a critical part of education policy in the future, and will require effective redeployment of resources to address the changing situation. As we exit the crisis, providing additional investment in education will be a critical part of social recovery. Investment in education increases information and knowledge about health, as well as economic opportunities for countries to get back to growth as quickly as possible and contributes to the creation of more cohesive societies in which every single individual has the chance to develop his or her talents. In this spirit, education investment should be a priority at the centre of any economic and social strategy for recovery post-COVID-19.
While the benefits of quality education for all are beyond doubt, the world is a long way from ensuring this goal. There have been considerable gains in access to education in recent years, but being in school does not equal learning for all: more than 617 million – or six in ten – children and adolescents worldwide, mostly in low-and-middle-income-countries, do not achieve even minimum levels of proficiency in reading and mathematics.
In these countries, there is a strong correlation between increased spending and improved education outcomes. Nonetheless, there is an estimated USD 39 billion annual funding deficit for achieving the SDG for education (SDG 4), and this shortfall mainly affects low-and-middle-income-countries. However, as our virtuous circle shows: achieving quality education, itself, can contribute to closing this funding gap.
Funds for education in low-and-middle-income-countries come mainly from two sources: domestic financing (governments as well as households) and international development co-operation. Domestic financing, of which tax revenues are the primary component, are by far the largest source of funding in these countries, dwarfing the resources provided through development co-operation (aid as a share of GDP in low-income countries has been falling over the last two decades, reaching 7.9% in 2014, rebounding to 9.1% by 2018). Work by the United Nations Inter-agency Task Force on Financing for Development has shown that aid is a tiny share of total education spending in low-and-middle-income-countries. Moreover, while aid to education reached an all-time high of USD 15.6 billion in 2018, less than half of this goes to basic and secondary education and to low-and lower-middle-income countries, which are most in need. Therefore, public domestic financing is the only source that has real potential to grow and to contribute to improved learning outcomes in low-and-middle-income-countries. A focus on strengthening tax revenues can allow governments to invest in their priorities, especially education.
As reported by the UNESCO Institute for Statistics (UIS), one in three of the 148 countries with available data – all of them low-and-middle-income-countries – does not meet either of the two financing benchmarks set by the SDG 4-Education 2030 Incheon Declaration and Framework for Action: public expenditure on education of 4-6% of GDP and at least 15-20% of public expenditure. These benchmarks imply that countries need to raise domestic resources to finance a minimum level of total expenditure equivalent to at least 20% of GDP. Most of these domestic resources will need to come from tax revenues.
Many low and middle-income-countries have a tax-to-GDP ratio of less than 15%. These countries, in particular, need to broaden their tax base as agreed at the Addis Ababa Conference in 2015 as a necessary step to accelerate progress on SDG 4.
Spent wisely and well, tax revenues can further improve education outcomes and create a virtuous circle that helps achieve SDG 4 and other SDGs.
How money is spent matters for learning outcomes and achieving SDG 4 almost as much as how much money there is to spend. The OECD Programme for International Student Assessment (PISA) shows how countries with similar resources for education sometimes achieve very different learning outcomes. Above a certain level (around USD 50 000 per student between the ages of 6 and 15) most students achieve at least the minimum level of proficiency in reading that is the benchmark for SDG 4: a score higher than 406 points on the PISA scale. A range of countries fall below this spending threshold, including some OECD countries, and are far from ensuring that all their children acquire at least basic skills. Therefore, to complete our virtuous circle, it is necessary for countries to generate data and evidence of educational outcomes through learning assessments and other education surveys on which to base effective policies and resource allocations to ensure better teaching and learning takes place in the schools.
If all countries were able to ensure that their children attain at least the minimum level of proficiency in basic skills, such as literacy and numeracy, the economic results would be significant – even for high-income OECD countries. In low-and-middle-income-countries, OECD analysis suggests the gains would be high: a present value of gains averaging 13 times the current GDP of these countries. Translated into a percentage of future GDP, this implies a GDP that is 28% higher, on average, every year for the next 80 years for countries that achieve universal basic skills. In countries where only around 75% of school-age children are enrolled in school, the gains from improving the current quality of schools would be three times as large as those from just expanding enrolment without improving the quality of the education provided.
For these countries, especially at a time of global health and economic crisis, the economic gains from achieving universal basic skills would more than cover the costs of quality universal education and the achievement of the SDG for education.
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