A little less polemical I hope, I’ve been thinking about sales taxes on luxury goods. Daniel Hamermesh has a post about this topic at the Freakonomics blog. His discussion is of college textbooks and a proposal to cut the sales tax on them (currently at 9%). Why cut taxes on a good that the wealthy disproportionately buy (“because college education is disproportionately undertaken by the offspring of higher-income families”)? This would be tantamount to “more tax breaks for the rich,” Hamermesh argues. (You might want to check out my post on whether college education is actually inferior.)

It is, of course, not true that only the wealthy pay for textbooks (or other luxury goods, for that matter). Reducing the cost of a good, including luxury goods, means people at lower incomes that were previously priced out of the market are now able to afford that good. Removing the sales tax on Rolls-Royces probably does nothing to help the poor. Textbooks, however, are goods that the poor are sometimes likely to buy, thanks to financial aid and other subsidies that help them afford university (you won’t find the poor getting aid to buy high-end luxury automobiles). Increasing the availability of higher education, I think, is a definite improvement for the poor. I think the argument that lowering the sales tax on textbooks is a bad idea is rather dubious.

Also, here is a good article by Aaron Edlin and Ian Ayres published on the Freakonomics blog regarding the recent tuition hikes in California (an astounding 32% by next fall), which students there have been protesting. Edlin and Ayres argue the tuition hike isn’t so bad—so long as there is a similar increase in financial aid going to the poor to help them afford it. It makes things fairer, they say. The rich, who were disproportionately benefited by the low tuition, now “pay a tuition much more commensurate with what he or she can afford.” The poor, on the other hand, are shielded from the tuition hike by the (supposed) increase in financial aid they’re receiving (the rich, of course, are not usually eligible for financial aid). (Whether California will be increasing financial aid is an entirely different story.)

This makes one wonder: are students who are protesting the tuition hikes in California only the rich students who are disproportionately benefited by low tuition? I suspect not. One reason might be the lack of increase in financial aid, another might be the increase in debt associated with higher use of financial aid (loans), and yet another might be the perception of really high tuition rates (e.g. at Yale and other private universities) that dissuade the poor to begin with (there seems to be information asymmetry). I suspect it’s probably not true that raising state tuition in this way is a “good thing.”

Advertisements