The Knowledge Tax

Government subsidies to higher education have recently become a hot-button political issue. But what if the federal government does not actually subsidize higher education, but taxes it? Labor economists struggle to explain why the rates of return to higher education have remained much higher than the rates of return to other investments. This Article proposes a novel explanation: distortionary taxation.

Economic theory suggests that when investments that are substitutes for one another are taxed inconsistently, investors shun the investment option that is taxed more heavily. Unfavorable tax treatment of higher education could therefore create an undersupply of educated labor. This distortion may reduce economic growth and social welfare.