The Economics of Higher Education: An Analysis of Taxes Versus Fees.

• Author: Frey, Donald E.

The potential purchaser of this volume, who may believe that the "economics of higher education" covers a comprehensive set of topics, ought to take the subtitle very seriously. The volume is limited exclusively to modelling the choice between taxes and fees in paying for higher education. Nor does the book examine all aspects of taxes and fees as alternative revenue sources; it deals solely with the determination of the division of costs between the public (taxes) and the student (fees), and with closely related outcomes such as the proportion of the population enrolling as a result of the division chosen. Indeed, the book is essentially an exercise in public-economics modelling, with higher education serving as a convenient example.

Having sounded this note of caution, however, a review ought to judge the volume on the basis of its own goals. Specifically, the author sets out a rigorous median-voter model to explain the rate at which a government will choose to subsidize higher education. The central question is why the majority of the population that does not invest in higher education would support any subsidy for those who do. This is solved by assuming that higher education externalities in production accrue to all. Thus, non-investors in higher education will be willing to subsidize education to the point that on the margin the externality-induced gain in their own incomes will equal the increased tax bite. That a majority does not invest guarantees that the median voter is a non-investor, a group whose pattern of preferences allows for a majority-vote equilibrium.

The model, of course, contains other key elements. Among them is that the ability to convert higher education to higher income is distributed unequally through the population. Thus, the privately borne share of costs of higher education, in conjunction with one's location on the frequency distribution, determines whether one will choose to go to university. Another key element is that any subsidy is covered fully by a flat-rate income tax with or without personal exemption. A third major assumption is that voters seek to maximize income over two periods, one during which education occurs (for those who invest) and another during which increased incomes are earned (for both investors and non-investors). Because the most general version of the model produces few unambiguous results, the author also must choose specific functions to impose enough structure to obtain clear...