Wednesday, December 16, 2009

Pittsburgh Sets Vote on Adding Tax on Tuition

New York Times article "Pittsburgh Sets Vote on Adding Tax on Tuition" (December 15th, 2009) provides an inadequate analysis of the consequences of Pittsburgh's proposed tax on tuition:

On Wednesday, the City Council is expected to give preliminary approval to Mayor Luke Ravenstahl’s proposal for a 1 percent tuition tax on students attending college in Pittsburgh, which he says will raise $16.2 million in annual revenue that is needed to pay pensions for retired city employees. Final Council action will be on Monday.

When considering the tax, there are three aspects to consider: the marginal student's decision, the marginal dollar of the University, and the incidence of the tax.

The price elasticity of demand for education from Carnegie Mellon (and other colleges in Pittsburgh) is likely quite elastic, while price elasticity of demand for education is likely to be highly inelastic. Goods become more elastic as fraction of expenditure increases for normal goods like education. Therefore, we expect full time students, poorer students, and students with less lifetime income to be the marginal exiting individuals. We might expect Carnegie Mellon's english students to leave the program more quickly than its engineering students. We expect that "national" students are more elastic than "local" students and would leave more quickly. In the long run (presumably four years as the pre-tax stock of students fully depreciates) the composition of local colleges will change, presumably to include more wealthy and local students.

The price elasticity of supply for education from Carnegie Mellon (and other colleges in Pittsburgh) is likely to be relatively inelastic in the short run and relatively elastic in the long run, especially as the composition of students shifts.

The incidence of the tax, therefore, is likely to fall primarily on Universities at first, and, as it is able to shift capital and become a more local university populated by wealthier students.

Correction's conjecture about the direction of our four relevant variables is graphically displayed below (click to enlarge).

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