Supply, Demand, and the Taxation of Knowledge

Abstract

In The Knowledge Tax, 82 U. Chi. L. Rev. 1981 (2015), Professor Michael Simkovic tackles the question of why rates of return on higher education are higher than rates of return on other types of investments, such as equity and real estate. Dissatisfied with existing economic explanations, the additional account that he offers is distortionary taxation: specifically, we tax higher education less favorably than other investments, thereby driving down demand for higher education relative to alternatives, creating an undersupply of labor, and buttressing education’s rate of return. In this invited response essay, I explore some of the issues raised but left open by The Knowledge Tax. I largely accept the article’s factual premise — that pretax rates of return on higher education are higher than returns on equity — but question some aspects of the argument and develop other aspects. I make three basic points: First, it is not clear that higher education is, in fact, taxed less favorably than traditional investments. Second, the analysis rests on the assumption that higher education and capital investment are substitutes, but it is not clear the extent to which this is the case. Finally, to the extent that tax considerations play a role in the decisions of potential students, we need a more robust account of which tax incentives matter.