Hundred Pockets

Debate still rages over at Felix Salmon’s blog about whether or not private schools deserve charitable status.

Various arguments are advanced in favour of tax-exempting schools, among them:

1. All taxes are bad, because the state wastes our money. So we should not drag new institutions into the tax system.
2. This is class warfare. If you want to tax rich people more, just say that you want to tax rich people more. Don’t pick on schools.
3. Private school parents already pay taxes which fund public schools, so why tax private schools – isn’t that taxing them twice?

I’ve been making a nuisance of myself by wading in, naturally. But one comment really interested me. Tiny Tim writes:

Pockets – I think [the economic] theory is wrong…

There is only a finite amount of cash available to subsidise the poorer applicants. Someone has to pay fees. And clearly there is an equilibrium point at which the fee payers subsidise as many less well-off as possible. That is the point the school aims for, given that they also need to remain competitively priced relative to other “very top” schools.

Why do I find this interesting? Because after stating that he thinks the economic theory of private school behaviour is wrong, Tiny Tim then goes on to describe the economic model really, really well. The only difference between Tim’s model and, say, Epple and Romano’s, is that in Tim’s model private schools are ‘optimising’ their mix of pupils in order to take in as many poor pupils as possible. So the school is a latter-day Noah’s Ark, saving all the poor children it can from oblivion.

In Epple and Romano’s model, schools also take in as many (smart) poor kids as possible – but they do so because this allows them to charge higher fees to other (richer) kids. They’re more like a present day dance club (Ministry Of Sound), paying super-hot models to come to their club nights. Why? Not because they care desperately about super-hot models – but because their presence allows the Ministry to charge more money to schlubs who want to dance Where The Pretty People Are.

I will now shamelessly quote from my own comment on Felix’s blog, below the fold:

If you wanted to convince me of a private school which is acting charitably, not profit-maximising, then you’d have to describe a system where pupils take the entrance exam – and then the *low*-scoring poor children are offered bursaries. That’s a school which is gambling on its ability to raise standards among disadvantaged kids. But no private school does that, and with excellent reason: the cost could be lower league table results for the school – and as Tiny Tim says, private schools are in competition. GCSE and A-level league table results are critical for being able to set a high price.

I should emphasise that I’m not at all anti-private-school. UK private schools are among the best schools on the planet… Saying that they maximise profits isn’t saying that they’re manipulative or evil or bad (I wonder if this is what’s annoying people?). They’re staffed with many lovely, caring individuals (like lots of other profit-maximising companies), and through scholarships/bursaries they offer a great trade to smart poor kids – we’ll give you an amazing education, if you allow us to charge other kids to sit next to you.

There’s nothing wrong with that at all! Economists love trade. It just isn’t charity, that’s all. And Felix’s post is about whether private schools deserve charitable status. All I’m saying is: giving scholarships to poor kids is not charity for private schools. It’s a key part of their business model. So it probably does not warrant tax-exempt status.

This entry was posted on Wednesday, August 26th, 2009 at 10:58 pm and is filed under economics, education. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.