International students still will come here, levy or not

The evidence suggests an international student levy will not greatly affect student demand, say ANU economists Bruce Chapman, Rohan Pitchford and Rabee Tourky.

The debate continues with respect to the desirability or not of a levy on Australian universities for the extraordinary revenue streams generated by international students. This conversation is of great importance to the sector because the number of students (typically across the past few years of about 350,000) and the money raised of about $10bn a year are both astonishing.

We can’t imagine the dire consequences for the sector – particularly for research activities – if misguided government policy led to significant disruption of this market. Thus the importance of getting the economic arguments right.

There are two critical aspects of this debate; one is theoretical and the other is empirical. What does economics have to say about these? There are several conceptual arguments that help us here. But, to set the scene, we note there are significant profits associated with international students revenue – returns to the universities above the costs of providing the teaching services to international students.

We all know there are major subsidies to non-teaching activities from this, and we call these outcomes “rents” to the system.

A major conceptual point is that economists have long argued that a tax on pure rent is the ideal tax: such a tax does not generally alter economic decisions, just like the effects of a profits tax.

But if there is a levy this might lead to higher fees and this is very important.

The further point in concept is that Australia’s most elite universities have had the benefit over the other universities of a very large number of years of major taxpayer subsidies that have endowed the former group with considerable research reputational power, and all institutions enjoy the largesse associated with them generally having free access to some of the best real estate in their cities, essentially at taxpayer implicit expense.

Both points imply a strong case for a levy since this will provide returns to taxpayer investments. On the empirical side, what real­ly matters concerns what economists term the price elasticity of demand, jargon that can cause confusion for the general public, but the basic idea is simple.

The elasticity is the responsiveness of demand to a small rise in prices, such as would likely come from a levy on international student fees. Two very extreme cases are illustrative of the importance of this concept.

Suppose demand does not respond at all to a price increase from the levy – for example, a 5 or 10 per cent tax leads to no change in overseas student demand. A levy in this situation is equivalent to a pure rent tax because nothing is altered with its introduction beyond extra revenue accruing to the government.

On the other hand, if demand falls to zero with such a tax then the market for international students is obliterated, which would be a profound problem for the sector. Therefore, we need to have a pretty good idea what the price elasticity actually is.

Before examining the evidence on this issue, two points need to be made. One is that Australia is a highly desirable place to study, being safe, with a good climate, and offering international students a route to permanent residency. These factors imply, but do not prove, that student responsiveness to a small change in prices would be small.

Critically what matters is the effect of a price increase for the whole system, not for an individual university. This is why the broad benefits of studying in Australia are so important; they accrue to all our universities.

Having evidence on the sector-wide elasticities is thus important but hard to find. We have two points to offer. One is that we have looked at the relationship between changes in the exchange rate (which directly affect the price paid to the universities in Australian dollars) and one-year and two-year lags in new international student enrolments, finding that it is small. But this can be suggestive only without peer review.

Much more important, we have uncovered a paper reporting the results for Britain on the issue we are concerned about, published by London Economics in 2021. The research reveals compelling evidence that for that country the elasticities are very small, and similar to the ones we uncovered with respect to Australia with our preliminary exchange rate analysis.

Consequently, we have some confidence that a small levy, even if it results in some price increases, will lead to higher total revenues than before. But of course some of this gain will accrue to the government, which then has to decide how to use it.

Some might suggest that part of the revenue could be used to direc­tly supplement university non-teaching activities; Keith Hough­ton, recently writing in The Australian, has illustrated that such an approach could benefit just about all Australian universi­ties.

Our bottom line is that a levy will be equitable and need not result in penalties on the high-reputation institutions that benefit considerably from taxpayer subsidies. Australian universities have reaped gains that are not due only to their efforts, they come also from reputational excellence that can be traced importantly to significant support from the Australian people.

Emeritus Professor Bruce Chapman, Professor Rohan Pitchford and Professor Rabee Tourky are at the Australian National University College of Business and Economics.