Access, Affordability, and the Social Contract

Short-Term Thinking: Analysing the Effect of Applying VAT to School Fees by Maxwell Marlow
Adam Smith Institute, April 17, 2024

As debates over how taxation shapes educational access grow on both sides of the Atlantic, this UK-based analysis offers timely insights for American educators and policymakers. The United Kingdom’s decision to apply a 20 percent Value Added Tax (VAT) to private school fees, effective January 1, 2025, has raised concerns about independent schools' financial sustainability and broader equity questions. Similar tensions are emerging in the United States, where former President Donald Trump has urged the IRS to revoke Harvard University's tax-exempt status, reflecting a wider global scrutiny of private education’s public role and financial privileges. In “Short-Term Thinking,” Maxwell Marlow critiques the UK VAT policy, arguing that the estimated revenue gains of £1.3 to 1.5 billion may be overly optimistic. He suggests that these projections fail to account for shifts in enrollment and rising costs that could leave the government with a net loss, particularly in high-migration scenarios. The report warns of unintended consequences, including the potential closure of smaller schools, increased competition in the state sector, and reduced bursary access for lower- and middle-income families. Now that the policy is in effect, some of these predicted outcomes are beginning to materialize. For example, Eton College has raised its annual fees by 20% to accommodate the tax, pushing the cost of attendance to over £63,000, and Erskine Stewart’s Melville Schools in Edinburgh have begun selling school-owned properties to absorb the financial impact. Staffing concerns are also surfacing, as some schools face increased workloads and cost-cutting pressures. This paper offers a valuable case study for American stakeholders on the potential consequences of using tax policy to influence the education market. Whether by VAT in the UK or by revoking nonprofit status in the U.S., such approaches raise essential questions about access, affordability, and the social contract of independent schools.