On The Inappropriateness of Levying a Graduate Tax to Finance a Tuition-Free Higher Education

Abstract

This paper analyses the idea of implementing a graduate tax to finance higher education in Chile. We discuss its technical difficulties, distortions and incentives. Using simulation exercises and administrative data, we empirically examine its financial appropriateness. We conclude that roughly two-thirds of the students would be worse off under such system compared to a system based on student loans. We also do- cument that funding a tuition-free higher education system through a graduate tax would impose a heavy fiscal burden during the first 13 years after its implementation. We estimate an initial deficit of approximately US$ 20.000 millions.