Is Labour's new 20% tax on private education too low? Should it be 40%? (Quora)

To begin with, the Labour policy (not yet implemented) is not for a new tax, it is for the removal of VAT exemption on those public schools which operate as charities. This is not all public schools. In 2022 the government stated that around half of public schools were registered as charities. Most of the remainder will be operating as regular businesses, allowed to make profits and already paying VAT.

Charities have no shareholders, do not pay dividends and therefore do not aim for profits. In any given year they may or may not generate a surplus of income over expenditure, but all they can do with a surplus, other than hold a reserve against a year in which they make a deficit, is either to reinvest in their own fabric or activities, or else enlarge their charitable activities by providing additional public benefits such as scholarships, assisted places or co-operation with state schools to assist the facilities of the latter.

Charities are required by law to provide these public benefits and may not exclude “the poor” from the receipt of them. Pretty much by definition, such benefits are not self-financing and are effectively subsidised by those customers paying full fees for their children’s education. It is therefore not unlikely that removal of charitable status from public schools would result in cutbacks of existing public-benefit provision.

Such reductions could result in the complete loss of these services, or could throw the burden of providing them on to the state. In either case, it would reduce the operating costs of the former charitable schools. Alternatively these schools might continue to provide charitable services despite not being recognised as charities, provided they have or can still generate the necessary funds, but it seems improbable that most would be in that position.

The elimination of extended charitable work might give some schools enough margin to absorb some of the newly-imposed VAT, rather than increasing fees by the full 20%. However, it seems inevitable that the net result would be a rise in fees.

I have seen no estimates by The Labour Party of the elasticity of demand that they attribute to this market. The most well known public schools, of ancient foundation and splendid fabric, may be what they are thinking of, but they are far from typical. A significant number of public schools already operate on the margin of the industry and will therefore go under. All their pupils will probably end up transferring to the state sector. The schools that survive will in many cases lose a proportion of their customers who are on the margin of being unable to afford the present fees and will not be able to afford the increases. Their children will also end up in the state sector.

Assuming class sizes in the state sector are not allowed to increase by any significant extent, this will oblige the state to enlarge the fabric of those existing schools that are already full (and sometimes already suffering from less than ideal levels of maintenance) as well as to hire a fair proportion of the teachers being shed by the public schools. (They don’t like doing this, as many teachers who have tried to return from public school employment to state school employment can testify. It is often assumed that in going where you can find work, you are really making some sort of political statement.)

As a result, firstly a significant proportion of the estimated tax yield will not be raised at all, that is, it will not be paid by those parents returning their children to the state sector (which they were already paying for through their regular tax bills, so they won’t need to make any additional contributions).

Secondly, it means that expenditure on the state education system will have to rise to accommodate additional numbers. It cannot all be devoted to increased quality; indeed, it may turn out to be a rather small amount that can be so purposed.

Further, I have seen no acknowledgement that separate legislation would be required in Scotland and would have to pass the Scottish parliament. If such legislation were possible, there would be no cross border distortions. If it were not possible, there are some good public schools in Scotland that might attract a lot more custom.

Moreover, education is a major invisible export for the UK. Reducing the size of an export industry is not usually considered one of the smarter political decisions.

TL: DR

It is seldom a good policy to kill geese that lay golden eggs.