The Economic Effects of an International Student Levy Under Alternative Price Elasticity Assumptions

We investigate the economic consequences and tax efficiency of a 5% international student levy (ISL). Like any tax, ceteris paribus, an ISL will reduce certain economic activities. At the industry level, the negative effects on activity will be largest for sectors involved in the export of education services. At the regional level, the negative economic consequences will be largest for regions that have relatively large export education sectors. Due to limited empirical evidence on the price elasticity of demand for export education, we test the sensitivity of our results under a range of elasticity estimates. For sufficiently inelastic demand for export education, an ISL improves the terms of trade and increases real consumption. By evaluating and comparing the marginal excess burden of an ISL with other hypothetical service export taxes, we demonstrate that these results stem from imposing an export tax at a low rate on a commodity that is generally tax-exempt and carries a low foreign export demand elasticity, rather than being a unique feature of the ISL. If the policy objective is to assist the education sector, our results draw into question the suitability of the ISL.