Socio-economic mobility and the UK government’s plan to impose VAT on school fees
Justin J
Introduction When the Labour Party of the UK came to power in 2024, part of their manifesto was a 20% Value- Added Tax (VAT) on private school fees. The aim of the tax is to increase government revenue and use the revenue to fund state schools. This brings changes to socio-economic mobility of the UK. Socio-economic mobility refers to how a person's socio-economic situation improves or declines relative to that of their parents or throughout their lifetime (OECD, 2024). This essay examines the effect of this VAT, with a specific focus on intergenerational mobility, defined as the comparison of an individual's socio-economic status to that of their parents (Social Mobility Hub, 2024). It argues that in the short run, this VAT will lead to a decline in the quality of private education, and marginal households' access will be constrained, resulting in downward mobility. In the long run, VAT could be used to reform substantially and create a better public education system, thereby promoting upward mobility. To support the argument, the analysis will be divided into human capital formation and inequality. For human capital, both micro-level effects on households and schools and macro-level effects on the national education system will be assessed. For inequality, the focus will be on whether the VAT alters its extent in a way that affects overall socio-economic mobility.
Human capital and mobility : theoretical framework
This essay applies the human capital accumulation model developed by Galor and Zeira (1993), which focuses on the effects of income distribution on economic outcomes via investment in education. Income distribution is a key determinant of intergenerational mobility (Becker and Tomes, 1979).
The model uses x t to represent the income or wealth of an individual or generation t , and x t +1 as the income of their child in the next generation. The 45- degree line shows perfect intergenerational income persistence. Points above this line show upward mobility and points below represent a decline. A key feature of the model is the threshold f, representing the cost of education. For low-income households where x t < f , the return is flat— households do not invest in education due to liquidity constraints or credit market imperfections, and intergenerational mobility stagnates. When x t > f , households can afford education, such as private schooling, and see returns in the form of upward mobility. Figure 1: Galor-Zeira Model on Income Distribution
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