Egged on by advocates of competition ranging from Milton Friedman to Christopher Jencks, the Office of Economic Opportunity recently began an experiment that could revolutionize American education. In early February OEO announced the award of preplanning grants to set up educational voucher systems to three cities: Alum Rock, California; Gary, Indiana; and Seattle, Washington. If the plans drawn up by these cities are approved, full-fledged voucher systems will go into operation in September.

Basically, the OEO program follows the guidelines laid down by Jencks, et. al., in their March 1970 Education Vouchers study. Racial discrimination will be forbidden, poverty-area vouchers will be worth more, and supplemental tuition may not be charged by participating schools. It is still not clear to what extent the existing school boards will have control of the programs—which could have a significant impact on their success. Still, each of the demonstration cities has asked to be in on the experiment, so a basic level of support does exist.

Despite the built-in obstacles, the voucher experiment should go a long way toward demonstrating what competition can do. The long-standing monopolies of the public schools (and the teachers' unions) will be shattered, and all the people, not just the wealthy, will at last have a choice of schools.

SOURCE: "A 'Market Economy' for the Schools", BUSINESS WEEK, 6 February 1971, pp. 76-78.


A system of public higher education like the much vaunted one in California is a method of redistributing income. Some Californians pay taxes so that other Californians can go to college free. The interesting question is who pays and who benefits. To find out, W. Lee Hansen and Burton A. Weisbrod of the University of Wisconsin have used a technique born in the auto industry and matured in the Department of Defense: the cost-benefit analysis. Their conclusion is that in California poorer families are disproportionately taxed to send the children of richer families to college (Journal of Human Resources, Vol. 4, No. 2, I969).

The largest subsidy, the $7,140 represented by four years at the University of California, is of course available only to those students whose high school grades were good enough for admission. Those with lower grades may qualify for the $5,800 that pays for a state college degree or for the $1,440 that two years at a junior college costs the state.

The question is: Who gets the subsidies the State makes available? Of all the students graduating from high school in California in any one year, 41 percent do not attend any state institution of higher learning and so get no subsidy at all. (Of this 41 percent, most—80 percent—don't go to college at all, and the rest go to private colleges and universities.) Of the 59 percent who do go to state schools, only some complete the program. For that reason the authors calculate that 14 percent of the students will receive something between $1 and $749 (up to one year of junior college); 30 percent will get between $750 and $1,999 (they will go into the second year of junior college); 3 percent will receive between $2,000.and $3,499; another 3 percent will stay on in college longer and use up between $3,500 and $4,999; 6 percent will use between $5,000 and $6,499; and only 3 percent will actually receive $6,500 or more. Clearly, the distribution of subsidies is markedly unequal. Adult Californians pay taxes to support a school system that educates only a small proportion of their children.

When the distribution of those receiving the subsidies (and 41 percent don't receive any) is examined in the light of the family income of recipients, its inequality stands out more sharply. The average family income in California is $8,000. Those families who have no children in the state higher education system are slightly poorer than that; their average yearly income is $7,900. All the families with children in the higher educational system have a higher than average family income, and that average rises with the level of the institution their children attend. Thus, the average family with children in a junior college (the cheapest kind) has an income of $8,800 —slightly higher than the overall California average. The average family with children in a state college-the next step up the ladder—is more comfortable; its income is around $10,000. The richest families, on the average, are those with children attending the most heavily subsidized University of California; their average income is $12,000. Families with children in junior colleges are receiving a state subsidy of approximately $720 a year, or 8 percent of their average income. Families with children in the state college system are receiving subsidies averaging $1,400 a year, or 14 percent of their family income. Families with children in the University of California receive the highest subsidy per year, $1,700 which is approximately 13 percent of their yearly income.

The final question here is to see which families pay the taxes that send some of their children to college. The authors of this study have no way of separating out those state and local taxes which directly support the higher educational system, so that their analysis is based on overall state and local tax figures. Their figures show that the poorest California families pay the largest share of their income in state and local taxes: families with an income of under $4,000 pay approximately $774 in state and local taxes, which amounts to a tax rate of 23.7 percent of their yearly income. Families with an income between $4,000 and $6,000 pay at a rate of about 10.5 percent of income. For families with an income between $6,000 and $8,000, the state and local tax rate levels out at about 8 percent, and there it remains as income increases. This means that a family with an income between $6,000 and $8,000, for example, pays approximately $576 in state and local taxes, while a family with an income of over $24,000 pays about $4,093—in both cases this is an effective tax rate of 8.2 percent of income.

When the taxation and subsidy figures are examined together, it is possible to see who pays and who benefits in the California system. A good part of the paying is done by California families who have no children in the system; their average income is $7,900, they pay about $650 in state and local taxes, and they get no subsidies for higher education. Families with children in the junior college system are somewhat richer to begin with ($8,800); they pay $680 in taxes and receive about $720 worth of education subsidies, for a net gain of $40 a year.

Families who send their children to the state college system start off with an average income of $10,000; they pay about $770 in taxes and get subsidies worth $1,400 for a net gain of $630. Finally, the richest families (average income of $12,000) with children in the University of California pay about $910 a year in state and local taxes, receive subsidies worth $1,700 a year and wind up with a net gain of $790.

Reprinted by permission from the September, 1970 issue of TRANSACTION, pp. 4-6.