tax for training program

8/14/2019 Tax for Training Program

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Tax-for-Trainin Pro ram

research by

Jose Miguel Queimado

Join us at:

www.onovoportugal.blogspot.com

. .


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Overview

Vision Implementation

ssem nat on an e -tra n ng e ect

Stakeholder Analysis- Government

Companies

Convincing Private Sector Main Arguments

Im act on Wa e E uilibrium

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Creating Value


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Tax- or-Trainin : This ro ram will allow

companies to reduce their tax expense by exchangingtax dollars against Campus Training Programs

Campus Training Programs will allow companies to

send professionals to train university students in thec assrooms or to nc u e t em n t e ex st ng tra n ngprograms at the company

Matching effect: By targeting the training to thosewho will put it into practice, the TFT matches skills

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together and understand that university students needprofessional training (For case of Portugal check appendix)

In a global market, industries within a country must

,

Tax-for-Training Program adds value to companies

on severa ron s: nanc a , recru ng, ra n ng

Very cost efficient (low marginal cost for each actor)

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Illustrating need for training

Case of Portugal within EU market. An analysis of

comparative advantages

Why would you invest in Portugal in 1986

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1986 - Portugals Positioning within the EUWhich Competitive Advantage? Low Wages

Leaders Why would you invest in Portugal? What about now?

Germany

France Belgium

Luxembourg

Danger Zone,

Spain

Portugal (1986)

Greece

Ireland

Leaders


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2007 - Portugals Positioning within the EUComparative Disadvantage: Higher Wages

ew ro uc v yLeaders

Why would you invest in Portugal?

UK

What about now?

Spain

Germany

France Belgium

Luxembourg

Danger Zone

ere s a

need for aprofessional

trainin

Greece

re an

Portugal (2007)

program

PolandBulgaria

Czech Republic

Hungary

Romania

Portugal (1986)

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New Low Wage

Leaders


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To reduce costs and to increase the matching effect of the program,

-

mp emen a on mus use an everage ex s ng c anne s an resources

For the Companies, the TFT program must be seen as an expansion of theirrecruitment and training programs. This will allow the companies to benefit more

from this program

For Universities, the TFT must be an expansion of the existing career placement and

professional training programs

Existing Tax Programs

Case of Portugal: Nothing found. Research further

Case of Developing Countries: Nothing found. Research further

Case of US:

No impact or redundancy with existing education tax credit programs forhouseholds: Hope Credit and Lifetime Learning Credit are granted to households

that with education expenses

There is an R&D tax credit for companies in US. The TFT could be an extension

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of this process to reduce bureaucratic costs and tax-credit allocation personnel


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Who will implement? A company and a University (or sign a Campus Training Program.

-

Who will promote implementation? The program has to be an incentive structure and aframework for partnership between companies and universities. It is not a bureaucraticprocedure to be implemented by the government. The impetus will mostly come from thecompanies and the universities that respond to the incentive structure established

Who will train the implementers? The Government should organize workshops for HR reps

and Career Service reps to learn how to identify the right partner and implement TFT in the.

Who will dispense training? The classes will be dispensed by professionals of the companies(not teachers).

Where? Two existing resources are possible: university classrooms/conference rooms or thecompany facilities for in loco training, if the students are included in the companys internaltraining program.

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en t er ter norma curr cu um c ass t me or nstea o a c ass tra n ng woucount as course)


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Due to the limited resources, training will be granted on a

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meritocracy asis an ase on a equacy of profi e ( anguage

skills, area of study, professional project, etc). Profiling iscarried out by university. Companies decide on composition of

Dissemination effect and self-training effect: the CampusTrainin will onl be ossible for a limited number ofstudents, but it will trigger a dissemination of knowledge andthe ability for students to train each other

Professors will also attend training and the core skills will besynthesized in PTT presentations, allowing other students tolearn this useful, targeted material

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Against

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Some schools of thought will argue that universities should not bow to labor market

demands

Some schools of thought will be against the profiling of students (eg, matching their

be accepted in Campus Training Program

For

TFT is not a compulsory program

Will not increase costs, might reduce costs if the on-site training allows the student to

waive a class

opt on o a ampus ra n ng rogram w g ve t em a compet t ve e ge aga nst peeruniversities

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Overall: For


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-

Against

Might disagree with selection criteria (grades & matching profile)

For

Application for Campus Training is not compulsory

Will provide a entry into job market

Will allow them to find a better job: more tailored to their skills and preferences matc es mater a w t necessary s s or o mar et

Overall: For

The applicability ratio of each hour of study is much greater than that of the material in

the university curricula. By increasing the return on studied time the TFT enables the

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true motor of this program: the self-training and dissemination effect


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Against

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Benefits only available to university/technical school students Investing in professional training of the most qualified students is allow the most well-

off to do even better vs. investing in the worse-off

For

TFT can benefit a broad base of young population, although an impact distributionana ys s s requ re to c ar y

The per dollar return on the tax-for-training program is higher than traditional

educational policies because of its natural matching mechanism: the companies will

find the most appropriate universities to partner (based on geography and the curricula of

each university). This ensure that the investment on training will yield a return Is this a good investment of the public budget (reduction of government tax revenue is,

de facto, a government expense)

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Overall: A Cost-Benefit Analysis is required


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Against

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Could be too expensive

Could be training students that company does not need (training for competitors) Some Head Hunting companies might be feel threathened by the natural matching

mechanism that the TFT establishes between companies and students.

For

List main reasons tc.

Overall: Cost-Benefit Analysis is required

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- -Benchmarking: Opportunity Cost of TFT Budget

Invest in TFT tax-cre its vs. inancing a twin government program:

Cost for the government to finance its own training program would be very high formediocre results. The cost of hiring professionals with comparable work experience

would be extremel hi h. Too costl

These lessons would not be as useful for the students and the companies because less

tailored

Government training would not yield the additional value generated by the matching of.

(Find Greenspam quote saying that the companies of the future will be the ones that can

match skills with needs)

Invest in TFT vs. existing educational policies (eg, Hope Credit): Traditional policies are less targeted, therefore lower return on investment

Given that professional skills are the scarce resource vs. the academic skills, there is a

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rationale for increasing investment of the former

Find Rodrik Framework of Binding Constraints and bottleneck for growth


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- -Distribution of Impact

Distribution of Impact is a Public Policy concern that must also be addressed in the cost

benefit analysis.

Social distribution of impact: This program benefits the young skilled workers (including

the young technical workers). The trained population is not very large, but all the university

students and technical schools students will be eligible, which means that the Campus

Training initiative can potentially benefit a broad base of population. The dissemination and

self-training effects will also broaden the base of benefited population. The companies are

also benefiting from the Campus Training

Geo ra hical distribution of im act: The tax-for-trainin ro ram can establish a Cam us

Training program whenever a company and a university agree upon the establishment of aprogram that is approved by the government. All universities and all companies are eligible,

provided they meet the government requirements. This will broaden the geographical

distribution and it will also allow for the re ional tar etin of the different initiatives b

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matching the Campus Training programs with its demand.


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,Decreasing Marginal Return on Capital

'

Expo 1998 Euro 2004 Mundial 2018?

Ver low ROIC

Rebuild LisbonAirport

Alqueva Dam

Transportation

Infrastructure,ew g ways

Investment

Technologic

Plan Tax-for-Training Program

High ROIC

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Assumption: financial incentive alone will not sustain the program. They are either too costly ortoo temporary. Companies must identify this program to a recruitment/hr/talent sourcing

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rationale. If possible, students will intern for free or conduct research from the classroom.

These non-financial incentives will sustain the relationship with the universities.Cost benefit analysis must include following considerations:

Per our emp oyee cost evote to training vs. o ar va ue o tax cre itA priori committing company resources (people) for the campus training is costly so gov would

have to give away considerable (and costly) tax credits

Solution: add non-financial incentives to increase the value created for companies

own internal training program

Solution: allowing Companies to have the final word on composition of class (of prospectivecandidates), increases the recruiting value of the TFT program to the Companies

.The non-financial incentives should tip the scale towards Campus Training, but only if certain

problems are addressed:

Risk that company is training people that will not work for them: Solution: the rofile of the com anies that should be tar eted b universities should be lar e

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companies or large offices with high entry-level recruitment needs. The Campus Training Programshould be articulated with recruitment programs to yield the most value for companies


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Main Arguments

,

It is only basic skill set so no company secrets will be released, which means that it will notthreaten the commercial interests of the company

By disseminating knowledge, the companies trigger a self-training effect that will greatlyreduce their training costs as part of the training will be carried out by the studentsthemselves or by trainers outside of the company (reducing the cost structure)

By increasing the training before day one at the job, the productivity of the first 12 monthsof the employees will increase, positively affecting the companys performance. This meansthat there is a return on each dollar paid in the tax-for-training tax. This is a greatdifference with traditional taxes, that have offer no return for the companies

Finally, a major consideration in this issue is the impact on wages. The training of universitystudents coupled with the dissemination effect and the self-training effect will reduce thescarcity of the these skills. Given that the scarcity of a skill will define the equilibrium priceto be paid by the companies, the Campus Training initiative would affect entry-level wage

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. -skills is that it will lower entry-level wage equilibrium of skilled employees. See next slide


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Dissemination &

self-training effectCam us Trainin

ages effect

Supply (S)

Current equilibrium

Short term equilibrium

Dissemination and self-

training equilibrium

Demand (D)Qualified Candidates

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This graph is not meant to quantify the impact of the tax-for-training program, but note that the demand

for employees is quite price-inelastic (Slope of D), which means that an increase in the supply of

qualified candidates will have a non-negligible effect on the equilibrium wage level for that industry


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Impact on Wages through year 5

Graph two industries in this slideBase of qualified experienced professional candidates

Wage level for year n = FIXED AMOUNT - substitutability ratio

= FIXED AMOUNT - .S

xe moun : s or c e an ages n a n us ry

: Industry-specific coeficient

S: Size of base of qualified potential candidates at year n

The impact on Wage Equilibrium goes beyond Entry-Level into the first 3 to 5 years professionals, by

increasing the base of candidates that can leap into that industry from another. This will create a

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downward pressure on wages for the first 5 years, which is a major cost of knowledge industries


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The TFT delivers value as the program offers a big bang for a buck because:

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1) It utilizes mostly resources whose cost have already been incurred: (universities alreadypaid for classrooms and companies already paid for the employees). The question of costefficiency of this program therefore deals only with marginal costs, a central concept in thestructuring of this program.

2) It delivers value by matching skill set supply with its demand. A large part of thewastage in other government funded policies is the money invested in building skills that will

never be put to use for lack of matching them with their need (geographic and industry. .

3) It (partially?) solves the externalities problems related to skill dissemination, which is oneof the biggest barriers and disincentives for companies to spread knowledge.

4) It is build around existing structures that can outlive individual Campus Training Programs,offering a sustainable positive impact. By building literature on industry specificprofessional skills and by including teachers in the training events, the knowledgeaccumulated can be keep by stable institutions.

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5) It is structured so that each player provides the resource/service that it does best, which means

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that it can be delivered at the owest poss e marg na cost:

universities provide classrooms and logistics support (profiling students, organizing

classrooms and screenin a licants . Most of these costs alread exist within the career

service, the marginal cost to the universities is very low

companies provide training. This is a very expensive resource if purchased by.

their industry, it is very easy for them to provide this training and no other cost is to be

expected other than the wages of those professionals

government provides tax-credits (the synergy is such that each dollar of tax-credit lostwill provide a service that would cost the government several times that amount, because

that service is being provided by those with the lowest marginal cost)

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Graph different marginal costs?


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-Dissemination and self-training effect

Non-Linear Return on Investment

ReturnCampus Training Effect

Targeted: No Waistage

1 for more return

1 for 1 return

1 Traditional Educational PoliciesUntargeted: Waistage

Investment

a ue rea on

1

Value Destruction

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The natural matching mechanism of the Campus Training Program targets the investment, reducing to

(almost) nothing the waistage: 1 for 1 yield. The Dissemination and Self-training effects are the true

value creating mechanisms as they explain how the initial investment triggers a chain reaction


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After the program has been established, it will become a premium venue for therecruitment of that company, which means that it will have other incentives than just

than just financial (tax credits)

The streamlining of resources for campus recruitment and training (TFT) means that

abandoning the TFT does not lower costs. No financial incentive to abandon

Possibly using university students or interns to conduct basic research for free

How to give a continuation of the knowledge acquired? The teachers and not just the students should participate in training

to compile a document (power points?) with the main takeaways of training, thesupervision of the drafting of these documents is the responsibility of the training

company. These documents should be company presentations, meeting the company

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,

purposes. The document gets updated and should become part of the material provided

by the professionals handling the training of university students


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Appendices

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Two possible models: Same price for the training of eachcompany or Different pricing of training.

Optimal solution is pricing the tax credit as a weighted average

average wage of employees in company (or weighted average ofsalaries in the company to give the most accurate account of the cost of

the personnel being sent to train) maybe other factors (build incentives and finance training externalities)

This is the optimal solution to prevent discouraging the most

training were paid for the same amount as the employees inindustries with low added value and low wages)

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Research criteria for allocation R&D tax credits


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TFT is an allocation of the budget towards professional training

Who will benefit the most? the companies that provide training

.

The allocation of resources will be decided upon by the companies, not the

governments. By sharing the training costs with the companies, the

overnment enables the efficienc of the rivate sector in allocatin

resources (eg, companies will only set up a Campus Training Program if

there is a need for one: efficient allocation)

at ona e: government wi subsidize companies for the professionatraining of university students to compensate for the externality that it

creates: companies will not always be able to reap all the benefits from

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Tax-for-training reduces tax expenses

ampus ra n ng rograms

Campus Training is followed by dissemination and self-training effect Nationwide geographical distribution

One sin le standard

Natural matching mechanism

What the program is not:

not an employment policy .existing resources: only when there is match between the needs of a university and thesupply of a university will the Campus Training Program be established. Should not beused as a government tool to promote regions, however, the medium term affect is that iswill shape supply of skills to match it with the needs of the regional labor market and it

,

technology poles or comparative advantages of certain universities in niche skill set.

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Interview companies:

understand their recruitment needs and campus recruitment process.

Understand the challenges in recruiting the right people

find out how many university graduates do they hire per year

find out what kind of training programs they have

Find Tax Policies towards Education and Trainin

Map out biggest 100 companies in Portugal, their main offices

Map the 30 largest universities and technical schools inPortu al and their com arative advanta es curriculum

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Ask Preliminary opinion on plausibility/executability of concept:

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Initial Review: Prof Dahlman

If concept is valid: University Viewpoint: Dean of Catolica

Tax View oint: Prof Chuck Marr Public Finance : Incidence of tax who willbear its costs, first and second wave effects? regressive? does it clash with anytaxation policy for companies? Households? Pricing methodologies forexchange rate

Companies Viewpoint: HR person in CGD (Michael Page?) Policy considerations: Maybe Prof Moran: Appropriateness of rationale to

finance externalities, pricing the training

Economics & Stats: Prof Randal Verbrugge: Validity of assumptions onmarginal costs/returns, graphs and Regressions necessary to research

Game Theory, Group Dynamic & Multiple Equilibria: Maybe Prof of IR orProf Verbrugge. Will it be necessary to have several join? Maybe two stableequilibria (nobody joins and everybody joins within one industry)

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Are there free-riding incentives?

Main threat is that companies prefer to train the students that they hire in-house, structure

TFT program with incentives for companies to train through the TFT (even if they do thetraining in-house)

Is there a need for ma or com anies of each industr to come to ether and a reein on this? Ifthe top companies agree upon this, than no more free-riding, no more externalities for them.

What are the second wave affects of this program? Who would be opposed to first waveeffects or second wave effects?

Will smaller companies benefit from training provided by larger companies? Solution: build .

structure of program (eg, Solution 3: This will not prevent larger companies to pick the mostable/qualified candidates.

Is there a way for the (or a) tax credit to reward that externality?

Will the companies join? Will the companiesjointly adhere? Only some industries?

Brainstorming session/interviews: invite reps from companies, universities and HR Which questions did prof Dahlman ask us to consider in formulating/structuring a strategy?

(must include a vision, identification ofopposing groups and protocol to address theirconcerns, must have a specific implementation plan)

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companies and the universities, addcom onents to these artnershi s such as:

internship/apprenticeship programs

research or studies conducted by the students forthe universities

joint research initiatives

creation of technological poles, etc.

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.and problem solving, but with an increasingly sophistication that

accompanies knowledge economy, each industry has a basic professionalskill set much beyond what is nowadays taught in universities

This skill set can be taught if the universities delivered in equippingstudents with basic analytical and problem solving tools

So histication of different industries creates a challenge to match thedemand and supply for skills

Knowledge economy has increased the premium (remuneration) of skill,

Every factor has a decreasing marginal return

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tax for training program

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