Tax-for-Trainingg Program

research by

Jose Miguel Queimado

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Executive Summary
• Overview
• Vision
• Implementation
• Di
Dissemination
i i andd ‘Self-training’
‘S lf i i ’ effect
ff
• Stakeholder Analysis
• Cost Benefit Analysis:
Cost-Benefit
¾ Government
¾ Companies
• Convincing Private Sector
¾ Main Arguments
¾ Impact on Wage Equilibrium
• Creating Value O Novo Portugal 2
Overview MUST EXPLAIN BETTER
• Tax-for-Training:
f g This pprogram
g will allow
companies to reduce their tax expense by exchanging
tax dollars against Campus Training Programs

• Campus Training Programs will allow companies to

send professionals to train university students in the
classrooms
l or to
t include
i l d them
th ini the
th existing
i ti training
t i i
programs at the company

• ‘Matching effect’: By targeting the training to those

who will put it into practice, the TFT matches skills
with needs
O Novo Portugal 3
Vision
• Major companies in each industry must come
together and understand that university students need
professional training (For case of Portugal check appendix)
• In a global market, industries within a country must
gather to form a tech/skill pole,
pole a competitive niche
• Tax-for-Training Program adds value to companies
on severall fronts:
f t financial,
fi i l recruiting,
iti training
t i i
• Very cost efficient (low marginal cost for each actor)
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Vision (Appendix)
• Vision to convince stakeholders to adhere to format
• Illustrating need for training
• Case of Portugal within EU market. An analysis of
comparative advantages
• Why would you invest in Portugal in 1986
(Accession to EU), in 2007?

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 1986 - Portugal’s Positioning within the EU
Which Competitive Advantage? ¾ Low Wages
Productivity
Leaders Why would you invest in Portugal? ¾ What about now?

Germany
Luxembourg
France Belgium Danger Zone,
No Competitive Advantage

Spain

Ireland

Portugal (1986)
Greece Low Wage
Leaders
 2007 - Portugal’s Positioning within the EU
Comparative Disadvantage: Higher Wages
New P
N Productivity
d ti it
Why would you invest in Portugal? ¾ What about now?
Leaders
UK

Germany ¾There is
¾Th i a
Luxembourg need for a
France Belgium Spain
professional
Danger Zone
trainingg
I l d
Ireland
program
Greece Portugal (2007)

Czech Republic

Poland
Bulgaria

Hungary

Portugal (1986)
Romania
New Low Wage
Leaders
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Implementation - Existing Resources
• To reduce costs and to increase the ‘matching effect’ of the program,
i l
implementation
t ti mustt use andd leverage
l existing
i ti channels
h l andd resources
– For the Companies, the TFT program must be seen as an ‘expansion’ of their
recruitment 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

• Existingg Tax Programs

g
– 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 for
households: Hope Credit and Lifetime Learning Credit are granted to households
that with education expenses
p
• There is an R&D tax credit for companies in US. The TFT could be an extension
of this process to reduce bureaucratic costs and tax-credit allocation personnel
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Implementation - Detail
• Who will implement? A company and a University (or sign a Campus Training Program.
Implementation: HR Dept and the Career Service Dept respectfully

• Who will promote implementation? The program has to be an incentive structure and a
framework for partnership between companies and universities. It is not a bureaucratic
procedure to be implemented by the government. The impetus will mostly come from the
companies
i andd the
h universities
i i i that
h respondd to the
h incentive
i i structure established
bli h d

• 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
most efficient way.
way Role of the Government: Sponsor and arranger that brings parties together

• 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 the
company facilities for in loco training, if the students are included in the company’s internal
training program.

• When?
Wh ? Either
Eith 1) After
Aft normall curriculum
i l class
l time
ti or 2) Instead
I t d off a class
l (training
(t i i would
ld
count as course)
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Dissemination and Self
Self-training
training Effect
• Due to the limited resources, training will be granted on a
meritocracy
i basis
b i andd based
b d on adequacy
d off profile
fil (language
(l
skills, area of study, professional project, etc). Profiling is
carried out by university. Companies decide on composition of
class
• Dissemination effect and ‘self-training’ effect: the Campus
Trainingg will onlyy be ppossible for a limited number of
students, but it will trigger a dissemination of knowledge and
the ability for students to train each other

• Professors will also attend training and the core skills will be
synthesized in PTT presentations, allowing other students to
learn this useful, targeted material

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Stakeholder Analysis - Universities
• Against
– 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
languages skills and field of study to the specific demands of companies) as a criteria to
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
– Adoption
Ad ti off a C Campus T Training
i i P Program will
ill give
i them
th a competitive
titi edge
d against
i t peer
universities

• Overall: For
O Novo Portugal 11
Stakeholder Analysis - Students
• 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
– TFT matches
t h material
t i l with
ith necessary skills
kill for
f job
j b market
k t

• Overall: For

The ‘applicability ratio’ of each hour of study is much greater than that of the material in
the university
y curricula. By y increasing
g the ‘return on studied time’ the TFT enables the
true motor of this program: the ‘self-training’ and dissemination effect

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Stakeholder Analysis - Government
• Against
– The TFT ‘exchange
exchange rate’
rate could be too expensive
– 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 distribution
analysis
l i isi required
i d to
t clarify
l if
– 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)

• Overall: A Cost-Benefit Analysis is required

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Stakeholder Analysis - Companies
• Against
– 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
p
mechanism that the TFT establishes between companies and students.

• For
– List main reasons
– Etc.
Et

• Overall: Cost-Benefit Analysis is required

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Cost Benefit Analysis - Government
Cost-Benefit
¾ Benchmarking: Opportunity Cost of TFT Budget
• I
Invest iin TFT tax-credits
di vs. financing
fi i a twin
i government program:
– Cost for the government to finance its own training program would be very high for
mediocre results. The cost of hiring professionals with comparable work experience
would be extremelyy high.
g Too costlyy
– 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
supply and demand of skills
skills. No matching effect
– (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
rationale
i l forf increasing
i i investment
i off the
h former
f
– Find Rodrik Framework of ‘Binding Constraints’ and bottleneck for growth
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Cost Benefit Analysis - Government
Cost-Benefit
¾ 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

• Geographical distribution of impact: The tax tax-for-training

for training program can establish a Campus
Training program whenever a company and a university agree upon the establishment of a
program 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 regional targeting of the different initiatives, by
matching the Campus Training programs with its demand.
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 Return on Public Investment,
Investment R
Decreasing Marginal Return on Capital
¾ The case of Portugal: EU incentives and the 'Cement
Cement Policy’
Policy
Expo 1998 Rebuild Lisbon
Euro 2004 Mundial 2018?
Alqueva Dam Airport
R ¾ Veryy low ROIC

Transportation
Infrastructure,
Ne highways
New high a s

Investment
R
Technologic
Plan Tax-for-Training Program
¾ High ROIC

O Novo Portugal Investment 17

Cost Benefit Analysis - Companies
Cost-Benefit
Assumption: financial incentive alone will not sustain the program. They are either too costly or
too temporary.
p y Companies
p must identifyy this pprogram
g to a recruitment/hr/talent sourcingg
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:

P hour
Per h employee
l cost devoted
d d to training
i i vs. dollar
d ll value
l off tax credit
di
A 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
– Solution: the cost of campus training will increase the inventive for including students in company
company’ss
own internal training program
– Solution: allowing Companies to have the final word on composition of class (of prospective
candidates), increases the ‘recruiting value’ of the TFT program to the Companies

Cost of Campus Training vs.

vs In House Training
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 p
profile of the companies
p that should be targeted
g by
y universities should be large
g
companies or large offices with high entry-level recruitment needs. The Campus Training Program
should be articulated with recruitment programs to yield the most value for companies
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Convincing Private Sector
¾ Main Arguments
• It will give them a better pool of candidates to work in their companies,
companies allow for better fit

• It is only basic skill set so no company secrets will be released, which means that it will not
threaten the commercial interests of the company

• By disseminating knowledge, the companies trigger a ‘self-training’ effect that will greatly
reduce their training costs as part of the training will be carried out by the students
themselves 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 months
of the employees will increase, positively affecting the company’s performance. This means
that there is a return on each dollar paid in the ‘tax-for-training tax’. This is a great
difference 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 university
students coupled with the dissemination effect and the ‘self-training’ effect will reduce the
scarcity of the these skills. Given that the scarcity of a skill will define the equilibrium price
to be paid by the companies, the Campus Training initiative would affect entry-level wage
levels by affecting the supply side.
side The medium-term
medium term effect of the dissemination of these
skills is that it will lower entry-level wage equilibrium of skilled employees. See next slide
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 Impact on Wage Equilibrium
Dissemination &
‘self-training’ effect
Campus
p Trainingg
W
Wages effect
Supply (S)

Current equilibrium
Short term equilibrium

Dissemination and ‘self-

training’ equilibrium

Demand (D)
Qualified Candidates

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
O Novo on the equilibrium wage level for that industry
Portugal 20
 Impact on Wage Equilibrium
Impact on Wages through year 5

Graph two industries in this slide

Base of qualified experienced professional candidates

Wage level for year n = FIXED AMOUNT - substitutability ratio

= FIXED AMOUNT - α .S

Fixed
Fi dA
Amount: t Hi
Historic
t i M Median
di W Wages iin th
thatt industry
i d t
α: 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
g the base of candidates that can leap
p into that industry
y from another. This will create a
downward pressure on wages for the first 5 years, which is a major cost of knowledge industries

O Novo Portugal 21
Creating Value - Cost Efficiency
The TFT delivers value as the program offers a big bang for a buck because:

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

• 2) It delivers value by matching skill set supply with its demand. A large part of the
wastage 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
matching) Try to graph Distortion Triangles? Probably not.
matching). not

• 3) It (partially?) solves the externalities problems related to skill dissemination, which is one
of 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 specific
professional skills and by including teachers in the training events, the knowledge
accumulated can be keep by stable institutions.

O Novo Portugal 22
Creating Value - Cost Efficiency (cont)
5) It is structured so that each player provides the resource/service that it does best, which means
that
h it i can be
b delivered
d li d at the
h lowest
l possible
ibl marginal
i l cost:

– universities provide classrooms and logistics support (profiling students, organizing

classrooms and screeningg applicants).
pp ) Most of these costs alreadyy 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

government or schools
schools. Since the company professionals are teaching the basic skills of
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 lost
will 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)

Graph different marginal costs?

O Novo Portugal 23
Creating Value - Mechanisms
Dissemination and ‘self-training’ effect
Non-Linear Return on Investment
‘1 for more’ return

Return
Campus Training Effect
Targeted: No Waistage
‘1 for 1’ return

1 Traditional Educational Policies

Untargeted: Waistage

¾ Value Destruction ¾ Value

V l Creation
C ti

1 Investment

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 explainO Novo Portugal
how the initial investment triggers a chain reaction 24
Creating Value - Sustainability
• What incentive to prevent companies from abandoning the TFT?
– After the program has been established, it will become a premium venue for the
recruitment 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
– The training should include a required assignment: students collaborate with the trainers
to compile a document (power points?) with the main takeaways of training, the
supervision of the drafting of these documents is the responsibility of the training
company. These documents should be company presentations, meeting the company
standards, they can be used by the university as well as the company for internal training
purposes. The document gets updated and should become part of the material provided
by the professionals handling theOtraining of university students
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Appendices

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Pricing Tax Credits
• Two possible models: Same price for the training of each
company or Different
Diff pricing
i i off training.
i i
• Optimal solution is pricing the tax credit as a weighted average
of a few factor:
– average wage of employees in company (or weighted average of
salaries 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

sophisticated companies from training (if there employees
employees’
training were paid for the same amount as the employees in
industries with low added value and low wages)
• Research criteria for allocation R&D tax credits
O Novo Portugal 27
A Distortive Policy?
• TFT is an allocation of the budget towards professional training

• Who will benefit the most? the companies that provide training

• Public or Private Allocation of Capital? the tax credit is just an incentive.

incentive
The allocation of resources will be decided upon by the companies, not the
governments. By sharing the training costs with the companies, the
ggovernment enables the efficiency y of the pprivate sector in allocatingg
resources (eg, companies will only set up a Campus Training Program if
there is a need for one: efficient allocation)

• Rationale:
R i l government willill subsidize
b idi companies
i for
f the
h professional
f i l
training of university students to compensate for the externality that it
creates: companies will not always be able to reap all the benefits from
their training
O Novo Portugal 28
Recap
• Tax-for-training reduces tax expenses
• C
Campus T
Training
i i Programs
P
• Campus Training is followed by dissemination and ‘self-training’ effect
• Nationwide geographical distribution
• One single
g standard
• Natural matching mechanism
• What the program is not:
– not an employment policy
– not a policy for to encourage growth in poor regions within the country.
country Must build upon
existing resources: only when there is match between the needs of a university and the
supply of a university will the Campus Training Program be established. Should not be
used as a government tool to promote regions, however, the medium term affect is that is
will shape supply of skills to match it with the needs of the regional labor market and it
could shape the labor market also
also, by installing new companies around regional
technology poles or comparative advantages of certain universities in niche skill set.

O Novo Portugal 29
Outstanding Research
• Interview companies:
p
– 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 Training

• Map out biggest 100 companies in Portugal, their main offices

• Map the 30 largest universities and technical schools in

Portugal
g and their comparative
p advantages
g ((curriculum))
O Novo Portugal 30
Outstanding Research - Reviewers
• Ask Preliminary opinion on plausibility/executability of concept:
– Initial
i i Review:
i Proff Dahlman
hl
If concept is valid:
– University Viewpoint: Dean of Catolica
– Tax Viewpoint:
p Prof Chuck Marr ((Public Finance):
) Incidence of tax,, who will
bear its costs, first and second wave effects? regressive? does it clash with any
taxation policy for companies? Households? Pricing methodologies for
‘exchange 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 on
g
marginal costs/returns, ggraphs
p and Regressions
g necessaryy to research
– Game Theory, Group Dynamic & Multiple Equilibria: Maybe Prof of IR or
Prof Verbrugge. Will it be necessary to have several join? Maybe two stable
equilibria (nobody joins and everybody joins within one industry)

O Novo Portugal 31
Think About Following
• Are there free-riding incentives?
• Are there disincentives for the main actors to adhere?
• 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 the
training in-house)
• Is there a need for major
j companies
p of each industryy to come together
g and agreeing
g g on this? If
the 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 wave
effects or second wave effects?
• Will smaller companies benefit from training provided by larger companies? Solution: build
this into the ‘exchange
exchange rate’
rate for pricing the tax credits
credits. Solution 2: build incentives into the
structure of program (eg, Solution 3: This will not prevent larger companies to pick the most
able/qualified candidates.
• Is there a way for the (or a) tax credit to reward that externality?
• Will the companies
p jjoin? Will the companies
p jjointly
y adhere? Onlyy 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 of opposing groups and protocol to address their
concerns, must have a specific implementation plan)

O Novo Portugal 32
Follow up Programs
Follow-up
• To build upon the partnership between the
companies and the universities, add
p
components to these partnerships
p p such as:
– internship/apprenticeship programs
– research or studies conducted by the students for
the universities
– joint research initiatives
– creation
i off technological
h l i l poles,
l etc.

O Novo Portugal 33
Assumptions
• General/academic skills vs
vs. professional skills: Universities teach analysis
and problem solving, but with an increasingly sophistication that
accompanies knowledge economy, each industry has a basic professional
skill set much beyond what is nowadays taught in universities

• This skill set can be taught if the universities delivered in equipping

students with basic analytical and problem solving tools
• p
Sophistication of different industries creates a challenge
g to match the
demand and supply for skills

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

which increases the relative penalty to the lack of skills

• Every factor has a decreasing marginal return

O Novo Portugal 34