In July 2023, a proposal to tax international students as a revenue-raising tool briefly surfaced but was quietly shelved. Since then, political parties have turned to capping international student numbers, particularly in the lead-up to the 2025 federal election.
These caps, however, effectively function as a tax but without raising public revenue. Instead, any implicit revenue is retained by education providers, who can raise prices on policy-limited foreign student places. This represents an unfortunate repeat of a typical Australian policy habit, favouring mandates and quotas where a tax instrument would be more efficient.
Given the economic significance of export education in Australia, understanding how such policies affect the economy is important. Yet the economic impact of public policy aimed at managing international student numbers, whether through a tax that raises prices or a cap that limits numbers, remains poorly understood.
Assessment
Our study employs the dynamic general equilibrium model VURMTAX (Victoria University Regional Model with Taxation detail) to assess the economic impact of taxing the international education sector.
The international education sector is modelled in some detail in VURMTAX, which distinguishes the activities of higher education and vocational education and training (VET) from other education activities, and recognises spending by foreign students on accommodation, food, transport, and other expenses. More broadly, the model incorporates details of state and federal fiscal structures, industry linkages, and regional dynamics.
We evaluate the economic effects of a 5% international student levy (ISL) on tuition fees paid by international students. A key part of our analysis is estimating how sensitive international students are to changes in study costs. If demand is elastic, then even small price increases can significantly reduce enrolments. If inelastic, the impacts are more moderate.
Using a systematic modelling approach, we estimate the elasticity of demand for Australia’s export education at -3.5. This means a 1% increase in tuition fees would lead to a 3.5% decline in international student demand. This is our central estimate for modelling, but we also assess economic outcomes under a plausible range of alternative elasticity values to test sensitivity.
Impact on tertiary education
The ISL has a clear negative impact on the tertiary education sector. Under the central elasticity estimate of -3.5, university activity declines by about 1%, and VET by 0.7%. The impact is greater for universities, where tuition fees make up a larger share of student spending.
Sensitivity analysis highlights the importance of demand elasticity assumptions. At the lower-bound elasticity (-0.6), the contractions are modest: 0.2% for universities and 0.1% for VET. But at the upper-bound (-6), the impact is far greater: university output contracts by 1.7% and VET by 1.1%.
Impact on the macroeconomy and welfare
The contraction in tertiary education has broader effects. As a highly labour-intensive sector, its decline reduces employment and real gross domestic product (GDP) in the short run. These effects are more severe when student demand is highly elastic. Over time, displaced labour is absorbed by other, more capital-intensive sectors, changing the composition of the economy.
Sensitivity analysis identifies a clear tipping point in our welfare results: when the absolute value of the demand elasticity is 2.86 or lower, the ISL improves Australia’s terms of trade sufficiently to raise real consumption. But if demand is more elastic than this threshold, the ISL produces a welfare loss.
Regional impacts
The importance of international education varies by state, and thus so too do the effects of an ISL. States like Victoria, where education exports account for a higher share of the economy, experience larger declines in economic activity. These regional disparities are exacerbated if levy revenue is redistributed uniformly across states, rather than returned to the jurisdictions in which it is raised.
Economic efficiency
We estimate that each additional tax dollar raised by a 5% ISL imposes an economic cost—a marginal excess burden—of 16 cents. This is lower than for many existing state taxes, such as stamp duty or insurance levies.
However, this apparent relative efficiency simply reflects the sector’s current tax-exempt status and the low rate of the levy, rather than any inherent feature of the levy. As the rate increases, so does the burden. A 10% ISL, for example, has a marginal excess burden of 23 cents per dollar.
Using VURMTAX, we estimate that the proposed caps on international students announced before the 2025 federal election are equivalent to an ISL of about 10%. Specifically, it was 11% for Labor’s proposal to cap student enrolments to 270,000 each year and 13% for the Coalition’s more restrictive proposal for a cap of 240,000.
This places the marginal excess burdens of these caps at around those of the goods and services tax and the personal income tax (about 24 cents per dollar), while leaving collection of quota revenue to the education institutions.
Policy implications
Ongoing and past debate over proposals targeting international students highlights the need for policymakers to systematically assess costs and benefits, understand underlying economic mechanisms, and maintain transparency with the public. Without this foundation, policies risk appearing arbitrary or unjustified, inviting public opposition, causing unintended economic damage, and eroding trust in government.
Whether framed as levies, caps, or visa controls, policies affecting the international education sector should be judged not only by their stated objectives but by their economic consequences. While the instruments may differ, all such policies influence the effective cost of studying in Australia. Our analysis shows that the economic and welfare impacts hinge on how responsive international student demand is to policy-induced cost changes, yet this remains poorly understood and seldom discussed.
Informed policymaking requires credible modelling, clarity about trade-offs, and thoughtful communication. Our findings highlight the value of rigorous, forward-looking modelling to guide decisions, illuminate economic mechanisms, and test the sensitivity of outcomes to key assumptions.
Further reading
Xianglong, L., J.A. Giesecke & J. Nassios (2025), “Cashing in on export education: evaluating the implications of taxing international students”, Applied Economics, https://doi.org/10.1080/00036846.2025.2480194.
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