Opinion: Why a graduate tax is progressive

There has been at best, a muted response among Lib Dem members to the graduate tax proposals announced by Vince Cable on Thursday.

There appears to be a general agreement that these proposals are better than the status quo but not really ‘progressive’ and that the only really Liberal outcome is so-called free education.

It could however be argued that this phrase is a misnomer. Nothing is free. It may be free at the point of use, but it still has to be paid for. The suggestion of its advocates is that it be funded through general taxation, and specifically through a penny on the top rate of income tax.

There are several likely problems with this. The increasing population means that the numbers seeking to attend university are likely to go up year on year, your penny on the top rate can only go so far in that scenario before another penny is needed or cuts are made to other services to pay for it.

The second problem is with opportunity cost. If you use the tax increase to fund universities, which are a state provided service used by higher earners proportionally more than lower earners, instead of using it to fund any of the other state services which are used more by the lower earners than the higher earners, you are using that penny increase regressively. In addition the tax increase may mean that jobs are lost in the economy, with the poor likely to lose the jobs, so even if it allows for more children from lower income backgrounds to go to university, their parents are still baring a bigger cost for this ‘free’ education than the richer students families are, which is also regressive.

The third factor to consider is that the penny rise to pay for universities is predicated on the principal that raising the tax rate increases the amount of money raised, which is not something which history has bourne out, and if this mistaken assumption of the past was repeated, it could leave a black hole in the funding of universities, with the money needing to be clawed back from elsewhere, and the lower income groups more likely to feel the pinch in that instance as they proportionally use more of the other services.

We have only heard a very vague outline of the graduate tax proposals, but they do seem to address this, with the tax being progressive, both in terms of income and in terms of which section of society pays for it.

It has been shown that tuition fees and the debt they lead to is a barrier to entry for poorer students, this is not surprising. Working class people generally have a fear of debt because for them, it has historically meant the repo man and the loan shark rather than the finance company and the bank manger for people of greater wealth. Paying a tax later, if earning more, rather than being lumbered with a debt later, is more likely to encourage children of poorer backgrounds to wish to enter university.

That’s not to say there are not concerns. Any idea to charge differently based on which university was attended rather than on income would be regressive in the extreme, and the graduate tax proposals should have built in a requirement that many hundreds of new state funded scholarships be created. This would assist the mobility of the brightest students from poorer backgrounds and also allow some degrees be free at the point of use because of an acute skills shortage or the unique social importance of that industry.

The graduate tax is probably not the final answer to the question of how to fairly fund a rapidly expanding third level education sector, but it’s a progressive start on the long road to finding that solution.

Read more by or more about , or .
This entry was posted in Op-eds.
Advert

34 Comments

  • Bill Kristol-Balls 17th Jul '10 - 6:47pm

    Not keen on the graduate tax myself. Much as I hate agreeing with Simon Heffer, what’s to stop someone getting their degree and then leaving the country without paying back a bean?

    How about variable tuition fees based on (a) the university and (b) the school(s) you went to.

    So Oxford gets to charge more than Hull but the actual fees are based on the cost of the school you went to.

    For example, if you went to a state school, you’d pay around £4,000 but if you went to Eton you’d pay £25,000. Seems mad that taxpayers subsidise the education of kids whose parents can afford to pay hundreds of thousands to educate them up to the age of 18.

  • Andrew Suffield 17th Jul '10 - 7:13pm

    There don’t seem to be any particularly good answers here. The money has to come from somewhere.

    what’s to stop someone getting their degree and then leaving the country without paying back a bean?

    Do we really need to address this? Note that it’s only UK citizens who get tuition costs paid for by the UK government, not migrants, so it’s not like we’d have a rush of highly mobile people coming for free education, and what you’re really proposing is: large numbers of UK citizens would rather leave the country than pay fair tax. I just don’t see it happening. If it does happen, we can address it then.

  • “what’s to stop someone getting their degree and then leaving the country without paying back a bean?”

    Or people from truly progressive countries coming here and automatically earning more than unfortunate enough to be educated in this country.

    silly vincent

  • Bill Kristol-Balls 17th Jul '10 - 7:30pm

    @ Andrew

    Who mentioned migrants? Not me.

    I was just trying to address the inherent problem of a tax that would be paid by graduates who chose to become a teacher in Britain, but not by those who went into investment banking and emigrated to Zurich, Dubai or Singapore.

  • Pete, leics 17th Jul '10 - 8:09pm

    Delighted. I wrote to the party leadership earlier this year with exactly this suggestion. Why is it a good idea?

    Firstly, and crucially, because the individual has no sense of personal debt. This is a critical issue, since once you are expecting to start grad life with big debts there is no incentive to live within your means whilst at uni which fuels the runaway consumer credit behaviour by suggesting personal debt is normal. It isn’t. It is an unnecessary burden.

    Secondly, because it is revenue neutral. Whilst we would all love to be able to fund free education for all at all levels, our national debt and frail world economy make that unrealistic.

    Of course, some individuals may leave the country, but that is jot the point. The proportion will be low enough not to make a big difference, and the key in any case is that it is graduates as a group who overall benefit, so graduates as a group fund uni. Individual graduates who do not benefit financially do not pay the tax. So it is pay for results.

    Of course we all know graduates benefit the economy as a whole including those who don’t attend higher education, so a balance of general tax revenues and personal tax payments is preferable and something that could be adjusted qhen times are not so hard. Either way is better than a fee paying education that fails to recognise that our individual actions will benefit the wider community.

  • ROB STEVENS 17th Jul '10 - 8:31pm

    “what’s to stop someone getting their degree and then leaving the country without paying back a bean?”

    Seeing as one of the main arguments of GT opponents is that “people pay income tax already” (notwithstanding that IT and GT are different but anyway) then what is to stop people going abroad already ??!!

    Indeed were we not supposed to see a mass exodus from the city and Canary Wharf overseas after the 50p higher rate? It did not happen: the city and Canary Wharf are not ghost towns with bits of litter floating aimlessly around in the silence !!

    Apart from a tiny group at the absolute pinnacle of the financial capitalist pyramid ’emigrating to work’ is a myth. My ex-consultant friend has been trying to get OZ papers for 3 years now and they keep ratcheting up the terms. This is not the 1970’s: there are more qualified and cheaper people available in SEA and the ISC- UK citizens are not nearly as sought after as they like to think.

    Good to see that- at the first moment there is actually a genuine “progressive” move put forward by Coalition- the Tory trolls and orange bookers are out in (critical) force :-0

  • There is no evidence that student fees put off people from poorer backgrounds – the proportions from different social backgrounds has not changed to any significant extent in recent years.
    But there is evidence that fees are politically unpopular with upper income middle England – the sort of people whose kids go to univ.
    Very few will emigrate as a result of a grad tax – but it does mean that that the 320,000 EU students will no longer have to pay for their univ education, costing Britain £1bn extra a year.
    I am not sure how the scheme can be said to be revenue neutral, since we do not know how much tax people will pay in the future.

  • I am sorry, I just don’t buy this idea that “because more middle class people currently take up University places (with the implication that their incomes are higher than others less likely to take it up), we should therefore levy a charge on the students”. It is not the fault of thse who take up places that some others don’t – surely the whole rationale of free higher education (OK at point of use) is to equalise out the lot of all over the years, and to use the education gained to improve the world. As someone from the baby boom years who received this, came from a non-privileged background, and haven’t hugely benefited financially, I believe it should be available to others to take up – and there is no doubt it is a benefit to wider society, not just the individual.

    I think it is playing with words to describe this as regressive. It is a universal benefit – and paid for from current taxes. If, as some have argued, there is a problem with income tax collection, then we should urgently address that problem, not run away from it and try to get the money by other, less fair means.

  • What’s to stop someone getting more than a decade of state-funded education and then leaving the country without paying a bean?

    Well, nothing, as things currently stand. I’m talking about school, of course!

  • Anthony Aloysius St 17th Jul '10 - 11:48pm

    “What’s to stop someone getting more than a decade of state-funded education and then leaving the country without paying a bean?
    Well, nothing, as things currently stand. I’m talking about school, of course!”

    What an excellent argument for abolishing state education. Let’s hope M. Gove and S. Teather aren’t reading this.

  • Conservative 17th Jul '10 - 11:59pm

    So progressive simply means attack the rich then from the comments above. Why should students pay anythong at all but least of all unfairly punish students for taking higher paying jobs by taxing them more – why does this always assault success? What we need is less people going to university for free and reinstating proper vocational qualifications. Then we need to encourage businesses and the civil service to start recruiting from 18 and 16 again bearing in mind that most degrees have little or no bearing on the job graduates eventually end up doing anyway.

  • David how do you reconcile stating correctly ” the penny rise to pay for universities is predicated on the principal that raising the tax rate increases the amount of money raised, which is not something which history has bourne out” with a belief that the graduate tax, a 2.5p rise in the tax rate would raise money, against the same lessons of history?

  • Andrew Suffield 18th Jul '10 - 12:39am

    but not by those who went into investment banking and emigrated to Zurich, Dubai or Singapore

    I just don’t think there’s a significant number of people who do this. UK citizens are, mostly, not very mobile: they have neither the resources nor the desire to relocate outside the country. The only group who are consistently mobile in this way are the education migrants – and they don’t get tuition paid by the UK government.

  • “If you use the tax increase to fund universities, which are a state provided service used by higher earners proportionally more than lower earners, instead of using it to fund any of the other state services which are used more by the lower earners than the higher earners, you are using that penny increase regressively.”

    I don’t buy this – this is the same argument the Fabians and other liars used to say raising the income tax threshold was unfair, because it didn’t help the poorest as much as it helped those who were relatively-poor-but-not-as-poor-as-the-poorest.

    Other than that, I think it’s spot on. The graduate tax is much better than fees, because of the excellent bit from Pete, leics’s comment:

    “the individual has no sense of personal debt. This is a critical issue, since once you are expecting to start grad life with big debts there is no incentive to live within your means whilst at uni which fuels the runaway consumer credit behaviour by suggesting personal debt is normal. It isn’t. It is an unnecessary burden.”

    Basically, thousands of graduates really don’t know the whole they’re being dug into. It’s like with the government and its record on deficits – oh don’t worry, let’s just take out all the money we want now, let’s not think about how we’ll pay it back, it will sort itself out somehow. I mean, they wouldn’t let us poor old grads get into a pickle would they?

    As for the thing about grads leaving the UK to avoid paying the tax – it’s pretty damn hard these days to find a job in the UK, let alone other parts of the world. Most grads these days don’t leave the UK – they can’t afford to!

  • A Graduate Tax is progessive because a Student Loan is rapidly becoming Regressive except for the Wealthy who might not necessarily be the brightest, and ablest consumers of Higher Education.

  • Christine Headley 18th Jul '10 - 11:40am

    Isn’t there something missing? Student loans don’t just finance fees, they also fund a proportion of living expenses. Vince’s proposal seems to be addressing the ‘fees’ end; how students will be able to afford books, laptops and baked beans is questionable. Unless I have missed something, in which case please point me in the right direction!

  • Andrew Suffield 18th Jul '10 - 12:19pm

    Student loans don’t just finance fees, they also fund a proportion of living expenses

    Student loans are cheap for the government. There’s no reason to take them away. Their size could be reassessed.

  • david thorpe 18th Jul '10 - 12:29pm

    thanks for the comments guys//

    @andy mayer: because its is possible to legally avoid income tax, it is no possible to legally avopid a graduate tax by any mechanism Ive yet seen.

    @ jane…if they were in a position to get a mortgage in thatchers britian then they were not really poor and not the people I have in mind with the statement I made
    @ tim 13 I dont agree University is a universal benefit, the NHS is a universal benefit, university is a lifestyle choice which many people choose for their own reasons not to take.
    also I am not a UK national but an EU one I recieved a fees loan but not a maintenance loan on that basis.
    cgharging on the basis of university attened is very regressive people go to oxbridge and become tecahers in comprehensive schools, why should they pay on the ame basis as someone who went to oxbridge and maybe even did the same course and became an investmnent banker.
    It has also been shown on numerous occasions tyhat a rise in the rate of tax does not nescessarily raise additional revenue, thatcher in the 80s showed this, as did the rise in cgt undre labour

    @christine headley…..that aspect of it is being worked on.
    @ tim there has been reseacrh from the gaurdian showing that fees are a barrier to the poorest from enetering university
    in relation @ Roberto C………………………..the graduate tax is progressive in the way the local income tax is and the council tax is not, it worlks on the basis of income not income bands, so is more precisely about actual individual earneings, while taxing at the 40% rate is just abotu the band, so the parent of an etonian pays an extra penny on income tax and their offspring go to Uni, the same penny is paid by a tecaher and a car mechanic who are just over the limit and into the top band.
    The etonian will for many reasons, not all of them economic, be much more likely to go to University, so his penny will pay for that, while the son of the mechanic may not, so his penny is paying for the etonian if he doesnt go, and not paying for services he may actually use within the state.

    I do believe that in addition to the graduate tax there should be a massively expanded system of grants and schaolarhsips for the poorest pupils and also that certain specific courses of special value socially should be exempt from the graduate tax.

  • The proceeds of a graduate tax should be ring fenced for university education.

  • “it is no possible to legally avopid a graduate tax by any mechanism Ive yet seen.”

    Try
    – Studying in Scotland, Wales or Northern Ireland
    – Studying abroad
    – Suing your university for a substandard education and asking the contribution be declared null and void
    – Having one parent who is not a UK national and having dual passports
    – Working abroad after university, particularly later in your career when you have more options and a higher salary
    – Working for a multinational who register your home office as Jersey and ‘contract’ you on UK projects
    – Changing your nationality through marriage
    – using any of the standard ways of reducing your pre-tax income such as higher pension contributions, tax friendly ievestments etc.

    All of these things become more possible and attractive the higher your income and more mobile your business. The group for which they are most difficult are high-flying public sector workers who choose to dedicate their life to public service in the UK. A tax on learning, aspiration and loyalty…

  • If the majority of higher earners are university educated anyway then all a graduate tax would amount to, compared to just increasing income tax rates, is a mechanism for excusing the small minority of high earners who aren’t university educated.

    My concern is that I’d be very surprised if the cost of implementing such a system didn’t dwarf the amount it was designed to raise in the first place.

  • ROB STEVENS 18th Jul '10 - 7:56pm

    Pretty elitist and nonsensical points- One-by-one:

    “– Studying in Scotland, Wales or Northern Ireland”

    If you now are from England but study elsewhere in UK you pay fees etc You’d also have to pay the GT

    “– Studying abroad”

    Hmm not an option open to a huge proportion of the population. Try projecting your argument for the 700,000 applicants not your own family and friends.

    “– Suing your university for a substandard education and asking the contribution be declared null and void”

    If the education was deemed to be substandard by a court then what is the problem?

    “– Having one parent who is not a UK national and having dual passports”

    You mean when you start working- if it is in the UK you’d be liable for the GT

    “– Working abroad after university, particularly later in your career when you have more options and a higher salary”

    Again not something that a huge proportion currently do and not something that is likely increase due to a GT. With skilled and cheap(er) graduates available in abundance from SEA and ISC UK citizens are becoming less and less attractive in overseas job markets.

    “– Working for a multinational who register your home office as Jersey and ‘contract’ you on UK projects”

    Again this already happens as a tax evasion technique by a tiny proportion of graduates

    “– Changing your nationality through marriage”

    Wtf!! To avoid a .5-2% GT !!! You are bonkers !!

    “– using any of the standard ways of reducing your pre-tax income such as higher pension contributions, tax friendly investments etc.”

    Again this already happens as a tax evasion

    Nothing in this list counteracts the progressive nature of a GT over and above the sledgehammer of fees/ loans. Its just another bout of ‘special pleading’ from someone who probably never liked to pay his share of tax in the first place.

  • Rob, ignoring your Netherlands football team debating style…
    – you would only have to pay the GT in S/W/NI if the UK government paid your fees to the institution in question. The institutions are at liberty to offer direct fees as an alternative, as they surely will, given they will receive no benefit from the GT. You could outlaw that, but it would be quite a challenge to the principle of devolution.

    – I agree foreign study is a choice for a few. But it is choice and it is one that is incentivised by the GT. Encouraging the well off to avoid the UK does not appeal to me as a plan for economic recovery.

    – On passports and marriage you miss my point. Tim Leunig points out EU nationals will continue to pay fees not the GT. If you are lucky enough to have the option you may choose to apply to a UK university as a non-UK citizen. Marriage is I agree not something likely be driven by tax considerations, but it provide an avoidance option if you do wish to marry a non-UK citizen. You think this irrelevant on the 2.5% alone, but it’s the incremental impact of esacalating taxes on talent that changes behaviour over time.

    – And that also is the point in all your answers where you dismiss the tax avoidance or mobility as already happening. The more tax you expect people to pay the greater the incentive to avoid. It will be interesting to see what projections for avoidance and evasion the Treasury produce if the Browne review recommends further study.

    On your final point about special pleading, I finished my studies 13 years ago, I’m not impacted by a graduate tax.

  • I don’t get the point about nationality.
    Whatever your nationality, if you live and work in the UK, you pay the same taxes (if I can get a discount, no-one told me in 12 years!)
    afaik, if you come from the EU purely to study, you do have to pay the fees as a UK citizen (not as overseas student) but do not get grants (if you’re an EU citizen already living in the UK for a certain number of years, you’re treated exactly as a UK citizen, including entitlement to grants).
    a Graduate tax could very well be designed so that if the EU citizen doesn’t stay in the UK, they have to pay full fees, if they stay, they pay graduate tax. that could be extended to UK citizens that leave the country actually.

    even without that, changing your nationality or having dual wouldn’t make any difference anyway, as long as you work here.

  • “Rob, ignoring your Netherlands football team debating style…”

    In your pseudo (self-defined…always a giveaway) Spanish debating style you neglected to answer the main point- obsessed as you are with matters of tax evasion:

    “Nothing in this list counteracts the progressive nature of a GT over and above the sledgehammer of fees/ loans”

    But I guess being progressive and centrist/ centre left is not a priority for you as I am guessing you are an orangeman (ironically, given the bad rap over het oranje) !

    @SandraF “a Graduate tax could very well be designed so that if the EU citizen doesn’t stay in the UK, they have to pay full fees, if they stay, they pay graduate tax. that could be extended to UK citizens that leave the country actually.”

    Quite

  • david thorpe 19th Jul '10 - 1:32pm

    @ ROB i would consider myself to be both progressive and orange leaning I dont think they are mutually exclusive.
    I do think rather more is being made of the nationality aspect than needs to be

  • Employers enjoy all the benefits of our country’s university system without paying a penny for it. Why should graduates fund the employer’s business costs through an extra tax burden? The employers should pay the graduate tax. Or, conversely, to avoid the tax, the employers could retrospectively pay off the university fees of each graduate they recruit. That would solve short term cash flow problems for the universities too.

  • david thorpe 19th Jul '10 - 3:44pm

    mack

    if that happens then the employer will have less money to hire the graduates so they will pay for their eductaion and then watch them on the dole, or more likely they will hire graduates and not hire other workers in blue collar professions……leaving a situation where the blue collar worker is siuffering to pay for the university eductaion of the better off which is deeply regressive.
    A system where an employyer recioeves tax breaks for putting an employee through uni is soemthing to be looked at especially if its an employee they hire staryight from school

  • David Barry 19th Jul '10 - 4:57pm

    A really good debate this to which I was referred by a comment maker on my own blog. The relevance is that I sketch out a model for the implementation of a GT. This version of GT does I believe deal with many of the objections to GT raised here. By all means have a look and see if you agree:-

    http://davidbarry.posterous.com/graduate-tax-part-two

    (basically this scheme gets money up front to the universities, and ensures that all the cash raised by the GT does go to universities – by way of the students – also students get their maintenance paid too)

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

If you are a member of the party, you can have the Lib Dem Logo appear next to your comments to show this. You must be registered for our forum and can then login on this public site with the same username and password.

To have your photo next to your comment please signup your email address with Gravatar.

Your email is never published. Required fields are marked *

*
*
Please complete the name of this site, Liberal Democrat ...?

Advert



Recent Comments

  • User Avatarexpats 20th Jan - 1:50pm
    To me Harold Wilson is the man who, despite right wing pressure at home, kept the young men of the UK out of Vietnam. As...
  • User AvatarJoseph Bourke 20th Jan - 1:45pm
    Innocent Bystander, there may be some truth in your assessment of academic economists, but most big investment banks and multi-nationals will have an economics department...
  • User AvatarJoseph Bourke 20th Jan - 1:18pm
    Jimmy Carter presidency was seen as something of a failure. However, much of his best achievements were as an International Statesman, after he was free...
  • User AvatarInnocent Bystander 20th Jan - 1:11pm
    But David, economists only exist to argue unprovable theories with other economists while the rest of us try and make the world function.
  • User AvatarJoseph Bourke 20th Jan - 12:48pm
    David Raw, I wouldn't put Harold Wilson in the category of Lenin, but his development years during the war were spent as a research assistant...
  • User AvatarInnocent Bystander 20th Jan - 12:44pm
    Obviously a real focal point of love and devotion. To have inspired such admiration and affection over their lifetime, is worthy of praise indeed. I...