Opinion: A lucky escape from the graduate tax?

If the BBC is correct there is sufficient opposition within the Coalition to stop a graduate tax seeing the light of day and instead come up with a system that is like fees, but not fees, and retains some kind of link between student and university. On that we will have to wait and see what it is before commenting.

I do not though fully understand why a reputable economist like Vince Cable gave the National Union of Students’ graduate tax proposal serious consideration. Apart from the clear inconsistency and hypocrisy, Vince presided over a party tax commission recently that called for simpler internationally competitive taxes and a focus on unearned, not earned income, it makes little sense even within its own criteria.

There is a possible political motivation. Reports around the Coalition negotiations suggested Vince was desperate for a deal with Labour. He clearly refused to work under George Osborne in the Treasury, and this support for a policy recently supported by Ed Miliband, might be a nod and a wink to a future ally.

But as a credible policy to better fund universities or be fair to students it was worse than the current system of fees. Here are some reasons why:

The Current System

The mixed system of state funding and fees is fair, reasonable and works. It provides some approximation to a social/individual benefit split from higher education. It creates a market in courses that compels students to think about the costs and future benefits of what they study. You can pay the fees through a loan. The repayment mechanism cannot impoverish you and stops when the debt is repaid. The debt accumulated is a small fraction of what most graduates will end up borrowing from banks at worse rates to finance their homes.

More people now attend university than did when it was ‘free’, and there is no evidence of talented but hard-up children rejecting university on the basis of fear of debt.

I am unconvinced then by the usual student debt arguments deployed by defenders of the pre-fees system. On fairness New Labour (remember them?) were right to point out that an entirely tax-funded system was moderately regressive given the implied subsidy to future higher income earners who were also overwhelmingly the children of higher income earners. For the moderate left then fees are more balanced than a full state subsidy, and encourage some personal responsibility.

Flat fees with poverty relief are also not unusual in our welfare system, prescription charges, passports, driving licences and similar. Tuition fees may be the largest, they are not unique.

There are problems. The current fees system does not adequately fund universities and the Russell Group would like to see them rise. The cap on fees also prevents a market working effectively and there is no discrimination in pricing between high-value and commodity courses. Raising or removing the cap though is politically difficult for Tories and perceived as politically impossible for the Liberal Democrats given the party’s long-standing commitment to abolition.

If Labour though can stop bleating about publicly funded mines, we can move on from this.

The Graduate Tax

The Graduate Tax, the latest NUS version of which would mean all graduate income above £15,000 would be taxed at 5% for 25 years, is more progressive on paper, should in theory fund universities to the tune of £6bn, and in early years will be a lower rate than the 9% deducted from income for loans. It sounds seductively brilliant, so what are the problems?

The main issue is that it suffers a traditional hard-left delusion that people don’t understand the real cost of high taxes, because they’re percentages. Five is such a small number, even one pound in twenty doesn’t sound like much.

In the real world where money is money and buys stuff, an example high flier, let us call her Jo Swinson, has done well. She’s got a job worth £66k a year and has had it since five years after graduating from LSE. If it continues at that level until the end of her repayment period, she will have paid over £50,000 for a course that under fees would have cost £9,000, or around £15,000 if the cap were raised. If she becomes a minister she will pay more.

Another example, let’s call him Chris Huhne, is super-bright and entrepreneurial; he seems to have made around £3.5m since graduating from Oxford. Under the graduate tax he’d then have paid about £175,000 for a PPE degree; extreme even for the privilege of Vernon Bogdanor’s company.

Neither of these two knew precisely how well they’d do, but people don’t go to university without any sense of ambition or expectations of future earnings. And whilst these two might prefer to give their money away, most rational people don’t leap at the prospect of paying 200% or more than they should for a service.

Worse, for the rest of us underachievers, to pay less than £15,000 for your course you’d have to have average earnings below £27,000 pa over 25 years. Given the average starting graduate salary in 2008 was between £20-£25,000; it looks like the NUS are advocating a scheme that would sting almost everybody for the majority of the repayment period.

Not only that but it would be perceived to be doing that, and the sensible risk management position is to assume you earn to the higher side of your expectations when deciding what to do.

Avoidance

Such a punitive scheme will encourage avoidance and severely damage elite education in England for high achievers and professions such a law, medicine and finance.

How much avoidance we cannot say, it requires Treasury and independent modelling. But neither can Vince Cable who really shouldn’t have endorsed the policy before thinking it through; particularly now he’s got access to all those people the state employs to do hard sums and consider the impact of policy.

What we can say is the avoidance options are closer than you might think. Scotland, Northern Ireland and Wales under devolution could retain fees as an option for English students. Their fees are already cheaper. Dublin is closer than Edinburgh to many parts of England and English is the first language. Dutch universities are an option and for linguists the whole of the EU opens up with a range of grants available for talent. You can even do one year of an EU course in the UK. UK universities would be incentivised to set up satellite offices or colleges in tax havens, and Gibraltar College Cambridge would have better weather than the miserable fen.

The US is not cheap, but there’s a reason for that, their elite universities are the best in the world, and their scholarship programmes the best funded.

Discrimination

International students pay around £10,000 a year to study in the UK; still better value for Jo Swinson and Chris Huhne than the graduate tax. I can see no sensible reason why an English student should be refused permission to pay the same.

A student might also reasonably argue that given the graduate tax represents a fee paid by the government on your behalf to a university, the rest being covered by your parents’ taxes, why can’t they pay the fee themselves if they wish, or take out a loan to do so. What kind of liberal compels you to take a bad loan from the government when you can pay for something yourself?

No Market delusion

The graduate tax would not as the NUS hope ‘end the market in university education’, just make it harder to access for those it is designed to serve. Where there’s a bill, you can pay.
Pre-tax avoidance will happen.

Non-Doms

But there is also post-tax avoidance. Another example, let us call him Vince Cable, decided to work for the greater good in Africa and for the Commonwealth for much of the 25 years of his post-graduate career. In Africa he would have avoided graduate tax entirely, whilst at Marlborough House, depending on what he actually did he could have arranged his affairs for avoidance by working outside the UK most of the year.

‘Ah’ some say, ‘but you can’t avoid the fees repayment doing that, they follow you around, and the graduate tax will be the same’. This is incorrect. International law means you can be pursued for a legal debt; it is not the same for a tax based on non-domiciled income. Such things are covered by tax treaties, most of which try to avoid mixed taxation from two national authorities, and there is no obvious reason why any country would damage their ability to attract the tax-dodging cream of English talent by signing a special agreement.
Post-tax avoidance will happen.

Progressive?

The common theme in all of these avoidance options is that they are more open to the children of the well-off, talented and aspirational than not. And this undermines the great lie of the NUS campaign that it is progressive. It is superficially progressive. What it actually does is creates a scheme where those with the fewest options up front and most success later pay the highest fees.

And even if you think that limited redistribution is important, what is the social problem this is trying to solve, that isn’t better targeted by existing redistribution schemes like welfare? ‘Not getting the same return from your degree as a banker’ is not obviously something the founding fathers of liberalism had in mind when they sought freedom from poverty or the widest distribution of wealth possible.

Money-Spinner?

If avoidance happens the scheme will not raise the money intended. If that happens the rate of graduate tax will have to rise, and it might rise anyway if we get a future Labour government led by Ed Miliband looking around desperately for ways to bail out their next credit expansion scheme. That expectation in turn will encourage more avoidance.

Narrowly progressive, punishes success, won’t raise what it claims, drives talent abroad, and requires compulsion that treats English students differently to non-English students. What was the liberal argument for this that appealed to Vince?

For the workers?

Another string in the NUS campaign is benefitting low-paid valuable employment that requires high intelligence. Bankers… yuk… Charity workers… yum…

But one group clearly impacted more than others by the graduate tax would be high fliers in the UK public and third sectors. Finance is an international market; most of the caring professions are domestic.

One group subsidised conversely, would be graduate prisoners. Rob a bank in your 25 years after university and you pay less graduate tax than if you don’t. This is not true of a loan for fees. Another would be peers, their ‘allowances’ ludicrously are tax free. They are not debt free. The Daily Mail headlines write themselves.

Generally though this point is special pleading masquerading as principle. Tim Farron, for example, may think such a scheme is awesome. Tim Farron also took a low-paid political job after university as Newcastle Union President, and then worked in higher education; clearly he would have benefited directly. Liberal Youth are not obviously a group of hard-up youngsters cruelly denied educational opportunity by reasonably priced loans. Why should doctors subsidise the degrees of wannabe MP researchers more than they already do through direct tax?

It is also the case we all contribute to the common good in our employment, even bankers, and even if only all that means is you pay tax. There is no hierarchy of worth that makes any sense, and if there were it would not be inversely correlated with salary. A head teacher is usually a successful teacher, someone who is still a classroom teacher after twenty-five years usually is less so. Both did the same course, why shouldn’t they pay the same fees?

The answer to this usually returns to redistribution in some form. But are we in the grip of some kind of scientology of socialism in this party?

More to life than Lorenz

There are values that matter to liberals other than the shape of the Lorenz curve. The liberty to choose is obvious, but also aspiration, justice, ideas, growth, truth, beauty and a myriad of other social goods that depend on the freedom to study and a thriving university sector that supports excellence as well as life chances for technicians and administrators.

You won’t get that by treating smart aspirational people like cash cows, and that is precisely what the graduate tax and other punitively high tax schemes do. What concerns me most is that either Vince can’t see this, or thinks it matters less than his personal preferences over coalition partners.

* Andy Mayer is a Liberal Democrat member in Bermondsey and Old Southwark.

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17 Comments

  • Such a contrast to all the posts saying what a great idea this was when Vince announced these proposals.

  • except, of course, that he never announced a graduate tax. He likened tuition fees to a graduate tax. Still, lets not let facts get in the way of a good rant.

  • Andy – a wonderful article and refreshingly different from the usual sycophantic nonsense on Lib Dem Voice. It also gives me some little hope that the party hasn’t been over-run by neo-Liberal Orange book Tories.

    Cable is confusing at the moment. Add his kite-flying today about bank funding and it appears that VInce is trying his hardest to position himself for something. What, I don’t know. But positioning none-the-less.

  • Here’s another ‘what is Vince upto’ question. I am a staunch supporter of the party and am one of those who defended the coalition vigorously. However, I feel hugely disappointed and let down today. I am a civil servant and have discovered that a decision has been taken to axe the civil service playscheme. The civil service playscheme is run for the children of civil servants. There hasn’t been any consultation or prior warning. The playscheme has run during every school holiday and allows women with children like me to carry on working without having to worry about childcare. However, the scheme will terminate at the end of this summer holiday. I can’t believe that the coalition govt with our LibDem family friendly policies has been a part of this. The decision reduces the work/life balance of women like me but, more importantly, sends a wrong message to the rest of the country. Forget my hardship for a moment and consider the wider picture. If the Govt can’t be bothered to run a playscheme then who needs to try? Government has always set an example to the rest of the workforce in terms of setting a workplace agenda. Flexible working, work life balance and the concept of working from home were put into practice by the Government in the civil service before others followed suit. The Diversity Agenda is crucial to the inclusion of women in the workplace. Why bother worrying about including more women in Parliament when we are making life harder for them at grassroots level? Here’s the gem – the decision to axe the scheme was taken by the Department for Business of which Vince is in charge. This has always been the department that set the high standards for others to follow. Women are hardest hit by the recession because they are recipients of subisidised services like childcare. So much for family friendly policies!

  • John Fraser 26th Jul '10 - 8:00pm

    This in neo ecopnomivc liberal nonsense that turns a suitable education into a simple commodity rather than a right. Their is something on the very of vindictyive about the generational theft (of basic rights) that such writers will dump on young poeple of today with glee.

    Vinces policy was not perfect but it as a damned sight better than that . If Vince was NOT having difficulties working with such a right wing extremist as Osborne I and many others in the party would think the less of him.

  • LOL. This article has been called “neo liberal” and explicitly “not neo liberal” within 3 posts.

  • “The mixed system of state funding and fees is fair, reasonable and works.”

    Lib Dem policy changed from the promise to abolish fees has it? How quickly supporters abandon their views on key policies change in your party..

  • I am just worried about all this….
    I work in Higher Education, and in spite of the increase in funding during the last decade, rising student numbers have meant that the sector is already seriously squeezed in terms of staff/student ratio, staff time for students and so forth – not to mention admin and of course research (pretty much the sole factor in HE staff evaluation).

    I support the LibDems – but the one aspect of the manifesto I was very doubtful about was the pledge to abolish tuition fees. It’s a very good idea on paper, but I simply cannot see how on earth Higher Education will be funded purely from taxation. Even before the crisis there simply wasn’t enough money to do this, and I certainly haven’t heard any good answer to this criticism.

    It’s the one LibDem policy left that really seems pie-in-the-sky rather than a realistic proposition.

    Seeing that my job is on the line, I am naturally not best pleased with such a proposition.

    There has to be some sort of realistic policy. I am tentatively in favour of a tax rather than fees: I don’t see a problem with more higly paid people paying more: think of university as a means to add value to your salary – giving back a percentage of that added value doesn’t seem overly unfair to me: in fact, it seems fairer, especially for the people who use their degree to work in lower paid public sector jobs (e.g. as teachers).

    And I’d like to see serious studies of potential tax avoidance before I buy that argument, however skilfully it is presented (as it is above) – those scenarios seem exaggerated to me. Moreover, if a graduate tax gets more Brits to study abroad, including in non-English speaking countries, that would definitely be an unintended, but throughly positive outcome as well. Brits are far too insular when it comes to university choice, and we could do with more graduates with overseas experience.

  • Andrew Suffield 27th Jul '10 - 1:45am

    The cap on fees also prevents a market working effectively

    Which is one of the goals, because an ‘effective’ market in university education means rich people get good educations and poor people get bad or no education. Personally, I don’t like that idea.

  • Malcolm Wood 28th Jul '10 - 12:05pm

    Really enjoyed reading the article, and would be interested to hear more on what you mean by being “in the grip of some kind of scientology of socialism”.

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