Vince’s Graduate Tax is no easy win

Vince Cable yesterday floated the idea of a graduate tax to pay for university funding, as an alternative to top-up fees.

In the early 1960s, around 4% of young people went to university.  Today that’s nearly 50%.   Undergraduate education has changed beyond recognition over those fifty years and, with money tight, another government is having another attempt to sort out funding.  As Vince has made clear, a graduate tax is one option he wants considered.

Encouraging those with the ability

The UK has never quite cracked the problem of getting people from poorer backgrounds into higher education.   If you’re in the poorest 20% of society, there’s a less than a one in ten chance you’ll go to university.  If you’re in the wealthiest 20% that figure’s touching on 50%.

No-one seriously thinks that can be fixed by reforming university funding: the barriers are clearly a lot more complex and the problems start at nursery age, not at eighteen.  But finding a way of funding higher education that leads to more of those poorer students coming into the system must be a positive step.  The question is whether a graduate tax would achieve that.

Who pays?

There’s no such thing as free education, of course.  Universities cost money and someone always pays.   Having a more educated population benefits everyone, including those without degrees, and people who earn more because they’ve a degree already pay more tax.  Many assert a principle that higher education – like 5-18 education – should be paid for totally from general taxation.

But on the other hand, those with degrees typically benefit from their degree more than a random citizen.  It may well be that, in some ways, the person who left education at 16 and earns a living on the tills at Tesco benefits from you having a degree, but you benefit more.

Then there’s the practical matter –  money has to come from somewhere to maintain the higher education sector.  Few are keen to pay more, but someone’s going to have to and the choice seems to be between all taxpayers and just those who’ve attended university.

Problems with a graduate tax

Lest anyone should think a graduate tax is a pain-free solution, it has plenty of challenges of its own.  Are we happy with high earners paying back much more than their education cost?  Will the money raised all be channelled back into higher education, or will it vanish into the Treasury’s vaults? Do people pay forever, or is there a ceiling on repayments?  How do we recover money from EU and overseas students, or from anyone who takes a degree and then leaves the country to work abroad?  When do people start paying?  Does everyone pay the same percentage of their income, or does the level of tax vary?

Too many students?

This year, once again, there are more applicants than university places.  One conclusion is that the number of places needs to be expanded so everyone who wants to go to university can attend.  That may be true.  But there’s an alternative view – that some of the people who want to go to university won’t benefit from it and would do better to follow a different educational path (e.g. an apprenticeship).

With the tenfold increase in numbers since the 1960s it would be ludicrous to think the system wouldn’t change.  If you’re going to educate half the population to degree level, the average undergraduate is clearly going to be less intelligent than if you’re just taking the top 4%, the degree courses will be different and the teaching methods modified.

The debate about who goes to university has often stalled at comical barbs about media studies degrees – perhaps it should be taken a little more seriously.

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30 Comments

  • As far as I can tell a Graduate Tax would take all of the problems of the current system and compound them.

    Students worried about debt racked up over uni, albeit paid back PAYE? GT effectively places them in permanent and unlimited debt in the form of higher tax. Cashflow shortfall in terms of people starting paying off their loans some time after they graduate? GT may never recoup the costs of higher educating those people, and unfairly burdens higher earners for services rendered, while not making the cashflow problem any easier.

    I have not seen any hard evidence that poor people are put off because of the high fees, precisely because those fees are in the form of income-contingent loans, and people expect to benefit financially from going to university. I even read somewhere that the proportion of poor people with good grades going on to university was almost identical to the proportion of middle and high income students with good grades going to university, the huge gulf in real terms obviously being due to the fact that students from low income families so consistently leave school with poorer grades. Surely it should be clear that this is the real issue to be tackled; how can we make schools in poorer areas perform as well as others, regardless of the socio-economic background of their students? Maybe it’s systemic, maybe it’s funding, maybe free schools are the answer, maybe better teachers, I don’t know. But I do know that that is the only way we will get more poor people to uni, by focussing on 3-18 education.

    As for free university education, give me a break. Given the student demographics, fully taxpayer-funded higher education represents a huge redistribution of wealth from the everyday taxpayer, most of whom did not go to uni and many of whom are low income, to middle-class children, who have already been at a natural advantage from their birth. Saying “society needs more graduates” is at the moment a middle-class wheeze. Society needs greater social mobility, better universities, and a much better pre-uni education system, but none of those goals are aided by the thirst for more graduates.

    Which leaves the initial problem of cashflow shortfall. I think it should be the students who pay, and I think our current system of income-contingent loans is the only way that can happen, but this leaves a huge deficit in the universities budget. The only answer is fewer students going to university, at least with government loans. The graduate market is currently flooded with too many bodies, and not just because of the recession. It would be lovely if everyone could sail merrily on into their thirties learning more and more and becoming happier and everyone shat sunshine and flowers picked themselves, but the government must think in terms of the economy as a whole. Sending so many kids to uni raises their hopes and their sense of entitlement, only to crush them, and leave them with huge loans to pay back, which is terribly unfair on them, and it also takes hundreds of thousands of young potentially skilful wealth-creators and entrepreneurs, the very people who best understand young people and the future, and makes them economically inactive, which is bad for the country.

  • Yet another Lib Dem proposal which penalises the poor. Under this stupid proposition the children of the rich will pay their university fees up front and thus avoid paying the progressive tax on their huge future salaries which is supposed in the main to finance the scheme. However, poorer students will be burdened by a graduate tax which will remain with them for life. Don’t agree? Can you really imagine the Tories abnegating the right for wealthy people to pay their children’s fees up front and thus avoid the graduate tax? Tories are so fond of paying taxes, as we know! And of course, the rich also have the option of educating their children abroad. It is unfair proposals such as this which have plunged the popularity of the Lib Dems down to 15% in the polls. If this is the best Cable can come up with, he should resign.

  • @Jack “Which leaves the initial problem of cashflow shortfall.”

    Make the employers pay a graduate tax. After all, it is employers who reap the benefit of our superb education system for nothing. Really wealthy employers could pay off the fees of their graduate recruits when they take them on and, if necessary, deduct the amount from the huge bonuses these graduate employees will undoubtedly receive as their careers improve.

  • MacK, I think it is highly unhelpful to frame this as some kind of class war, rather than a more prosaic problem of funding, which it is. It would be very unfair to tax higher earners (who already pay proportionally more income tax) even more, on the basis of using their degree to create wealth. Even more than high income tax bands (which often include talentless money-pushers and those with skills on which the market places inflated value) that would be a tax on success, which we do not want. Not every high-earning graduate is a stereotypical “Tory bastard”.

  • @Jack: class-warrism aside, JacK makes the important point that employers gain from the skills picked up at University for free. And transferrable skills are emphasised these days more than ever (I have to do 10 days of “skills training” per year at University). In the past, employers would train their graduate recruits at their own expense so they are being given a massive present by the higher education sector. It would make sense to make the employer liable for 50% of the graduate contribution.

    I would also like to see exemption for those staying in academic research (if they’re lucky enough to be over the income threshold in the first place), so that the pressure for Universities to be kindergartens for the banking and consultancy sector is decreased.

  • Ooops, I meant MacK of course.

  • Student loans are the sole component of student debt.

    A reasonably intelligent person (and lets assume that includes anyone attending university though the evidence of some of my tutorial class colleagues would suggest otherwise!) would regard a student loan as a relatively risk free debt (real interest of 0%, no requirement for repayments if on low income/unemployed/long term sick etc).

    The bit that does cause problems is the additional borrowing most students require – commercial interest rates, repayments starting sometimes immediately, no relief if unemployed etc.

    With state loans not covering living costs taking on that debt is inevitable and much more of a deterrent than borrowing from SLC.

  • Yet another example of the Lib Dems being hit with the reality of government. The whole Lib Dem opposition stance of ‘abolishing’ tuition fees was a huge fraud .I listened to Vince Cable last night and he repeated almost word for word Labour’s reasoning for bringing in tuition fees.

  • paul barker 16th Jul '10 - 1:14pm

    Does anyone think of future taxation as a debt ?

  • @ Jack

    Why is it class war to suggest that the employers should pay their fair share for the huge benefits they receive from the education system.? Why should labour (i.e. potential graduate workers) bear the whole burden of what are essentially business costs?

    @ Lee Griffin @Ed

    Totally concur.

  • This is a complete and utter dog of an idea. Vince Cable should have the sense to drop it.

  • Phil Martin 16th Jul '10 - 3:08pm

    So the day has dawned when our no fees policy has run out. If we are honest it was populist but lacking in viability for a party of Government. I assume Vince has always known that the current system is in effect a type of graduate tax but restricted to the actual amount borrowed so has decided to tweak it to make it a bit fairer. Quite how we get the extra cash that universities need I’m not so sure.

    Rightly or more likely wrongly we have made this a cornerstone policy. We cannot afford to get it wrong. I think Vince may have also recognised that high university attendance rates are a good not a bad thing. Labour’s target was a bit daft and unnecessary but was based on the levels of attendance increasingly being reached in other developed economies. Best to drop the idea, but without the nonsense about it being desirable for less to go. Find mechanisms for universities and would be students to determine numbers not Govt.

  • Lee, you have an interesting idea of students’ motivations.

    For a start, the X% is likely to be much smaller if you get a 2:2 and a crappy job than if you get a first and a high-flying career. The NUS proposals are for 0.3% of income at the lowest band and I think 2.5% of income in the top band. But secondly, they’ll only be paying this tax if they have a job. Do you think our current tax system puts people off going into the city rather than teaching because they’ll have to pay an extra X% more on their earnings? It certainly doesn’t seem to.

    As for deliberately scuppering your career by failing on purpose in order to get out of paying an extra 0.3% tax on whatever job you can get without a degree these days, anyone thinking that is rational probably doesn’t deserve a degree in the first place.

  • John Fraser 16th Jul '10 - 6:09pm

    If its this a graduate tax that would allow universities to put UP their fees if it is then all that Vince is doing is creating a smokescreen for the lies we made to the electorate.

    If it is a graduate tax on the level of existing fees it is an interesting idea.

    Its crunch time Vince members and the electorate have been mislead by the party enough. Make sure its the second option or the party may go into freefall .

  • So

    “In the early 1960s, around 4% of young people went to university. Today that’s nearly 50%.”

    and yet

    “If you’re in the poorest 20% of society, there’s a less than a one in ten chance you’ll go to university. If you’re in the wealthiest 20% that figure’s touching on 50%.”

    How do those two statistics correlate? nearly 50% of young people go to university… yet only the wealthiest 20% of society are approaching the 50% going to university rate?

    Huh?

  • “It’s asking students to make a financial judgement at the beginning of their HE life before they know how that judgement will pan out. In this sense it’s a needless barrier, one that is less of a barrier to education for those with disposable incomes while they’re at uni. You can cite the banking sector and other high earning sectors if you like but people that embark down that line know exactly what the tax/reward is going to be for choosing that path.”

    It also puts the Governments emphasis on the end result of going to university, rather than attendance in itself being the Goal. People will argue either way as to whether this is good, but my personal belief (as a university graduate) is that University education has been too much of a focus in it’s own right, as opposed to what it leads to and does for you in the long run.

    It also means that people may be more willing to consider alternative methods of training… if they can go on an apprenticeship scheme, achieve a high salary and not have to pay so much tax, then this is going to seem more attractive. I fully agree with redressing the balance between practical vocational training and university education.

    I agree that there is a danger that it could prove a disincentive to doing well and getting a well paid job at the end (although I struggle to see why people wouldn’t, having finished University, go for the best paid job they can… I really think this goes too much against peoples nature), however I think the benefit of providing a psychological safety net for people who are not sure if university will benefit them (one of the key issues with getting people from the poorer sections of the population to go to university) outweighs them.

    Another benefit over the current system is that it, if graduate incomes are linked to university funding, then the Universities will be more inclined to increase the role they play in trying to guide and support students in finding a job in the career they have chosen. This could potentially strengthen links between universities and companies/organisations/industries, leading to courses that, by necessity and interaction, are more in tune with the industries they tie in to. If this were to happen it would help reduce the number of students who leave university and don’t find a job (and are therefore unable to pay back fees) and in time would give students more confidence that a university degree leads to a job at the end.

    I’m undecided whether I think this is a change really worth making, or whether I support the Government on this matter or not… but these are advantages I can see so far. I’m sure there are many disadvantages too… the point about mature students paying there fees up front being one, and similarly for those parents who can afford to and want to pay their child’s fees and thus freeing them from future debt.. yes it’s nice to bash people with lots of money, but they have a valid argument that they should be allowed to support their children with it. On the flip side though, it means that if this were to go ahead children from wealthy families have one perceived advantage removed, as I’m sure parents would be less willing to pay off a childs extra tax, than they would be to pay up-front fees… we shouldn’t discount the ‘all in the same boat’ feeling in determining whether people from all backgrounds feel willing to attend university. I know from experience that a lot of people resented the fact that they would be paying loans for fees back after finishing, whereas people with rich parents wouldn’t have to pay anything as it was all covered for them already.

    Don’t mistake me, a free education system is the perfect solution… but with the large numbers of people attending it can’t be sustainable to do so. However I’m deeply annoyed that the debate does not include whether trying to send everyone to University is desirable or beneficial to society.

  • These proposals will put the universities in hock to the banks which will increase their debt while they await receipts from the graduate tax; this will then make it imperative for them to increase their fees astronomically; universities will then be even more dependent on wealthy and foreign students who pay their fees up front; result, places for those poorer, indigenous students who haven’t been put off by the graduate tax will be drastically reduced. But the Lib Dem Cons won’t worry about that because it will mean fewer members of the proletariat will have been given the analytical skills to critique the Coalition’s class war policies.

  • This graduate tax idea is plainly stupid. It just doesn’t add up.

    The only way to fund free higher education is to put up other taxes. VAT has gone up too far. Putting up income tax and national insurance is the answer.

  • John Fraser 17th Jul '10 - 1:22pm

    @Lee
    If train drivers or nurses said they needed a 30-40 percent increase in wages we would treat this as a not very serious negotiating position . The number of wasted degrees needs to be looked at as well there must be better ways of educating people than giving them a 2:2 in media studies just so they can stack up shalves at Tescos.

    An absolute promise of fees not increasing was made by us and should have went into the coalition negotiations. The fact that our leader disliked this policy and kept tryng to drop it undemocratically was probibly the reason it didn’t . We have now U turned on so many of our campaigning issues that we are fast becoming a party that the public will not trust again in a hurry

  • Everyone is talking about the “value of education” while completely ignoring the fact that so many people leave secondary school with insufficient education and skills. Surely the value of education is far higher here than for university students. All this “free higher education” nonsense would do would be to further entrench social immobility and poverty. It’s a conceited and blinkered middle-class racket.

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