Graduate tax? No thanks

One of the things which the Blair government got right was establishing the principle of student fees in higher education. It is depressing to see our hyperactive coalition government, in the person of Vince Cable, trashing this principle and trying to sell us a graduate tax instead.

There are so many things wrong with this idea that it is difficult to know where to start. One is the anarchy which seems to prevail in the government. We currently have an excellent universities minister in David Willetts plus a commission under Lord Browne considering student finance. Why is the Business Secretary butting in? Has he nothing better to do? More importantly, the proposal fails the test of credibility when he claims the revenue raised will be ring-fenced. Hypothecated taxes of this kind have a long history of being raided. And of course it is perfectly compatible with graduate tax hypothecation for other university funding provided by HEFCE and the Research Councils to be slashed. Universities should not trust a here-today-gone-tomorrow politician like Mr Cable.

Imposing a higher tax on more successful graduates is wrong on two counts. One, that highly paid graduates are already taxed at a higher rate than poorly-paid ones. Two, the individual returns on higher education conceal the fact that much of the higher pay of graduates is a reward for underlying ability, experience and effort rather than the qualification. Econometric studies of pay indicate that only a fraction is explained by a degree or other qualifications.

In many cases, high-earning graduates make their money in fields which have nothing to do with their degrees. I pray in aid the case of Lily Cole, currently studying the history of art at my old college. She is a top model and actress, who will earn huge amounts in her future career. Of course she should pay fees like everybody else, but why should she or others like her be taxed at a higher rate than, say, Twiggy, who has featured with her in Marks and Spencer adverts but never went to university?

The coalition has a doctor’s mandate to cut government spending. Mr Cable’s proposal does nothing for this, and indeed there is a suggestion that in the interim period between the existing scheme and the proposed graduate tax, government net spending on HE would actually increase.

As someone working in higher education, I believe that we should be reducing dependence on government funding of all kinds. A graduate tax would reinforce our dependence on the state, with all its pettyfogging regulation, its attempts to outguess the market and its hamfisted social engineering. It would turn the clock back a decade. We don’t need it.

You did not know where to start but you have made a good start. Let me add a couple of other issues. Who is going to decide what is “higher education” for the purposes of the tax? I am an actuary and took an economics degree. I teach people who are partially qualifying directly through an actuarial science degree. But, if they did no degree and qualified using professional route they would not have to pay the tax (to show how confusing this will be, the actuarial professional courses are provided by BPP which is a profit-making, degree awarding body!). And then there is no distinction with a graduate tax between an expensive degree and a cheap degree – everyone pays the same.

And another thing…This will mean universities will become directly funded by government again which will be a disaster. And what happens to people who take a masters course (at full fees) without having taken an undergraduate degree – do they pay?

I very much dislike the idea of ‘lifetime’ taxes, which are almost certain to further complicate an already impossibly complicated British tax system. With respect to changes to our tax system the two urgent and important requirements are: (1) reduce the rates of tax and (2) simplify the whole system, especially of taxing incomes.It is amazing how politicians are ready to renege on manifesto promises which nearly everyone wants implemented, yet insist on going through with silly pledges that almost nobody is in favour of.The motto of the coalition government, which could act as a guide in most policy areas, should be: Less interference.

A fascinating artile. I wonder if I could clarify a couple of points?“Imposing a higher tax on more successful graduates is wrong on two counts. One, that highly paid graduates are already taxed at a higher rate than poorly-paid ones…”But surely the point is that a graduate and a non-graduate on the same salary pay the same amount of tax under the current system, despite the former having received a subsidy to get there. Irrespective of whether there should be a subsidy, if there is one it is right that it is clawed back somehow.

“Two, the individual returns on higher education conceal the fact that much of the higher pay of graduates is a reward for underlying ability, experience and effort rather than the qualification. Econometric studies of pay indicate that only a fraction is explained by a degree or other qualifications.”I thought that there was clear evidence of a “Degree premium”; that graduates on average earned a substantial sum more than non-graduates, proving that their degree was value for money. Indeed, I thought that that was a major argument for why they should pay their own way.If there is evidence that the degree premium is false or over-stated, I would be grateful if you would cite it.

Further problems include:
What happens to those students who want to pay tuition fees upfront? This reform does nothing to help reintroduce a fully functioning pricing system into higher education which reflects the costs involved, the preferences of students and the demand for certain skills in the market.
Such a tax will also make it much more difficult for universities to attract donations from alumni, making universities more dependent on state aid.
Finally, since when is it the role of a government minister to dictate how private institutions should be funded? Maybe some universities might like to offer this option as one of many different payment methods – why not let them decide?

I don’t think this is a very well thought out tax. Does this mean new graduates or all existing graduates pay the tax. This would be a huge burden for people who are now graduates who may have chosen a different route if they knew they would foot the bill later on. Assuming it is all graduates.

Tom, with respect you may have misunderstood me. There is a graduate premium, but many factors influence people’s pay, and their degree is only one factor. The excess of a graduate’s pay over a non-graduate is not a good measure of the effect of the degree, as graduates typically have other characteristics which differ from those of non-graduates. Another way of looking at this is that shown, for example, in longitudinal studies of graduating classes, where people with the same qualification go on to very different classes.

To be even more concrete: I was at university with the current Governor of the Bank of England. We attended the same classes and sat the same exam. He now earns considerably more than me. His higher pay reflects graduate degrees he undertook, jobs he has done, work he has published, a great deal of drive and outstanding ability. He already pays more income tax than me. Why should somebody like him pay extra graduate tax compared with someone like me? It is a tax on ability, commitment and effort and why should these things be taxed at a higher rate if you have a degree?

Len,Thank you for your clarification. I had indeed misunderstood and thought that you were suggesting that the graduate premium was not real (in my defence, one can see how the sentence “that much of the higher pay of graduates is a reward for underlying ability, experience and effort rather than the qualification” could be taken to imply that).I think there is in fact a further point here. To the extent that the state subsidises higher education for economic ends, we should be encouraging those degrees that are more economically productive, rather than requiring the more productive to pay more in tax. A results-blind system compensates for poor degree choice or academic failure.

But the state is not in the best place to decide which degrees are more economically productive – and arguably it does not need to subsidise those degrees that are economically productive. Personally, I would rather the state helped students with maintenance if the state is going to help them at all (especially if the students did nothing they could claim social security). Charge full fees and put any state subsidy into maintenance (which would be economically neutral).

I agree with Philip’s proposal to charge full fees up front. I would add to this a proposal that fees and maintenace should be financed privately through personal loans. The contract would stipulate an undertaking that the borrower graduate and obtain a graduate job within a reasonable interval. If he kept the undertaking, public funds would be released to pay off all or most of the loan. If not, then the loan would fall due for repayment at once, and the graduate could be bankrupted if unable to repay.This would have the advantage of weeding out of HE those who, though academically able, would be better off doing something other than a degree, such as getting a job with training.

Philip,Now I think you’ve misunderstood me! I am not suggesting that the state can pick adademic winners. I am saying that taxing those whose degrees bring them greater success at a higher rate than those whose degrees prove subsequently to be less useful/productive runs counter to logic, as it reduces the risk of failure and increases the cost for success.

I still disagree with the concept of a graduate tax. No more than 15 per cent of the population can cope with an academic education at higher level which is up to standard as such, and not dumbed-down.Of these perhaps only a third are able both to cope with such an education and to get those graduate jobs which are actually available. The others are destined for a life on the dole or in burger-flipping, when they are ought to have been deterred from going to university. Being capable of so much more, they should have had that capacity developed through apprenticeships and high-quality vocational courses of direct relevance to wealth-creation.

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