What’s wrong with the all-ages graduate tax?

Tuition fees are quickly going the way of Brexit – a hyper-sensitive issue which sends usually reasonable people on the brink. So powerful is their news-generating potential that Sunday papers will jump on any opportunity to “splash” on the latest chitter-chatter, no matter how trivial or doubtful.

Cue the Sunday Times reporting yesterday that Chancellor Philip Hammond is allegedly considering cutting university tuition fees by £5,000, through reducing the annual maximum to £7,500. Naturally, the Treasury immediately denied it, but not before a choir of supportive voices from all corners of the Government. Chairman of the Education Select Committee Robert Halfon said that we need to ‘look at value for money for tuition fees’.

Whilst the question of how we choose to reform higher education funding remains unanswered, what is fairly certain is that it will be reformed, and soon. It is therefore worth considering the good, the bad and the ugly of the available proposals. And the ‘all-age’ graduate tax is a prime example of the latter.

In a paper published by the Centre for Learning and Life Chances in Knowledge Economies and Societies (LLAKES) jointly with the UCL Institute of Education, the authors propose a tax levied on all graduates, either at a single rate of 2.5 per cent beginning at £25,000 in annual income, which would have rose steadily from 0.25 per cent at £21,000, or a dual rate of 2 per cent up to £29,000, after which the ‘higher’ rate of 3 per cent kicks in on income above £29,000.

The report argues that such a tax would have a number of advantages over the current system. Firstly, it addresses the problem of inter-generational unfairness in higher education by making the generation which did not have to pay for it bear some of the current burden. Secondly, the monthly payments would be lower than under the current system, easing the burden on young graduates. And thirdly, it would bring in a lot more revenue, addressing the problem of the accumulated debt and placing higher education on more stable fiscal foundation.

The authors claim that it is not a ‘retrospective’ tax just because it makes some people better off and some worse off, since that is the effect of most new taxes or new rates. Further, they claim that older generations have received ‘private gains from their degrees which are unlikely to be exceeded, or even matched, by younger graduates’, which is something akin to an unearned ‘windfall’ which should be taxed. And this is before we get to consequentialist justifications such as higher revenues.

But is it really just like any other tax? Instrumentally, perhaps – just another deduction from the monthly pay packet on top of income tax and national insurance. But unlike those two taxes, it is justified on the basis of past inequitable effects of charging for a service, and not (at least, not wholly) on the basis of its adequacy to the current fiscal situation. So it follows that unlike income tax and national insurance, it stands or falls on the soundness of equitable principles behind it, not just its consequences.

And those are questionable. First of all, where does this stop? If we logically accept this premise, would we not also have to conclude that we should compensate the non-beneficiaries of other past fiscal policies? There is a degree of irony in the authors’ attempts to see off the ‘retrospectivity’ challenge on the basis of it being simply an elected government exercising its right to vary fiscal policy. That’s not how they justified it in the first place – you don’t defend a hike/cut on a tax by saying “it was lower/higher before which was unfair on group X”.

Were beneficiaries of lower rates of income tax in the past liable to reimburse those who had the misfortune of being born into higher rates? The authors would, rightly, reply that they are not, but if that’s so, why are they using the same logic to justify their proposals? And would the same argument apply, only in reverse, with regards to tax cuts, something currently being attempted in America? If getting ‘free’ university amounts to a taxable ‘windfall’, should we not tax pensioners who are enjoying higher life expectancy without the pension age adjusted to account for it? What about commuters getting cheaper train fares before privatisation?

As to the consequentialist justifications, those are suspect too. Would it really raise more than the current system of fees? The authors themselves acknowledge that it would be very difficult to pursue the tax on those who are working abroad. Remember also the Laffer curve effect – given this would effectively amount to a higher rate of income tax, we should not automatically assume a direct correlation between rates and revenue stream.

And that’s before we get onto the argument that a graduate tax is a complete departure from the idea that higher education is a product which you purchase for a certain price, having done the due diligence. No longer is there a connection between what you think it’s worth and how much you pay. Given that, as authors claim themselves, they welcome the fact it would bring in more to the Exchequer, they also accept that some people will over the course of their lives pay in more than they originally might have paid in fees, effectively subsidizing those on lower incomes who may not. Which means that it would do nothing to address the problem of value for money in higher education, since the incentive to pick a course giving highest chances of a highly-paid job would be weakened, not strengthened.

Then there is the inherent complexity – who counts as a ‘graduate’? Do masters’ students pay more? What about PhDs? All those questions create opportunities for loopholes and added complexity to what is already one of the most complex tax systems in the world.

The key issue we should be focusing on is value for money. What’s broken is the pricing mechanism, not the system of fees itself. But a graduate tax is a step in the opposite direction; it’s a bit like concluding that the answer to dealing with an overpriced, dysfunctional product is not to address the causes of skewed price signals, but to attempt – unsustainably – to fund it out of the public purse.  

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