Objections to a graduate tax

20 September 2010

Commenting on the idea of a graduate tax to fund universities, Dr Wendy Piatt, Director General of the Russell Group, said: 

“In the second submission that the Russell Group made to Lord Browne’s review, we showed why the present system of income-contingent graduate contributions includes the best features of a graduate tax while avoiding the many downsides.  At present there is no upfront payment for students when they enter university.  Graduates only begin to make repayments when their earnings reach £15,000 pa and even then they contribute a fixed proportion of their income (9% of income above £15,000).  Repayments end when the loan is paid off.   If, for whatever reason, the graduate is unable to start making repayments within a 25 year term, the loan is written off.

“All the disadvantages of a graduate tax that we outlined in our evidence explain why no other country has yet implemented this system of graduate repayments.   There are other issues to consider too, for instance it can be problematic even to define what is meant by ‘a graduate’ (which qualifications lead to ‘a graduate’?).”

The points below are extracted from the Russell Group's second submission to the Browne review.

Graduate contributions: Why a general ‘tax’ is the wrong option

Some commentators have argued that a graduate ‘tax’ is a fairer means of facilitating graduate contributions to higher education than ‘fees’ and ‘loans’. Yet there are important reasons why this kind of taxation is unfair, unsustainable and probably counter-productive:

1. No clear benefit to students

The current system in England of fixed contributions supported by income-contingent repayments is similar to a graduate tax, but one which is capped at a fixed price.  It therefore has all the key benefits of a graduate tax – that students are not required to pay anything up-front, and their contribution is linked to their earnings as graduates, without the significant disadvantages discussed below.

2. Counterproductive - Avoidance behaviour

Taxation or finance schemes which attempt to extract significantly higher contributions from middle and high earners can easily become counter-productive and result in lower overall revenue.

The prospect of incurring a punitive tax liability would undoubtedly create incentives for those who anticipated higher earnings to avoid paying the tax. This may introduce perverse incentives for the most talented students to seek an education outside of England, and for best graduates from English universities, both home and EU, to move abroad and deprive the UK of vital skills and knowledge. Even without moving overseas, many graduates who expect to become higher earners would seek to pay their tuition up-front. The Government would then face a choice between compelling all graduates to pay the tax, or risk losing many future high earners, in which case graduates unable to pay up-front would likely face even higher tax burdens. In both scenarios, poorer students, with more limited choices, would be the least able to avoid the graduate tax liability.  Those likely to pay the most overall would be students from low income families, who lack the resources to pay fees upfront but who nevertheless, go on to become very high earners.  This would not be supportive of social mobility.

3. Counterproductive - Loss of charitable contributions

The NUS proposes that a graduate tax should be levied for 20 years post-graduation. It is likely that the ongoing expense of a graduate tax would greatly reduce the inclination of graduates, especially high-earning ones, to give voluntarily to their former university. In recent years this has become a growing and more important source of income for universities. 

4. Breaking the link between price and quality

In contrast to the competition generated by fixed prices which could be set by universities, a graduate tax would provide little incentive or adequate resource for universities to drive up quality. By moving to a central allocation of resources under state control, it would undermine university autonomy, restricting their ability to invest in the teaching and learning experience in a manner responsive to the needs and wishes of their students. Furthermore, although graduates would make different contributions according to their earnings, this entails a somewhat simplistic approach to pricing the different benefits which graduates secure from their education, which fails to take into account the overall undergraduate experience or overall experience in later life. It therefore perpetuates much of the unfairness of applying the same price to very different modes of education.

5. Hypothecating tax revenues

There are very few examples of the UK Government ring-fencing future tax revenues for a specific purpose. It is far from clear whether graduate tax revenues could be ring-fenced for investment in higher education. Higher education institutions and future students would be taking a risk that future political leaders would remain committed to higher education. 2.

6. High up-front cost

Raising investment in universities through a graduate tax would require a major up-front investment by Government which it would be unable to recover. The only alternative would be many years of under-investment in universities until the graduate tax revenue becomes available. Unlike a clearly defined obligation, or ‘loan’, the Government would not be able to offset current expenditure against the loan book, so any up-front expenditure would have to be raised through adding to the level of public borrowing. In addition, the Government would not be able to raise cash to support these costs through the sale of graduate obligations. A large increase in up-front, non-recoverable spending on higher education is unlikely in the current economic climate.

7. Overpayment

A key difference between set graduate contributions and additional taxation is that the latter breaks the link between what graduates repay and the costs of their study. Under the graduate tax system recently proposed by the National Union of Students, some graduates would pay back a great deal more than the cost of their own tuition. The NUS estimates that a tax system would eventually provide additional investment equivalent to £5,000 per year tuition fees for all students. But we estimate that under these proposals the lowest 20% of earners would gain no benefit, average graduate earners would pay the equivalent of a £5,000 per year tuition fee, while graduates in the upper 20% of earners would pay the equivalent of tuition fees of at least £13,000 per year.  If fees alone are considered, the contribution made by these higher earners would be equivalent to fees of £16,000 per year.

Average salaries for graduates in this latter group are £20,000 in the first year post-graduation, rising to £86,000, 20 years post-graduation – the kinds of salaries paid to senior academic professors or heads of department, senior civil servants or NHS managers. Such a vast overpayment on the part of thousands of graduates in this income group would be unreasonable and likely to be seen by many as unfair. Moreover, given the recent introduction of the 50% income tax rate, increases in National Insurance payments, and the recently announced increases in VAT, there will probably be even less of an appetite for a new graduate tax.   

Greater progressivity can of course be a broader political goal, in which case overpayment by higher earners may appear attractive. However, such a goal should rightly be addressed through the wider taxation system: it would be both illogical and unfair to confine a more progressive taxation system to university graduates alone. The result would be that many very high earners would pay lower rates of tax than even moderately high earners, simply because they happened not to be university graduates. The income tax already paid by high earning graduates should be seen as sufficient contribution on their part towards any public subsidies for lower earning graduates. 

8. Repayments from Home/EU students who move abroad

A graduate tax would be almost impossible to levy upon graduates living outside of the UK, adding to the avoidance problem discussed above. Securing these payments is already problematic under the current system, but the obligation and expectation is at least there that graduates will repay their obligations, regardless of future mobility. It would be difficult in the extreme to levy and collect a graduate tax from graduates living and working overseas.

9. Problems of definition

It can be problematic even to define what is meant by ‘a graduate’.   The term could include people with a achieving a range of higher education qualifications, obtained on a part-time or full-time basis, over anything from one year to 5 years, or even longer.

10. Non-completion

A related problem is that of determining the level of contribution made by people who do not complete their course of study, or who fail to achieve a qualification at the end of it. It might be possible to determine a graduate’s liability based on credits completed, rather than whether or not they complete a standard 3-year degree (the NUS have proposed a system of this nature). However, careful consideration would need to be given to the design of such a system to ensure that those who attend university, regardless of whether they complete their study intention, or achieve a given number of credits, incur a liability which is commensurate with the resources that have been expended upon them during their time in higher education.   

11. Low earners

Most graduate tax systems offers little or no benefit for low-earning graduates in comparison with the current system, particularly if maintenance support is taken into account.  So while many argue in favour of graduate taxes on the basis that they want to protect the low earners, in fact they will probably pay more in these schemes than in many fees and loans regimes. It is also important to note that, although the higher education sector would receive the same amount of income from the graduate tax proposed by the NUS as from raising tuition fees to £5,000, under the NUS plans graduates would foot the entire bill. In the current system, the Government writes off the outstanding obligations of lower earners after a fixed period, meaning that taxpayers share some of the cost of tuition fees. In effect, the NUS proposals transfer most of the cost of these subsidies for lower earners onto moderately high-earning graduates, rather than the Government.

12. No other country has a graduate tax

The disadvantages outlined above help explain why no other country in the world has yet implemented this system of graduate repayments.  By contrast, systems of fees and loans (with or without government subsidy) are prevalent in many countries.