Objections to a graduate tax

19 August 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

5.1 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 both unfair and unsustainable.
 
5.2 No clear benefit to students: The current system of fixed contributions supported by income-contingent loans 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.
 
5.3 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; and graduates in the upper 20% of earners would pay the equivalent of tuition fees of at least £16,000 per year.
 
5.4 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 possibility of further tax rises following the General Election, there will probably be even less of an appetite for a new graduate tax.
 
5.5 Moreover, if maintenance loans are taken into account, the proposed graduate tax system offers little or no benefit for low-earning graduates in comparison with the current system. 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 debts 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.  
 
5.6 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. 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.
 
5.7 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. But unlike loans, the Government would not be able to raise cash to support these costs through the sale of debt. A large increase in up-front, non-recoverable spending on higher education is unlikely in the current economic climate.
 
5.8 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.
 
5.9 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.
 
5.10 Revenue from EU students: Another practical difficulty with a graduate tax system is that of securing payments from EU graduates, or other graduates living overseas. Securing these payments is already problematic under the current system, but the obligation and expectation is at least there that graduates will repay their loans, regardless of future mobility. It would be difficult in the extreme to levy and collect a graduate tax from graduates living and working overseas. This may also introduce perverse incentives for our best graduates, both home and EU, to move abroad and deprive the UK of vital skills and knowledge.