A graduate tax is the hipster’s choice for funding higher education. It is what politicians turn to when they want to sound alternative (but not too alternative) when it comes to paying for universities.
When Tony Blair’s government proposed tuition fees in 2002, the Treasury let it be known that Gordon Brown preferred a graduate tax. It did not happen. In 2010, Ed Miliband made a graduate tax a plank of his successful leadership campaign. Again, Labour wrestled with the idea, but it did not happen. In coalition, Vince Cable asked Lord Browne to look at the possibility of the tax. It was quickly shelved.
Politicians invoke a graduate tax in an attempt to shift the vocabulary of higher education funding away from individual debt towards a general principle of progressive taxation. The problem is that whenever you look at the practicalities, the idea falls apart in your hands.
Why doesn’t it work?
Like the current fees model, a graduate tax operates on the principle that those who benefit from universities should pay for them. Like the present system, the money would be collected by HMRC and the tax could be designed to be contingent on income.
But there is currently a limit to the amount graduates pay. Once you have paid back the cost of your own education, the payments stop. Under a graduate tax the payments would, in theory, go on in perpetuity, long after you had paid for your own studies.
That’s not to say that some graduates wouldn’t be willing to pay for those who come after them, but why should mid-earning public service workers pay the same rate of tax as high-earning bankers? Why should graduate charity workers pay more tax than non-graduate stockbrokers? How could graduates who work abroad be taxed? What to do with those with current loans? This is before you consider how strategies for “tax efficiency” would mean that some people avoided paying altogether.
In the present system, money follows students into the university of their choice. With a graduate tax, there is nothing to stop politicians in a tight spot redirecting funds to other priorities. The rate of a graduate tax would become a matter of speculation at every budget. As a tax on the middle class, only the most unprogressive of chancellors would want to reduce it.
Perhaps most important – at least from the point of view of the Treasury and vice-chancellors – is that Whitehall accountancy conventions mean the current loans system is considered an asset (the repayment of a debt) rather than being subject to the projections of tax receipts. It is this off-the-book accounting that saved higher education from the austerity inflicted on other areas of British public life during the Osborne years.
Shifting to a graduate tax would not stop the marketisation of higher education that so distresses the academic body. It would only switch the public contribution away from underwriting the present loan system to a selective tax, the full value of which would have to be lobbied for by universities at every turn.
Are loans better?
This is not to say that the present system is anything like a good idea. Some say it is really just a graduate tax by another name. It is not. A graduate tax cannot be sold to a third party, it would not vary with inflation, its repayments would be predictable and not subject to career volatility, and its expedient use by politicians could be held to public account.
If anyone wants to argue that universities are important to the whole of society and should be paid for in a progressive way by those who earn the most, they are making an argument for general taxation, not a graduate tax. In the long run, this would much better deal for the taxpayer than the current Ponzi scheme of fees and loans.
Owen Smith’s rival, Jeremy Corbyn, has realised this and proposed a return to grants and free education paid for by a 1.5% increase in corporation tax. Unfortunately, his sums do not add up. Such a rise would have brought in £645m last year. The cost of fees and maintenance loans in England during the same period was £12bn. Clearly, further study is required by both candidates.
