Graduate tax

Ed Balls proposed a "student tax" to replace tuition fees in his election manifesto.

A graduate tax is a proposed method of financing higher education. It has been proposed in the United Kingdom and the Republic of Ireland.

Background

Under the Higher Education Act 2004 British and European Union students at publicly funded universities in England, Wales and Northern Ireland are charged tuition fees (called "top-up fees") directly by the universities. The amount of the fees is limited by law and the fees can be funded by government-backed student loans issued by a government-backed company. The loans need only be repaid when the graduate is earning a sufficient amount of money to do so. Non-EU students can be charged an unlimited fee by the universities, and these are usually considerably higher.

In 2009 the National Union of Students (NUS) proposed a tax on graduates who have received academic degrees over a period of years after the granting of the degree. Four of the five candidates running in the British Labour Party's leadership election in 2010 also backed the proposal.

A graduate tax was mooted before the introduction of top-up fees in the United Kingdom, but was ultimately rejected. A system of graduate tax was seriously considered as part of the Browne Review although Vince Cable has stated that "No decisions have been made." On 15 July 2010 Vince Cable appeared to endorse a graduate tax, saying in a speech that he was "interested in looking at the feasibility of changing the system of financing student tuition so that the repayment mechanism is variable graduate contributions tied to earnings".

NUS proposal

The National Union of Students has proposed a tax that would be levied on graduates for 20 years following their graduation, progressively ranging from 0.3% to 2.5% of their income.

Benefits

A graduate tax would allow education to be free at the point of delivery. Proponents claim that one benefit of a graduate tax is that it would prevent a market in higher education developing whereby students chose where and what to study based upon the ability to pay rather than academic ability. A graduate tax might raise more money for universities over the long term than capped tuition fees, depending on the level of the cap. David Greenaway, a critic of a graduate tax admits that an "obvious attraction" of such a tax is that it is levied only on graduates, the immediate beneficiaries of higher education.

Under the NUS's proposals a 'People's Trust' would be set up that would be independent of the Treasury. The current system of loans has been seen as unviable because they require an expensive public subsidy to universities. David Willets has described how a rise in tuition fees would increase public spending: "It is in such delicate equilibrium that shifting any single element requires us to shift everything else. If fees were to go up, the government would have to lend people the money to pay for them - and that would push up public spending....It's not just that students don't want to pay higher fees: the Treasury can't afford them. So the arrangements we have now are clearly unable to respond to the current economic climate."

A graduate tax may not be perceived to be a debt in the same way as a student loan is. Vince Cable states that "[the current system] reinforces the idea that students carry an additional fixed burden of debt into their working lives. Yet, most of us don’t think of our future tax obligations as 'debt'."

The UK Youth Parliament, funded by the British Youth Council, supports the abolition of tuition fees with a view to introducing a graduate tax. In November 2011 at their annual House of Commons debate, former Member of UK Youth Parliament Harrison Carter spoke of the benefits of the tax at the Government Despatch box. He contended that the tax would go straight to universities, bypassing the HM Treasury. He dubbed others "naive" for not wanting to give something back for an education they would ultimately benefit from. Carter spoke of the country's duty to educate its citizens. He said we were failing in that duty because "the debt from University, for many, makes it an impractical next step".

Criticisms

The graduate tax could create several perverse incentives. For example, graduates of UK universities would have an incentive to move away from the UK after graduation to countries where it would be difficult or impossible to collect the graduate tax. The Russell group of universities claims that this could "deprive the UK of vital skills and knowledge". Further perverse incentives may be present, depending on the details of how the scheme is implemented. If the tax is levied only upon students who graduate, then some students would have an incentive not to graduate after having completed their courses of study. If the tax is levied only upon students who graduate from UK institutions, then some students would have an incentive to transfer from UK universities to foreign institutions for their final year(s) of study.

A graduate tax breaks the link between the actual cost of a degree and the amount the graduate pays for it. Some graduates would end up paying more in taxes than their degrees actually cost, while others would pay less. The Russell Group claims that this situation "would be unreasonable and likely to be seen by many as unfair".

Because individual universities will not derive any direct financial benefit from becoming more attractive to students, the graduate tax would "provide little incentive or adequate resource for universities to drive up quality" according to the Russell Group.

Criticisms include the transitional problems which exist where students are going through university but not paying the tax. Free-market thinkers have criticised the graduate tax for not creating a market based element in higher education. Alistair Jarvis of the 1994 Group of research universities has stated: "Any mechanism that prevents variable fees and the functioning of a regulated market would be damaging to the sector...We strongly support a regulated market because this is the best way to drive up excellence in research and teaching, and to deliver student satisfaction. A system of variable fees has been, and remains, the correct strategy. This system should be developed, rather than fundamentally changed."

It has also been argued by The Independent that it is too early to change the system again in the United Kingdom. Greenaway argues that a graduate tax would not deliver additional resources rapidly and that there is a potential problem of 'leakage' with EU nationals leaving the UK and therefore not paying the tax. A graduate tax is unpopular with Russell Group Vice-Chancellors as it would likely result in a more equitable distribution of research funding towards less prestigious universities.

Nicholas Barr, professor of public economics at the London School of Economics has praised the current system of student loans as a method of financing higher education, arguing that variable fees foster competition that is of benefit to both students and employers.

Another problem concerns how foreign students at UK universities and emigrants from Britain would be treated by the tax.

Madsen Pirie of the free-market Adam Smith Institute, writing in The Daily Telegraph, argues that it is wrong for talented graduates to face higher taxes under a form of progressive taxation and that such a proposal might make emigration more appealing to graduates. A loan can also be paid off early whereas a tax would continue to be charged for a longer period of time.

The Universities and Colleges Union, a supporter of free higher education has criticised a graduate tax. Sally Hunt has criticised the tax as a rise in fees by stealth: "All the polls show that the general public will not stomach a rise in university fees. If the Government thinks it can get the public to swallow higher fees as some sort of graduate tax, it is living in a dream world. We need a proper debate on how to fund our universities, not an exercise in rebranding. We will judge the plans on what they actually do and whether or not students will be forced to pay more, not how the Government markets them."

Ireland

A graduate tax has also been proposed in Ireland. Since 1995, the Free Fees Initiative has meant that almost all students in the Republic of Ireland from the European Economic Area and Switzerland do not have to pay fees, with the government paying them on their behalf. However, they must pay a student contribution (formally called the student services charge and informally known as the registration charge), which for the academic year 2010/11 was set at a maximum rate of €2,000 (up from €1,500 in the academic year 2009/10). Many students from lower-income families can get grants to cover this and other costs (such as academic field trips), as well as a maintenance grant.

In March 2009 Fine Gael, then the largest opposition party in Dáil Éireann, proposed a "graduate contribution scheme" to replace the current system. In its policy document The Third Way it proposed a system that would be automatic and universal (applying to all graduates regardless of wealth), and would amount to 30 per cent of the total cost of their third-level education. The party also proposed to abolish the student contribution so that education would be free at the point of delivery. The contribution would be collected via the PRSI system and would be ring-fenced for third-level education. There would be no interest charged on the contribution and it would not be retrospective. There would be a minimum rate of repayment set by the State, but graduates could increase the amounts repaid if they wished.

The scheme appeared in Fine Gael's 2011 general election manifesto. As part of the coalition deal between Fine Gael and Labour following the election, they committed to "undertake a full review of the Hunt and OECD reports into third-level funding before the end of 2011". They said that their "goal is to introduce a funding system that will provide third-level institutions with reliable funding but does not impact access for students".

In December 2011, in the run-up to Budget 2012, the Department of Education examined a number of models of funding for third-level education, including a return to fees, a student loan system (similar to the UK's or New Zealand's) and a graduate tax.

See also

• Browne Review
• Hypothecated taxation
• Taxation in the United Kingdom
• UK labour law

References

• H Glennerster, S Merrett, G Wilson, A Graduate Tax Revisited,Higher Education Review, v35 n2 p25-40 Spr 2003
• "What exactly did he mean...", Research Fortnight, 28 July 2010, p27

External links

• National Union of Students Blueprint
• Neil Shephard's "What is a graduate tax?"