Why a graduate tax is a bad idea

David Cameron at Prime Minister’s Questions today said the Labour leadership election “basically involves sucking up to the trade unions”, playing into the prevailing view of it as an exercise in telling the Labour Party what it wants to hear.

This is not true of one candidate. David Miliband has not joined the herd rushing from student loans to a graduate tax, a populist error which the other leadership candidates share with the Liberal Democrats. Vince Cable is making some speech in favour of the principle of a graduate tax. Ed Balls has responded by saying he was in favour of it in the Treasury when that soft git Gordon Brown was bullied out of it by the sulkily determined Tony Blair (I paraphrase).

Alex Barker at the Financial Times today has one of the best short explanations why a graduate tax was rejected in 2003, which I quote in full:

1. The dead hand of state control

A graduate tax will kill any sense of a market in university degrees, as all funding will be centralised. Bureaucrats will divvy up the cash for the university courses they judge to be worthy. Instead of following the informed decisions of students, the money will follow the whims of Whitehall. This tax “reform” would effectively run universities like the Further Education sector. Brilliant.

2. A student loan you never pay off

The main difference with the student loans (which are paid back on the basis of income) is that a graduate tax never ends. Regardless of what your course costs, you keep on paying the government. It spreads the pain from a graduate’s 20s into their 30s and 40s. It particularly punishes people from poor backgrounds who do well out of university, just the kind of incentive we need for ambitious entrepreneurs. Meanwhile, rich people will be able to exploit an option to pay less up-front, if it is available.

3. Threat of a brain drain

The graduate tax will be impossible to implement fairly. Without a wholesale overhaul of our tax system, those who move overseas will be exempt, whatever their earnings. It’s one more reason to leave Britain’s banking sector. Meanwhile, all those people who come to Britain to study will be put off. A graduate tax will likely lead to a hike in up-front university fees (to make lifetime payments more equal and stop rich Brits from dodging the tax by paying up-front). That’s one more reason for the Chinese and Indians to go to Harvard.

4. It raises no money (at least in the short term)

There is a crisis in the public finances. A graduate tax will raise serious money by making a profit on university education. But realistically it won’t help the Treasury for five to ten years. In fact, it will probably make this spending review even harder. Immediately replacing student fees with a graduate tax will cost billions of pounds.

This is a view that is, rather surprisingly, still the editorial position of The Independent.

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