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Why a graduate tax is a bad idea

John Rentoul

Miliband 400x556 215x300 Why a graduate tax is a bad ideaDavid 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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  • http://www.tumblr.com/blog/spitefuel Spitefuel

    However the loan remains as a fixed amount right?

  • TattieSoup

    Hmm, but looking at it on a subject basis rather than student by student might produce unexpected results. Media studies might produce a large excess of students who are not particularly qualified for any of the jobs available to them, but if out of every thousand students you get one hollywood actress and one Jonathan Ross, you are going to get a lot of tax. That could mean that the most funding is then available for media studies, and students who are more suited to something useful like plumbing are forced to do media studies because they can’t afford anything else.

    I think the best way is the student loans system as it exists at present, but with more focus on getting the money back. The repayment rate at the moment is very low, most ex-students hardly notice it and they could afford to be squeezed a bit more. It would be in their own best interests as higher minimum payments means they would pay less interest overall.

    The loans should be treated more like commercial loans and not written off at retirement. This would discourage people who have no intention of working or using their degrees from taking them out in the first place, while people who really get into trouble would be able to go bankrupt.

    But most importantly, the government should recognise, and encourage others to recognise, that university is an extremely expensive way of training people that is only suitable for a minority of subjects. If they encouraged fewer people to go to university, most of those people would end up being BETTER trained for what they want to do in life, and there would be more money to go around for the subjects that require a university education.

  • CurtOntheRadio

    no – there is certainly an interest element. probably compound too. if one never worked one might attain quite a debt over 20 years presumably. Quite different to a grant system or income tax system. Pretty gruesome having a growing debt which was acquired to attain qualifications, and yet still to find one’s self unemployed.

  • http://www.tumblr.com/blog/spitefuel Spitefuel

    That’s why I prefer the idea of an income based taxation system especially if there is a direct link between funding for courses that generate the most earning in graduates getting a direct reward back for the revenue they generate. Subjects that effectively produce degrees with no career potential or don’t develop the person should as a result get reduced funding (although there should be a budget for courses that might not instantly produce results – Maths as well as the Arts might be affected by a lack of instant reward for example).

  • http://www.tumblr.com/blog/spitefuel Spitefuel

    Actually I think the tax should be for adult training not for just university and as such should fund courses like plumbing and so on (if the time limit was applied for example it could be 3 years tax for every 1 year study so a trainee plumber 1 years training would be paid off in 3 years – hypothetical not worked out).

    The tax system would apply to everyone beyond retirement so that would solve the Loan repayment issue you mentioned.

    As for Media Studies etc. So few of them go on to become highly paid you don’t have to worry about the curve ball of high income. Also it would balance out because collectively Physicists would earn more.

    Remember since a tax is percentage based if Ross had been a media studies graduate that would have been a lot of revenue. If the BBC had intelligent management of course they’d have sacked Ross a long time ago and hired in 6 talented people to produce far cheaper shows. There is no way he was worth the money. But that’s ANOTHER DEBATE ENTIRELY ;)

    Fewer people to university yes; however I think more training for adults that’s career appropriate.

  • JayB_10

    This is ridiculously unfair. we all get the same education, which is a good or service, so why would some have to pay more than others. Its the equivalent of changing VAT so that richer people have to pay more for the same goods as poorer people.

    The reasoning is also as flawed. Lets say two people do the same degree. One works harder than the other and therefore gets a better job. under the new grad tax proposal, the one that worked harder then has to pay more for the same education. Its a tax on cognitive ability and work ethic. Now tell me, how is that fair?

    This may be extreme but there is more than a hint of communism here, that everyone should be equal no matter how much more effort some people put in than others

  • JayB_10

    This is ridiculously unfair. we all get the same education, which is a good or service, so why would some have to pay more than others. Its the equivalent of changing VAT so that richer people have to pay more for the same goods as poorer people.

    The reasoning is also as flawed. Lets say two people do the same degree. One works harder than the other and therefore gets a better job. under the new grad tax proposal, the one that worked harder then has to pay more for the same education. Its a tax on cognitive ability and work ethic. Now tell me, how is that fair?

    This may be extreme but there is more than a hint of communism here, that everyone should be equal no matter how much more effort some people put in than others


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