Graduate tax?

I must confess I’m a little worried about how Britain will pay for Universities.

I’ll start by coming clean. In some ways I am unashamedly elitist: for higher education to be worthwhile it has to exclude some people, whether through admissions processes or by people failing or dropping out. The Open University is open to all but a challenging route to a degree which some will not complete, at the other extreme the Oxford and Cambridge admissions lottery thins out many. In some sense it is unfair that not everyone is able to benefit from a university education but for it to be useful it has to be that way. I am a huge fan of the Open University and the work it does to provide access to those who can’t by other means. We need to be sure that access is as fair as possible to people: those who’d benefit from it can access it and aren’t put off by issues beyond that.

I take it as a given that both the state and individuals benefit from education. At the crudest level it keeps a number of 18-21 year olds off the street and off benefit (at my most cynical I have thought this might be the reason that the government was so keen on the 50% figure). At the other end it provides people with skills and expertise the state needs.

There is an argument that rather too many jobs demand a graduate when all they really need is someone who could get a degree, and they might be better recruiting based on A-Levels. But there are many benefits to a university education.

I do think there is another argument around whether as many as 50% would benefit fully from a university education, but that is for another day.

Given that there are benefits what is the best way to pay for it?

Vince Cable has recently reopened the idea of a graduate tax, and prior to that most expected the Browne report to suggest increasing fees and loans. The idea behind both is that students should repay the benefit they receive in part which seems attractive at face value. I’ve had a look at the full text of Vince’s speech.

Firstly, Vince rightly points out that under the current system the amount of the education people pay for is the same for a teacher or care worker at one end, and at the other end a doctor or a merchant banker. This means someone earning £20k a year ultimately pays the same overall as someone earning £200. This is regressive. A graduate tax could redress this issue.

However the concern I have is with the argument behind it. In his speech Vince says

for our students there are on average good rates of return to HE qualifications,
which have held up despite large increases in participation: over a £100,000 net
of tax over a working life relative to a non-graduate. This suggests employers
continue to see additional value in graduate skills, knowledge and capability.

[…]

My generation had the remarkable privilege of being
educated free. There was an implicit assumption that we paid for the graduate
premiums in our income through higher income tax. But there was also a sense of
unfairness articulated by Alan Johnson when he was Minister: why should a young
postman contribute through his tax to pay for an already privileged group to
avoid earning a living for three years and then emerge with higher earnings
potential?

In any event, a model designed for 10% of the population
could not be applied to 40%: hence the move to a graduate contribution.

This is where the problem can be seen. Let us accept the £100,000 figure, then this means that over life time then the person is paying £20,000 in extra income tax if they only pay basic rate or more if they pay higher rate. Those who pay higher rate will be paying £40-50,000. This is, of course, not all the tax they pay. This is ignored in his example.

Let me turn this round as well. Suppose we have two postmen. Both earning the same. Should one pay more tax because he has completed a degree? Is education something we wish to discourage? Or consider two people, one a nursery teacher (a graduate, average of £18,875 pa) the other a car salesman (£26,584 pa). Both basic rate tax payers. Why do we want the nursery teacher paying a higher rate of tax? Or take Bill Gates who dropped out of his university to part found Microsoft: imagine a British version of Microsoft where two people set up a company at the end of the final year of one, and the second year of the other. Why would one be paying more tax than the other? Did one really benefit more than the other from their university experience? If so how?

Another argument is that it puts people off applying. However the poor economic climate means we have no idea if this is true. The overall numbers applying have risen steadily over the last five years. What we don’t know is if this rise is in the brightest and best, or just the middle classes. I would like to see figures on applications from deprived areas, and if anyone could show me those I’d be grateful.

Here a graduate tax would continue to be problematic. Would we put off people who didn’t know if they need a degree? Would some groups of people select careers to avoid the tax?

I can see the argument that people should pay the cost of their education as not all people get that education. I disagree as it ignores the wider benefits, and will put off people from disadvantaged backgrounds, but I can see a consistent argument.

I can see arguments for paying from general taxation: the same principle as with secondary and further education, we need as a society to have people educated. I can see the argument for providing the service people will benefit from free at point of use as in the health service.

The problem with the graduate tax is it is neither. It says you should pay for the service, but this payment should not be linked to the cost of it. It says that some should pay vastly more than the cost, some much less. In the election we, as Liberal Democrats, campaigned to say it was wrong to have high earners paying less of his income proportionally than low earners. Now we are saying that we want to introduce a new tax that can and will do the same.

Maybe the graduate tax is the way to bridge a gap between Liberal Democrats who want it to be from general taxation, and the Conservatives who want individuals to pay. If so then maybe it is a reasonable compromise, but I need a lot of convincing of this.