The graduate tax: higher education’s zombie idea

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Student finance has been back in the newspapers this week, with the government being criticised for increasing tuition fees and scrapping maintenance grants. As part of his re-election campaign, Jeremy Corbyn seized the moment to restate his commitment to free education, promising to scrap tuition fees and cancel student debt. Much to my horror, his opponent Owen Smith, responded by proposing a graduate tax, a bad idea that refuses to die.

When a graduate tax was being considered by those close to Gordon Brown in the early noughties, it had a clear a selling point to students. At the time access to tuition fee loans was means-tested, meaning that some students had to pay for tuition at the point of delivery. The graduate tax was a route to avoid this, with all students paying for their higher education after graduation. However, it proved not to be the only option, with the post-2012 system making tuition fee loans available to all students. As a result, in terms of taking payments, the current tuition fee regime is identical to a graduate tax; students don’t pay for university, graduates do.

The attraction to graduates was removed even earlier. In theory, a graduate tax is preferable to tuition fees, because graduates don’t have to worry about earning enough to meet their monthly student debt repayments as they will only ever be asked to pay back a proportion of their income. Of course, since the very start of English tuition fees, repayments have been income contingent, so removing the danger that non-working or poor graduates will be stuck with student debt bills they cannot afford to pay. Again the lack of any practical differences between the current student finance regime and a graduate tax is extraordinary; debt repayments are taken through PAYE as if they were actually a tax.

These tweaks to tuition fees have lessened the force of one of the strongest arguments against a graduate tax: that students could avoid paying simply by leaving the country. The current system’s reliance on HMRC to collect student debt makes it vulnerable to the same problem, as the ongoing problems surrounding collecting EU student debt demonstrates. That said, at least those graduates have an outstanding debt that Student Finance England can seek to collect. Unless all students could be made to sign a legally binding contract to tithe their future income, the government would have no recourse to force those working outside the UK to pay their graduate tax, nor any ability to backdate.

The signature benefits of a graduate tax may have been removed, but at least students would pay less, right? Wrong! The choice between a graduate tax or tuition fees, is not whether students should pay for their higher education but how this contribution should be collected. If Owen Smith simply wanted students to pay less then he could have used higher public investment to reduce tuition fees, make the repayment terms more generous or reintroduce maintenance grants.

Indeed, many students would pay much more under a graduate tax. It’s very hard to see anyone’s monthly contributions being significantly reduced given that low-income and non-working graduates are already protected by the £21,000 threshold. But removing a nominal debt amount from the calculation means that Student Finance England can keep collecting from richer graduates long after they’ve paid back the cost of their own higher education. That’s fairer but in an unusually brutal way for what is pitched as a moderate alternative to free education.

Plus ca change, plus c’est la meme chose

Leaving aside giving poorer graduates a sense of schadenfreude at their richer peers’ misfortune, the arguments for introducing a graduate tax therefore must rest away from the benefits for students or graduates – it must positively change the sector more fundamentally. It doesn’t.

For starters, a graduate tax could not reverse marketisation. The roots of marketisation are not tuition fees, as universities compete on the quality of the education and facilities provided, rather than price. Unless we want to move towards a system where students either go to their local higher education college or a highly selective national centre of excellence, students shopping around for the university that best suits them is simply inherent to the system. Less disruptive tweaks such as the reimposition of Student Number Controls would be better at reducing the cutthroat atmosphere that has descended over student recruitment.

It’s not just that a graduate tax is no upgrade on tuition fees, it also comes with all the downsides of relying on general taxation. Even though a graduate tax still involves students making a direct contribution to their education, this money would be centrally collected and distributed by the government. As someone who has personal experience of making sense of ministers’ erratic decision-making this is an idea that sends a cold shiver through my spine.

For all the flaws of tuition fees, at least the money follows the students. Under a graduate tax the money would quickly be tied to whatever bright idea has caught Whitehall’s attention that month. Worse, it’s hard to see why a future government wouldn’t succumb to the temptation to raid graduate contributions to support its wider educational policy priorities. Would the sector be able to stop a government from earmarking revenue from the ‘graduate tax fund’ for school-led aspiration-raising activities or in-college careers guidance?

But the worst thing about a graduate tax is that it is simply pointless. The true attraction of tuition fees for successive governments is that they hide the majority of the government’s spending on higher education. Every penny that universities receive in tuition fees comes from the taxpayer through state-backed loans, but only the estimated proportion of the student loanbook that will never be reclaimed from graduates has to be declared on the government’s accounts.

It was only keeping student finance off the books that saved universities from the swingeing cuts that have devastated further education. Under a graduate tax the government would be forced to declare this spending in full because accountancy rules do not allow it to factor-in future taxation revenue in the same way it can for loan repayments. If a government ever did scrap tuition fees, public finances would be no better off whether they introduced a graduate tax or embraced free education.

Ever since New Labour decided to charge students for their higher education, there have been those on the Labour soft-left that have sought to triangulate between the ‘extremes’ of free education and tuition fees. The reality is that a graduate tax is a false escape route for those too indecisive to decide, or too cynical to admit, whether they want to charge students or not. The choice really is between free education or tuition fees – this is one debate where there is no third way.

5 thoughts on “The graduate tax: higher education’s zombie idea”

  1. Mark McCormack says:

    I’m clearly someone on the fence or not bold enough to push for an extreme [as a grad tax fan]. This article is thought-provoking as it pushes, to my mind at least, the importance of public engagement in HE funding. It works: I’m now questioning its merits! A narrative so often overlooked by ‘free education’ campaigners is that of public engagement in the rationale: without getting non-students across all demographics to care about the Government funding HE, there’ll be little incentive for governments to commit to finding it over something else. We protest to governments over loans and we march, but until families and friends are marching alongside I don’t expect major change. A long shot perhaps, but by showing the cost of HE on the Budget books and on a lifetime of payslips may actually help to promote the necessity of government funding for higher study, especially as larger recipient populations age.

  2. Alex Usher says:

    For the majority of students who will not pay off their debt in full the current system is simply a 9% surtax on marginal income over GBP 21,000/p.a. for 25 years. From a practical perspective, for these students, the current system is indistinguishable from a graduate tax.

  3. Tom Pullman says:

    Another problem is surely that the graduate tax could only legitimately apply to new graduates, and thus would probably not provide the necessary level of income to the Treasury for decades, given the length of time it would take for graduate-tax-paying graduates to reach a steady-state proportion within the working population. Where are the funds to make up the balance supposed to come from in the very lengthy meantime?

  4. Roger says:

    Reality bites. Current figures from the government suggest that the total student indebtedness will peak in 2040 at £1 trillion. That’s absurd, because the turkeys will have stopped voting for christmas well before then. The percentage who believe that their education was good value is falling like a stone. They will soon realise that 80% of them are only required to pay for the facilities of the of the top 20%. And the whole thing will collapse.

    In 2001, Tony Blair said “We believe there is no greater ambition for Britain (to) deliver opportunity for all through realising the talent of all. He continued, “We believe there is no greater ambition for Britain than to see a steadily rising proportion gain the huge benefits of a university education as school standards rise, meeting our goal of 50% of young adults progressing to higher education by 2010.”

    What did he think they were all going to do?

  5. Will Haines says:

    Let’s pretend.

    Let’s pretend that we don’t have a Graduate Tax, even though – on ‘the payments side’ – the ‘current regime…is identical’; even though the ‘lack of any practical differences’ is ‘extraordinary’.

    Let’s pretend that we don’t have a Graduate Tax, because a dim electorate thinks that, somehow, ’Student Loans’ only affect lazy beer-soaked layabouts wasting three years of their lives at the taxpayers expense. Let’s pretend it doesn’t mean that doctors, nurses and teachers have to pay more tax than you or I. Remember that when next complaining about the NHS.

    Let’s pretend that we don’t , in fact, have a Recent Graduate Tax, because that would be even more unfair. Let’s pretend that graduate MPs, beneficiaries of a ‘free’ university education, did not vote to impose a tax just on new graduates – but not on themselves, because that would have been one of the more nauseating acts of modern politics.

    Let’s pretend that the sixth-largest economy couldn’t afford to educate its citizenry. Let’s pretend, Cleggy, that this change to HE funding saved the economy from collapse. Let’s pretend that, magically, every Fresher was able to contribute £27,000 to the economy and thus save us from becoming Greece.

    Let’s now pretend that the fiction of ‘Student Loans’ is a robust approach to the problems of HE funding.

    It might appear that VCs and the rest of our University Great and Good gave up the idea of ‘free’ education without any noticeable struggle because they couldn’t wait to get their grubby little hands on the cash, as it walks in through the door during Freshers’ Week. Much better to clobber this generation of students than to submit to the Treasury allocating cash between universities (and asking awkward questions about the level of VC remuneration). But let’s pretend they’ve done it in the interests of their students. Or, possibly, just those students who are lucky to be benefitting from the extra places now available. Possibly.

    The Treasury is happy, despite this loss of control, because it can play pointless accounting tricks with the ‘student debt’ in an effort to match the stupidity and expense of the NHS PFI fiasco. Let’s pretend that a private SLC can borrowed more cheaply than this money-printing government.

    In summary, let’s pretend that it is a Good Thing and a Solid Foundation for HE that student finance is kept off the books. We could also pretend that the education we give our politicians and civil servants (and accountants) is resoundingly successful.

    Finally, let’s try really hard and pretend that we can make the Recent Graduate Tax fairer by turning it into an All Graduate Tax; a tax paid by all graduates in addition to the standard Income Tax. No? Not electorally acceptable? If you think there might be some resistance to this idea, bear in mind that that is where we’re currently headed anyway. Think of it as a slow-burn Poll Tax.

    Let’s pretend that it’s not all going to end in tears.

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