A graduate tax: the right solution for the wrong problem?

Fifty years ago Howard Glennerster, Stephen Merrett and Gail Wilson, all social welfare economists at the London School of Economics, published A Graduate Tax.

At the time, a graduate tax was considered a way to afford the expansionist aims of the Robbins’ Report and the idea has since then frequently reappeared in policy discussions. It may even appear for consideration in the musings of the current Augar Review. But would it actually solve the student finance problems in our current marketised system?

While the idea of a graduate tax was never adopted by government or even encouraged by universities, it is an idea that has found support across the political spectrum since the introduction of partial tuition fees in 1998. Since then, the idea was also floated in 2004 with the introduction of variable tuition fees, and again in 2012 with the imposition of full-cost fees.

The complex income-contingent deferred repayment system that has evolved over the years is often portrayed as virtually a graduate tax, albeit not in-name. There are enough differences for a tax to be periodically touted as an alternative.

In 2009, for instance, the National Union of Students proposed such a system, as did David Willetts, the Minister for Universities at the time of the publication of the Browne Review of Higher Education Funding and Student Finance in 2010. In more recent years, the idea has been resurrected by the free-market Adam Smith Institute in 2017 and former Secretary of State for Education Justine Greening in 2018.

So what are the principles that underlie such a tax?

A graduate tax: the debate

The original article advanced four main positive arguments:

  1. Expansion of the system post-Robbins would rapidly make the system unaffordable and the non-university attending masses should have a way of recovering their costs
  2. A tax on graduates would “ease the constraints on the system” because increasing revenues would finance more expansion
  3. System efficiency would be served. Assuming all students received non-means tested grants for maintenance it would remove barriers to access. As the authors put it: “Income is provided when it is needed, and repayment made when it can be afforded”.
  4. It would increase university autonomy by freeing them from dependence on block-grants. However, that would depend on the Treasury passing on the revenue to the universities.

Rereading these arguments in 2018, we can see both the appeal of such a system and its similarities to the income-contingent deferred repayment we have today. These arguments were pertinent to the 2003 White Paper that launched variable fees with the intent to create differential pricing: there should be expansion but not funded from the public purse; graduates would benefit the most and therefore should contribute more; maintenance grants (abolished in 1998 but reintroduced by the 2004 Act) and repayment only after graduation would enable working class participation.

Institutional autonomy from the state has never been entirely realised since then, mainly because the state underwrites student loans and can thus always introduce caps when the economic going gets tough (e.g. 2009 to 2015); but as Glennerster et al pointed out, a graduate tax would also only pass on income to institutions via the largess of the Treasury.

The length of time it would take for graduate tax revenue to sufficiently support the system would depend on the level of repayment. For Glennerster, this level of knowledge would await the kind of link between the return on investment of different and course costs that the government subsequently outlined in the Longitudinal Educational Outcomes (LEO) dataset. Of course, these instruments were developed and refined for purposes other than identifying an appropriate tax rate. And here lies the biggest barrier to a graduate tax being introduced following the Augar Review.

Why not this time?

While the arguments for and against are largely the same as fifty years ago, the system as it currently stands shifts the parameters of the debate and thus the prospects for a graduate tax. On one level, the perceived inequities of the current system, which loads up to £50,000 of fee plus maintenance loan debt on graduates (and, perversely, the most on those from the poorest backgrounds) drives the search for reform of student finance. On another level, the specific version of a differentiated market that pertains in the English system relies entirely on that same inequity to drive consumer choice.

The current marketplace works by persuading applicants that some HE institutions and some programmes of study are worth more than others (hence the interest in LEO). The very presence of a £50,000 debt threat is designed to force consumers to shop around for cheaper provision. As the 2015 Green Paper put it:

Now that we are asking young people to meet more of the costs of their degrees once they are earning, we in turn must do more than ever to ensure they can make well-informed choices, and that the time and money they invest in higher education is well spent.

Even more starkly, the following White Paper, “Success as a knowledge economy” insisted that:

Competition between providers in any market incentivises them to raise their game, offering consumers a greater choice of more innovative and better quality products and services at lower cost. Higher education is no exception.

So the policy intention is laid bare: it is up to consumers to make their own choices so that they can reap the reward of lower fees and higher quality. Rather than seeking a fairer way of affording publicly funded HE (Glennerster’s noble cause) current policymakers are wedded to creating a tuition-price differential that serves two related ends.

A dual-price mechanism

Visible dual pricing serves two purposes. Firstly, the fee differential between institutions should roughly match the entry requirements differential (based on UCAS tariff points) with only those institutions that can demand the highest UCAS points able to justify the maximum fee (now capped at £9,250). The fees charged by institutions commanding lower tariff points would taper off under competitive pressure from new providers encouraged to market with fewer entry barriers.

The second purpose is to lower the average tuition fee across the system from its current level (£9,110) to around £7,500, the figure modelled by government to make the repayment regime affordable. Frightened by the recent insistence that government will not prop-up failing institutions and the bright new business school opening up across the road offering full degrees at £6,000, there would be every incentive for institutions to lower prices.

Readers with a weaker constitution should perhaps not contemplate the prospects for widening participation if all the poorest and otherwise underrepresented students accumulate at institutions least able to offer a transformative HE experience. Ministers are sanguine about that, talking up the access role of alternative providers.

In this market, remember, the driving motivation is that of the applicant-consumer. In this framing the problem is higher than optimal average tuition fees. The solutions are price-quality comparison and increased supply (new providers) to drive down the average fee. A graduate tax, in many (illusory) ways so close to the current policy construct, would actually remove the only motive power that would differentiate institutions by price.

A graduate tax may eventually be introduced, in some form or other, but it is not a solution to the current problem besetting policymakers: how to create a consumer-driven fee differential that separates the research elite from the rest of the sector, while at the same time reducing average tuition fees in the system.

8 responses to “A graduate tax: the right solution for the wrong problem?

  1. One of the main problems of a graduate tax is that it puts off the brightest and best from studying in the UK. If you are considering studying economics at a top University, you can be relatively confident that with a grad tax your degree will end up being incredibly expensive, and there will be a significant incentive to look to top schools outside the UK. These are the very same students who will end up donating huge sums to their home institutions later in life.

    I agree about the worrying prospect of underrepresented students only going to weaker institutions, although I’m not sure to what extent that’s already not the status quo (consider e.g. the proportion of POLAR/ACORD students in Russel v. non-Russell group unis).

  2. A graduate tax is something you pay as long as you earn above a threshold income, say 9% above £25k. Earn £26k & you pay £90 a year. Earn £260,000 & you pay £21,150. Earn £2.6m & you pay £231,750. You keep paying beyond the point that covers the cost of your degree. And you pay the graduate tax on top of income tax and tax on anything you purchase using income.

    “The complex income-contingent deferred repayment system that has evolved over the years is often portrayed as virtually a graduate tax, albeit not in-name. There are enough differences for a tax to be periodically touted as an alternative.”

    Loan repayments are not a tax. The current system makes it explicit what the charge is and students also know, to an acceptable level of precision, the maximum amount a degree will cost them (the loan + interest). Under a graduate tax, the amount charged is decoupled from the amount repaid and unknowable.

    I think the above is what the following paragraph is saying:

    “In this framing the problem is higher than optimal average tuition fees. The solutions are price-quality comparison and increased supply (new providers) to drive down the average fee. A graduate tax, in many (illusory) ways so close to the current policy construct, would actually remove the only motive power that would differentiate institutions by price.”

    In other words, graduate taxes do not result in value for money.

  3. Agree – although my point was that a GT wouldn’t do the job current policymakers require anyway.

  4. The WP fear is that if the dual price mechanism I describe does result in many new low cost suppliers then the poorest students will be drawn to them and have less transformative HE outcomes than they might from a mid-ranking post-92

  5. The radical approach would be to have a graduate tax whereby each university gets the revenues from their graduates. All of a sudden, universities would have a strong vested interest in the employability and earnings potential of their students – where your graduates go on to have decent careers, the students’ alma mater wins as do the students themselves; where your graduates struggle to get a decent job with their so-so degree, the university loses out along with the student. It would keep employability front and centre at the universities, as well as having the effect that when recruiting students, universities would be thinking “is what we offer really going to give the applicant skills that society wants to pay for?”, and not just bums on seats.

  6. I would rather have a consensual relationship with my alma mata rather than simply being their piggybank, not least as my earning potential was far more influenced by my postgraduate qualifications (from other institutions) than my undergraduate one.

  7. RIP Steve Merrett (d.2018). Colleague at LSE, 1968

    The Bibby GradTax is distinctive in being a sure vote loser. It will apply to ALL graduates who have benefited from state funding, including old grey men. That way, equity is enhanced, and returns start sooner than if it only applies to new graduates.

  8. El objetivo de la universidad es formar profesionistas competentes y ciudadanos que le sumen a su comunidad y sociedad. Muchis estudiantes deben solicitar créditos para estudiar la universidad. Después de que concluyen sus estudios deben pagar su crédito, en muchos de los casos, por más de cinco años.
    Además y de acuerdo al empleo que obtengar pagarán un impuesto sobre la renta, que reflejará su nivel de ingresos. Entre más ganen más pagarán.
    Sería excesivo y un incentivo negativo para estudiar, cobrar un impuesto a graduados.

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