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“We’ve tried everything else, so why not a graduate tax?”

Helen Carasso of the University of Oxford explains why this ‘answer’ to the high levels of debt with which graduates now start their careers creates as least as many problems as it might be thought to solve.
This article is more than 6 years old

Dr Helen Carasso is a lecturer in Higher Education in the Department of Education, University of Oxford.

Only five years since the current system for funding Home/EU undergraduates at universities in England was introduced, its future is already in serious doubt. Policy proposals, first from Jeremy Corbyn during this year’s General Election campaign and then from Theresa May at the Conservative Party Conference earlier this month, have once again put university fees and student funding at the centre of a national political debate.

It remains to be seen whether this will be as hotly contested as the passage of the 2004 Act introducing £3,000 fees, which survived its key vote in the House of Commons with a majority of just five even though Tony Blair’s Government had a majority of 161, or as emotionally charged as the vote in December 2010 to raise the cap to £9,000, which generated violent protests on the streets of London and more than 150 arrests.

Under inquiry

With the expectation that next month’s Budget will include announcements on university fees and funding, the Commons Treasury Select Committee has entered the debate, and is holding an inquiry into Student Loans, to which I gave evidence earlier this month (jointly with Andrew McGettigan). The terms of reference for this inquiry include an examination of ‘a so-called graduate tax’. By describing it this way, the Committee highlights the fact that no-one knows quite what a graduate tax would look like. That is not surprising, given that no national higher education system of any size is funded this way.

The model described in a paper published last month by Andy Green and Geoff Mason at UCL Institute of Education – for a graduate tax, covering living costs as well as tuition, to be levied against all graduates – sits at one extreme of the possible designs. Financial modelling in the paper suggests that, with significantly lower levels of graduate tax than the loan repayments that graduates under the post-2012 funding model currently make, revenues would not only ‘make a substantial and immediate contribution to the costs of first degree tuition and maintenance’, but also quickly start to offset accumulated graduate debts. On the basis of reasonable assumptions about a graduate salary premium, such a system would also be progressive – with higher earners making a larger contribution to the funding of higher education.

The paper does not though explain how financial support for maintenance would be controlled (presumably it would only cover reasonable living costs, however those are defined) or distributed. It also recognises that such a scheme would be very difficult to sell to graduates (or as politicians might say, voters) who went to university before 2012, let alone those who studied before student loans of any type were introduced.

Clear problems

But even with a less comprehensive graduate tax, for example covering only tuition costs, there are clear problems:

  • by doing away with the fee, politicians would be doing away with the ‘voucher’ that operates within the ‘market’ they have created for undergraduate degrees; this was the mechanism that gave them the confidence to remove the controls on undergraduate places in England and allowed universities to adjust the size and shape of their portfolio to reflect the demand from suitably-qualified applicants. Without it, we can expect to return to a system of capped student numbers – a disadvantage to applicants and to universities.
  • if the tax revenue is not expected to cover living costs, the government will still need to ensure that affordable maintenance loans were available, creating an extra operational burden. There may also be presentational problems, with graduates feeling as if they are ‘paying twice’ for their university education.
  • with no fees, there would be no basis on which to continue Access Agreements and with them some £750m that is committed each year to widening participation in higher education
  • for graduates, the liability to an open-ended higher rate of tax could seem punitive, and there would be no incentive for students to make choices about tuition or living costs based on perceptions of value for money
  • unlike fee loans, the public money spent on funding tuition would appear on the national accounts as expenditure, contributing to the deficit the Treasury would be reporting

But perhaps most worryingly for universities and students, as the Dearing Review pointed out in 1997, there is no guarantee that funds raised by a graduate tax would actually make their way to fund university teaching. As it says, there would be:

“… no safeguard that higher education would receive any benefits from the contributions, since to provide such safeguards would cut across the general principle that tax revenue is not earmarked for particular services.”

This is bad news for universities, who would once again be reliant on funding for undergraduate teaching that was at least similar to the old HEFCE ‘T’ grant model, with no certainty about the unit of resource from year to year to deliver their courses. But it is also bad news for the students, as they would have no guarantee, regardless of the amount of graduate tax they might pay in later years, that their universities would have the funding available to provide education to the standard that they would wish.

So, you do not have to look too deeply into the details to see that there would be no winners if we replaced income-contingent student loans with a graduate tax. However, if we were to start talking seriously about generating a contribution to the costs of higher education from employers – who are major beneficiaries of the nation’s highly skilled and qualified graduate workforce – through a payroll tax, along the lines of the Apprenticeship Levy, that would be a different matter.

3 responses to ““We’ve tried everything else, so why not a graduate tax?”

  1. Any graduate tax should not include maintenance. The latter is very much individual to the student e.g. household income, whether and how much they choose to borrow and it’s relatively straightforward to have a maintenance loan repayment system run alongside a graduate tax. We’re not advocating the latter but MillionPlus published a report in 2010 ‘A Graduate Tax: would it work?’. The analysis is robust and it addresses these questions and more although based on 2010 figures.

  2. I’ll agree to differ about the political acceptability and administrative burden of operating a Graduate Tax for fees in parallel with loans for maintence costs, Pam. But the biggest disadvantage for institutions (and therefore for their students) of a Graduate Tax model of funding is surely the lack of certainty about the Unit of Resource to teach each undergraduate.
    Your 2010 report cites the TV Licence Fee as an example of a hypothecated tax that works. But this is an annual ‘up front’ payment that goes to a small number of broadcasters on a set formula, not a retrospective, income-dependent stream of revenue to the Exchequer, to be distributed among c150 providers through a formula that would presumably relate in some way to student (or even possibly alumni) numbers. So it is not a good parallel that should be used to reassure vice-chancellors about the security of the teaching income to their universities.

  3. A payroll tax would still have almost all the problems you identified with the graduate tax. If you’re worried that a tax on graduates won’t find its way to the universities, there’s no reason to expect that wouldn’t be an issue if you taxed their employers instead.

    It would also seriously increase graduate unemployment. Depending on who you believe, between a quarter and a half of university graduates are in non-graduate jobs that don’t need a degree. If you add an extra tax on employing graduates, companies are going to be much less keen on hiring them and we’ll see job ads saying “degree holders need not apply”. And in turn that will hurt graduation rates – if a 3rd class degree is going to give you worse employment chances than no degree at all, better to take a dive and fail all your exams on purpose.

    It might be an interesting solution to the problem of degree inflation, but it’s not something that would work in favour of either universities or graduates.

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