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The Case for a Graduate Tax

  • 29 August 2018

HEPI has previously highlighted some of the shortcomings of moving to a graduate tax system.

Here, Paul Maginnis (@paulmaginnis1), the author of a new book entitled The Return of Meritocracy: Conservative Ideas for Unlocking Social Mobility puts forward the case in favour of a graduate tax.


Tuition fees are a visceral subject for many students, who resent the fact that the generation which went before ‘pulled up the ladder of opportunity’. But with the number of young people going to university increasing tenfold since the 1950s, reform was always going to be necessary.

When tuition fees were trebled under the Coalition Government in 2010, many feared this would lead to fewer disadvantaged young people attending university. In reality, the opposite has been true. Since tuition fees were trebled, record numbers of students from disadvantaged backgrounds have entered university as there continues to be no upfront tuition costs.

In 2017, the Minister for Universities, Jo Johnson, stated that ‘young people from the poorest areas are now 43% more likely to go to university than they were in 2009–10’. This evidence shows that raising tuition fees has not had a detrimental impact when it comes to social mobility and attending university.

In Scotland, there are no tuition fees but this has ended up being a huge tax cut for the middle classes. It is often ignored by the media that a disadvantaged young person from England is twice as likely to attend university as somebody with the same background from Scotland. It is also worth noting that Scottish university numbers are capped, unlike in England. Since the rise in tuition fees there has clearly been an effort by English universities to help lower-income students gain access to higher education. An example of this is children in care being given considerable leeway on required grades at many universities.

What is clear from any objective calculation is when the repayment threshold was raised from £15,000 to £21,000, only the most successful graduates (in financial terms) would pay off their loans. Under the £15,000 repayment threshold, the Institute of Fiscal Studies predicted that the 30-year write-off meant 32% of graduates would have some debt written off. Under the £21,000 repayment threshold, 73% were predicted to have at least some debt written off. As a result of the threshold being raised to £25,000 in April 2018, 83% of graduates are now expected not to pay off their loans. This much higher figure suggests a false economy on fees (Editor’s Note: see herefor a different take), as the vast majority of students won’t pay off their whole loan.

A simple tax calculation shows that a graduate would have to be in a high-earning job throughout their career to fully pay off their student loan. For example, somebody who earns on average £35,000 throughout a 30-year career would still not get anywhere near paying off their student loan. I never heard this sort of argument when I was at university. Students clearly but understandably could not get past the fact that the sheer amount of ‘debt’ you end up with is overwhelming.

There is a lot of scaremongering about the ‘debt’ which students face, but of course it is not really a debt in any traditional sense, as consumer champion Martin Lewis has pointed out time and time again. Unlike a real debt, you only make repayments if you earn over £25,000. In practice, we already have a graduate tax which I believe should be made official and as a consequence the system of tuition fees should be phased out.

The Government should continue to argue that with so many students now attending university, they should pay something towards it. On average, graduates earn over £100,000 more during their careers than those who don’t go to university. What is progressive about expecting those who don’t go to university to pay for somebody who did when they will earn less money?

In my book, The Return of Meritocracy, I argue that although there are progressive elements of the current system, it is clear that many students are instinctively against the large amount of debt that tuition fees bring. When fees were trebled in 2012, the free market was meant to kick-in and competition for fees was meant to arise. This has not materialised as nearly every university charges the maximum fee.

With a graduate tax, there would be no ‘debt’ that needs to be paid back (which seems to be the main issue for students) and it can be structured to be more progressive. If it was introduced at 7% on earnings over £27,000 it would be a clear indicator that a graduate would have to be on the average UK wage to begin paying back. It would be made affordable by graduates earning over £75,000 paying 10% of their earnings for their university education. At the same time if they slipped below the £27,000 threshold, nothing would be paid back. As with tuition fees, the tax would cease 30 years after graduating from university.

Reclassifying the student loan system as a graduate tax would, at a stroke, put all spending on student loans back onto current public spending. The consequence of this would be to significantly increase the deficit. The Government may as well embrace this move as the ONS are current reviewing the student loan system. They are likely to conclude that some or all of the current loans appear in the national accounts so the Government might as well take the initiative anyway.

With the current tuition fee repayment rate of 9% of earnings over the newly introduced threshold of £25,000, a cut to 7% on earnings up to £75,000 would be a progressive move. It would be understood as a tax which would stop graduates receiving alarming letters stating that they owe £50,000 in addition to enormous interest rates. The Government should continue to argue that graduates need to make a financial contribution to keep higher education affordable, while ensuring those who do not go to university are free from subsidising this.

4 comments

  1. John says:

    I don’t understand this sentiment that only those that go to university benefit.

    If I work in services or hospitality or the building trade but didn’t go to university, the more people that use these services who did and consequently can afford to do so because of improved salary, directly benefits me.

    If a doctor treating me in hospital has a degree, it benefits me. If the architect who went to university builds a bridge I cross every day to work has a degree it benefits me.

    This seems to be an aspect of conservatism, an I’m all right Jack counter productive attitude which I’ve never understood.

  2. Johnny Rich says:

    As Paul points out, the current system in England is a graduate tax by stealth. However, a key difference between this and a genuine graduate tax is that the loans system effectively hypothecates the funding the HE. If a Government was minded to reduce spending on HE, a graduate tax that goes straight into Treasury funds would offer no protection to HE. The current system – of which I am no fan – does have some advantages: one of which is the autonomy it affords to universities.
    Even a hypothecated graduate tax would not solve this as the difference between the income collected and the income spent would be a painfully self-evident public subsidy from he taxpayer to HE.
    I am NOT saying we should stick with the current system. Nor am I saying that the taxpayer should not subsidise HE. On the contrary, I believe public spending on education – including HE – is just about the being investment any country can make in the public good. Moreover, the current system does leave students and graduates, particularly those from poorer backgrounds, burdened with an ever-present financial panic that is harmful to their mental health, their educational progress, their decision-making and even their confidence as consumers.

  3. Richard says:

    Whilst I broadly agree with a graduate tax, I’m not sure about mapping across the thresholds from loans. Surely a series of banded rates at a lower level that apply to all graduates for their working lives would be cheaper to manage and generate more revenue. Although I take the point on autonomy the current system benefits large institutions and punishes smaller, as seen in the recent recruitment round. A return to direct funding would help to address this and change the dynamic, making students participatants again.

  4. Fred Dingleberry says:

    The point that always seems to be missing from this debate is that, in addition to student loan repayments, there already is a graduate tax. It’s called P.A.Y.E. Under this system the more you earn, the more tax you pay. If the argument is that graduates earn more and therefore should pay more tax then you are simply describing the system that already exists.

    As a graduate with a degree completely unrelated to my field of work, I would be appalled to find myself subjected to a punitive tax for holding an irrelevant degree certificate. In fact, if such a measure were to be introduced, I would immediately seek to have my degree voided by the awarding institution.

    Since it is also routinely argued that Universities should cater to the skills needs of enterprise and industry, any shortfall in funding for higher education should surely be met by the organisations that stand to benefit financially from a skilled and educated workforce.

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