Finding a difference is taxing

The debate around a graduate tax rumbled on this week – with decreasing certainty as to the coalition’s position. Here, Young Fabian Policy Development Group member, Dan Harkin, struggles to separate the wheat from the chaff.

The YF Aspiration and Equality PDG will be addressing university funding in a future meeting.

Everyone from the BBC to the Telegraph has reported Vince Cable’s recent speech as in favour of a graduate tax. Most of the Labour leader candidates and the NUS have come out in favour it. But this isn’t really much of a debate. The difference between the two systems is skin deep.

Before tuition fees were brought in, higher education was free. Sort of. With the expansion of student numbers the grants were successively diminished and mortgage-style loans were brought in to cover the gap. Labour brought in a new student loans system, which was income contingent and means-tested. The rate of interest was (and continues to be) subsidised. When so-called top-up fees were brought in, the fees were added to the loan. Universities were required to use part of the income generated to support poor students.

I remember being sat in campaign groups at university, having paid a token fee for the year, surrounded by many over-privileged individuals campaigning against the fact that they had to pay full fees (this was the earlier tuition fees system). Never mind that the individuals on whose behalf they were supposedly campaigning didn’t pay any such fees. Under the current system the provisions for poor students is even more generous.

Student leaders talked about the burden of debt. But let’s get one thing straight, a student loan is not a mortgage. Loan providers don’t take it into account because it is paid back through your tax bill. To be frank it is either this form of debt or the real debt burden of a credit card or overdraft. And there is nothing wrong with the principle of distributing your income in your highest-earning years to your leanest years: that’s what we do with pensions. We take out loans to help us start out and we save to help us later on. Therefore loans are an entirely rational way to finance one’s education.

So what about a graduate tax? Imagine if we got individual A, with a student loan, and individual B, who pays a graduate tax, to exchange places. Both graduates would start repaying after a certain income level (£15,000 under the current system). The amount they pay back would be a portion of income, not fixed payments (10 per cent above the earning threshold). They would both cease paying after retirement. It’s a bit like asking two people at different weddings, one dancing the Macarena and the other the Time Warp, if they’d prefer to swap. Doing the Macarena with your aunty is painful but doing it wouldn’t be any more enjoyable if the friend of the family in the DJ booth put on his only other CD. (Incidentally, I’m fairly certain Mr Cable is technically proficient whatever the track.)

The only difference I can make out is that the loan repayments are, by their nature, finite. The Scottish system had a cap on the total amount an individual would pay back under its graduate contribution scheme. So either the graduate tax would replicate that, in which case it would be utterly indistinguishable from the current system, or it wouldn’t – in which case it appears to be somewhat sinister. But a graduate tax is problematic for a whole host of reasons: it’s not a direct payment to an institution; it’s hard to define a graduate; it’s hard to chase non-UK nationals with a “tax”; and, as there’s no borrowing element, it delays the funds available to universities.

Last there is something rather unholy about charging a class of citizens a different rate of tax. Taxes normally fall on a particular economic activity. Picking out a group of individuals and taxing them separately is an ill-paved road to start travelling down.

There isn’t space to go into all the arguments surrounding whether students should contribute towards the costs of their study. My argument assumes that will be the case, especially if student numbers need to rise as our economy changes. Given the large private benefit derived from having a degree it seems dodgy to suggest that the taxpayer should pay for the whole cost of a degree – especially when further education and part-time students get such a rum deal.

There are loads of ways to reform the current system to extract more money from those who should stump up the cash and still make it accessible to those from disadvantaged backgrounds. (Means-testing the share between the state and individual could be a goer.) But just rebadging it won’t help anyone. Hey, Macarena.