The heavy debt burden imposed on recent and current university students in England is frequently justified on the grounds that graduates derive many private benefits from their privileged higher education. However, the private benefits from higher education have been recognised for decades. There is no good reason why higher education costs should be charged only to younger generations of students.
A new graduate tax could pave a way out of the current quagmire of student debt but, in the interests of inter-generational equity, it must be applied to university graduates of all ages, not just recent and future graduates.
In a recent joint paper, Andy Green and I set out the main advantages of an all-age graduate tax as follows:
- First, it would reduce the extent to which higher education competes with other urgent claims on general tax revenue.
- Second, annual tax payments for recent graduates would be considerably lower than student loan repayments under the current system.
- Third, it would provide a more secure fiscal foundation for higher education finances than currently exists. For example, a tax levied at 2.5 per cent of taxable income for all employed graduates in England would yield more than twice as much in annual revenue as is currently received from loan repayments made by English-domiciled graduates.
- Fourth, a tax of this kind could help deal with the problem of accumulated student debt if tuition fees are abolished – something which is often neglected by supporters of fee abolition.
In order to tackle accumulated loan debt, indebted graduates could be offered a choice between continuing with their loan repayments and letting their payments under the all-age graduate tax be formally substituted for their debt obligations. Conversely, graduates who have already paid off their tuition fees should be exempted from the all-age graduate tax in full or in part (depending on the level of fees involved).
The political and practical difficulties of such a tax would be formidable but so would be its benefits. With careful thought and preparation, the difficulties could be overcome.
For example, employers already take responsibility for calculating the loan repayments that are due from recent graduates in their employ and deducting the sums involved from employees’ gross earnings. In the case of older graduates, employers could be required to set a date each year for graduate employees to notify them of their qualification status and then seek instructions from HM Revenue and Customs as to what level of graduate tax (if any) should be collected from each employee. Self-employed graduates could be required to answer additional questions in self-assessment tax forms about their qualifications.
As with any new tax, concerns will arise about possible avoidance. However, the incentives for honest compliance with an all-age graduate tax by individual graduate employees – and the penalties for non-compliance – would be the same as for any other element of the tax system.
Other concerns might include the retrospective nature of this tax and the potential loss of revenue if graduates move overseas to avoid it. However, many taxes have a retrospective quality in that tax-payers might have behaved differently if they could have foreseen changes in tax regimes, for example, those affecting capital gains or the activities of buy-to-let landlords. With regard to graduates moving to other countries, it seems unlikely that life-changing decisions of this kind would be made unless other influences besides small increases in income tax rates were also at work.
An all-age graduate tax could also help address a serious problem identified in the terms of reference for the new government Review of Post-18 Education and Funding, namely, that growth in three-year First (Bachelor) degree studies has been over-emphasised in recent decades at the expense of high-quality vocational and technical education and training.
A rebalancing of post-18 educational provision between First degree study and vocational education and training is long overdue. In an innovative proposal which could help secure this rebalancing, Tom Schuller, Alan Tuckett and Tom Wilson suggest a National Learning Entitlement (NLE) which would enable all persons aged 18 or above to have free access to publicly-provided (or publicly-recognised) education and training for the equivalent of two years.
Significantly, the NLE would apply to further and adult education colleges as well as to universities and could be used flexibly for part-time study over a number of years. Course fees would only be charged in third and subsequent years of study.
Such a scheme would be costly but could lead to a welcome increase in intermediate skills development, especially if it is recognised that quality standards in vocational and technical education and training are just as important as those in higher education.
One risk of the NLE proposal is that the burden of fees charged for post-NLE study to First degree level could fall heavily on future generations of students, including mature students (whose numbers have fallen sharply in recent years). However, if an all-age graduate tax was introduced in conjunction with the NLE, this could reduce the burden placed on future students seeking to continue studies to First degree level.
Geoff Mason is Visiting Professor at the Centre for Research on Learning and Life Chances (LLAKES), UCL Institute of Education. He was formerly Senior and Principal Research Fellow at NIESR for many years.