Graduate tax
Encyclopedia
Higher education
Higher, post-secondary, tertiary, or third level education refers to the stage of learning that occurs at universities, academies, colleges, seminaries, and institutes of technology...
. It has been proposed in the United Kingdom and the Republic of Ireland.
Background
Under the Higher Education Act 2004Higher Education Act 2004
The Higher Education Act 2004 is an Act of the Parliament of the United Kingdom which introduced several changes to the higher education system in the United Kingdom, the most important and controversial being a major change to the funding of universities, and the operation of tuition fees, which...
, British and European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
students at publicly funded universities in England
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
, Wales
Wales
Wales is a country that is part of the United Kingdom and the island of Great Britain, bordered by England to its east and the Atlantic Ocean and Irish Sea to its west. It has a population of three million, and a total area of 20,779 km²...
and Northern Ireland
Northern Ireland
Northern Ireland is one of the four countries of the United Kingdom. Situated in the north-east of the island of Ireland, it shares a border with the Republic of Ireland to the south and west...
are charged tuition fees (called "top-up fees") directly by the universities. The amount of the fees is limited by law, and the fees can be funded by government-backed student loan
Student loans in the United Kingdom
Student loans and grants in the United Kingdom are primarily provided by the government through the Student Loans Company , a non-departmental public body. It has been the subject of much discussion whether or not the SLC is a bank, however these claims are entirely unfounded and The Student Loans...
s issued by a government-backed company. The loans need only be repaid when the graduate is earning a sufficient amount of money to do so. Non-EU students can be charged an unlimited fee by the university which is usually considerably higher.
In 2009, the UK's National Union of Students proposed a tax on graduates who have received academic degree
Academic degree
An academic degree is a position and title within a college or university that is usually awarded in recognition of the recipient having either satisfactorily completed a prescribed course of study or having conducted a scholarly endeavour deemed worthy of his or her admission to the degree...
s over a period of years after the granting of a degree. Four of the five candidates running in the 2010 British Labour party leadership election
Labour Party (UK) leadership election, 2010
The 2010 Labour Party leadership election was triggered by a general election which resulted in a hung parliament. On 10 May, Gordon Brown resigned as Leader of the Labour Party. The following day, he stepped down as Prime Minister....
also backed the proposal. A graduate tax was mooted before the introduction of top-up fees in the United Kingdom but was ultimately rejected. A system of graduate tax was seriously considered as part of the Browne Review
Browne Review
The Browne Review or Independent Review of Higher Education Funding and Student Finance was a review to consider the future direction of higher education funding in England. It was launched on the 9 November 2009 and published its findings on 12 October 2010. It was chaired by Lord Browne of...
although Vince Cable has stated that “No decisions have been made". On July 15, 2010, Vince Cable appeared to endorse a graduate tax, saying in a speech that he was "interested in looking at the feasibility of changing the system of financing student tuition so that the repayment mechanism is variable graduate contributions tied to earnings".
NUI proposal
The UK's National Union of Students has proposed a tax which would be levied on graduates for 20 years following their graduation, progressivelyProgressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
ranging from 0.3% to 2.5% of their income.
Benefits
A graduate tax would allow education to be free at the point of delivery. Proponents claim that one benefit of a graduate tax is that it would prevent a market in higher education developing whereby students chose where and what to study based upon the ability to pay rather than academic ability. A graduate tax might raise more money for universities over the long term than capped tuition fees, depending on the level of the cap. David GreenawayDavid Greenaway (economist)
David Greenaway is a British economist. He is currently professor of economics and Vice-Chancellor of the University of Nottingham, having succeeded Sir Colin Campbell on 1 October 2008. Greenaway is the director of the Leverhulme Centre for Research on Globalisation and Economic Policy which he...
, a critic of a graduate tax admits that an "obvious attraction" of such a tax is that it is levied only on graduates, the immediate beneficiaries of higher education.
Under the NUS's proposals a 'People's Trust' would be set up that would be independent of the Treasury.
The current system of loans has been seen as unviable because they require an expensive public subsidy to universities. David Willets has described how a rise in tuition fees would increase public spending: "It is in such delicate equilibrium that shifting any single element requires us to shift everything else. If fees were to go up, the government would have to lend people the money to pay for them - and that would push up public spending....It's not just that students don't want to pay higher fees: the Treasury can't afford them. So the arrangements we have now are clearly unable to respond to the current economic climate."
A graduate tax may not be perceived to be a debt in the same way as a student loan is. Vince Cable states that "[the current system] reinforces the idea that students carry an additional fixed burden of debt into their working lives. Yet, most of us don’t think of our future tax obligations as 'debt'."
Criticisms
The graduate tax could create several perverse incentivePerverse incentive
A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences.- Examples :...
s. For example, graduates of UK universities would have an incentive to move away from the UK after graduation to countries where it would be difficult or impossible to collect the graduate tax. The Russell group
Russell Group
The Russell Group is a collaboration of twenty UK universities that together receive two-thirds of research grant and contract funding in the United Kingdom. It was established in 1994 to represent their interests to the government, parliament and other similar bodies...
of universities claims that this could "deprive the UK of vital skills and knowledge". Further perverse incentives may be present, depending on the details of how the scheme is implemented. If the tax is levied only upon students who graduate, then some students would have an incentive not to graduate after having completed their courses of study. If the tax is levied only upon students who graduate from UK institutions, then some students would have an incentive to transfer from UK universities to foreign institutions for their final year(s) of study.
A graduate tax breaks the link between the actual cost of a degree and the amount the graduate pays for it. Some graduates would end up paying more in taxes than their degrees actually cost, while others would pay less. The Russell Group
Russell Group
The Russell Group is a collaboration of twenty UK universities that together receive two-thirds of research grant and contract funding in the United Kingdom. It was established in 1994 to represent their interests to the government, parliament and other similar bodies...
claims that this situation "would be unreasonable and likely to be seen by many as unfair".
Because individual universities will not derive any direct financial benefit from becoming more attractive to students, the graduate tax would "provide little incentive or adequate resource for universities to drive up quality" according to the Russell Group.
Criticisms include the transitional problems which exist where students are going through university but not paying the tax. Free-market thinkers have criticised the graduate tax for not creating a market based element in higher education. Alistair Jarvis of the 1994 Group
1994 Group
The 1994 Group is a coalition of 19 top "smaller research-intensive universities" in the United Kingdom founded in 1994 to defend their interests following the creation of the Russell Group by larger research-intensive universities earlier that year...
of research universities has stated: "Any mechanism that prevents variable fees and the functioning of a regulated market would be damaging to the sector...We strongly support a regulated market because this is the best way to drive up excellence in research and teaching, and to deliver student satisfaction. A system of variable fees has been, and remains, the correct strategy. This system should be developed, rather than fundamentally changed."
It has also been argued by The Independent
The Independent
The Independent is a British national morning newspaper published in London by Independent Print Limited, owned by Alexander Lebedev since 2010. It is nicknamed the Indy, while the Sunday edition, The Independent on Sunday, is the Sindy. Launched in 1986, it is one of the youngest UK national daily...
that it is too early to change the system again in the United Kingdom. Greenaway argues that a graduate tax would not deliver additional resources rapidly and that there is a potential problem of 'leakage' with EU nationals leaving the UK and therefore not paying the tax. A graduate tax is unpopular with Russell Group Vice-Chancellors as it would likely result in a more equitable distribution of research funding towards less prestigious universities.
Nicholas Barr
Nicholas Barr
Nicholar Barr FRSA is a British economist, currently serving as professor of public economics at the London School of Economics . He received his Ph.D. in Economics as a Fulbright Scholar from the University of California, Berkley and his MSc in Economics from LSE...
, professor of public economics at the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
has praised the current system of student loans as a method of financing higher education, arguing that variable fees foster competition that is of benefit to both students and employers.
Another problem concerns how foreign students at UK universities and emigrants from Britain would be treated by the tax.
Madsen Pirie
Madsen Pirie
Dr Duncan Madsen Pirie, PhD is a British researcher, author, and educator. He is the founder and current President of the Adam Smith Institute, a UK think tank which has been in operation since 1978.-Early life and education:...
of the free-market Adam Smith Institute
Adam Smith Institute
The Adam Smith Institute, abbreviated to ASI, is a think tank based in the United Kingdom, named after one of the founders of modern economics, Adam Smith. It espouses free market and classical liberal views, in particular by creating radical policy options in the light of public choice theory,...
, writing in The Daily Telegraph
The Daily Telegraph
The Daily Telegraph is a daily morning broadsheet newspaper distributed throughout the United Kingdom and internationally. The newspaper was founded by Arthur B...
, argues that it is wrong for talented graduates to face higher taxes under a form of progressive taxation and that such a proposal might make emigration more appealing to graduates. A loan can also be paid off early whereas a tax would continue to be charged for a longer period of time.
The Universities and Colleges Union, a supporter of free higher education has criticised a graduate tax. Sally Hunt has criticised the tax as a rise in fees by stealth: "All the polls show that the general public will not stomach a rise in university fees. If the Government thinks it can get the public to swallow higher fees as some sort of graduate tax, it is living in a dream world. We need a proper debate on how to fund our universities, not an exercise in rebranding. We will judge the plans on what they actually do and whether or not students will be forced to pay more, not how the Government markets them."
Republic of Ireland
A graduate tax has also been proposed in the Republic of IrelandRepublic of Ireland
Ireland , described as the Republic of Ireland , is a sovereign state in Europe occupying approximately five-sixths of the island of the same name. Its capital is Dublin. Ireland, which had a population of 4.58 million in 2011, is a constitutional republic governed as a parliamentary democracy,...
. Since 1995, the Free Fees Initiative has meant that almost all students in the Republic of Ireland from the European Economic Area
European Economic Area
The European Economic Area was established on 1 January 1994 following an agreement between the member states of the European Free Trade Association and the European Community, later the European Union . Specifically, it allows Iceland, Liechtenstein and Norway to participate in the EU's Internal...
and Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
do not have to pay fees, with the government paying them on their behalf. However, they must pay a student contribution (formerly called the student services charge and informally called the registration charge) which for the 2010/11 academic year was set at a maximum rate of €2,000 (up from €1,500 in the 2009/10 academic year). Many students from lower-income families can get grants to cover this and other costs (such as academic field trips), as well as a maintenance grant.
In March 2009, the largest opposition party in Dáil Éireann
Dáil Éireann
Dáil Éireann is the lower house, but principal chamber, of the Oireachtas , which also includes the President of Ireland and Seanad Éireann . It is directly elected at least once in every five years under the system of proportional representation by means of the single transferable vote...
, Fine Gael
Fine Gael
Fine Gael is a centre-right to centrist political party in the Republic of Ireland. It is the single largest party in Ireland in the Oireachtas, in local government, and in terms of Members of the European Parliament. The party has a membership of over 35,000...
, proposed a "graduate contribution scheme" to replace the current system. In their policy document, The Third Way, they proposed a system that would be automatic and universal (apply to all graduates regardless of wealth) and amount to 30% of the total cost of their third-level education. They also proposed to abolish the student contribution so that education was free at the point of delivery.
The contribution would be collected via the PRSI system and be ring-fenced for third-level education. There would be no interest charged on the contribution and it would not be introduced retrospectively. There would be a minimum rate of repayment set by the State but the graduate could increase this if they wished.
The scheme appeared in Fine Gael's 2011 general election manifesto. As part of the coalition deal between Fine Gael and Labour
Labour Party (Ireland)
The Labour Party is a social-democratic political party in the Republic of Ireland. The Labour Party was founded in 1912 in Clonmel, County Tipperary, by James Connolly, James Larkin and William X. O'Brien as the political wing of the Irish Trade Union Congress. Unlike the other main Irish...
following the election, they committed to 'Undertake a full review of the Hunt and OECD reports into third level funding before end of 2011.' They said that their 'goal is to introduce a funding system that will provide third level institutions with reliable funding but does not impact access for students.'
In the run-up to Budget 2012 in December 2011, the Department of Education has been examining a number of models of funding for third level education, including a return to fees, a student loan system (similar to the UK or New Zealand) and a graduate tax.
See also
- Browne ReviewBrowne ReviewThe Browne Review or Independent Review of Higher Education Funding and Student Finance was a review to consider the future direction of higher education funding in England. It was launched on the 9 November 2009 and published its findings on 12 October 2010. It was chaired by Lord Browne of...
- Hypothecated taxation
- Taxation in the United KingdomTaxation in the United KingdomTaxation in the United Kingdom may involve payments to a minimum of two different levels of government: The central government and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty...
- UK labour law