A Graduate Tax: Would it work?

Key Report Findings

1.  In recent public statements, some politicians (and others) have suggested that a graduate contribution system is the same as a graduate tax. This report makes clear that the two are not the same: under the graduate contribution system that operates in England, full-time and part-time students pay fees upfront and full-time students access state-funded fee loans that are repaid on an income-contingent basis after they leave higher education.

2.  Under the current system, students can incur debts of up to £10,000 (based on 2010/11 fee levels) to cover the costs of their tuition. If fees increase, then there is no doubt that student debt will increase.

3.  Under a graduate tax, fees are not charged and the possibility of a market in fees is removed. Instead, those who have participated in higher education pay a graduate tax according to their earnings (once they leave higher education). A graduate tax can be levied for a specified or unspecified period of time.

4.  A graduate tax does have complexities but it is likely to be no more or less complicated than the current system. While there are theoretical risks around tax avoidance e.g. by the self-employed, a graduate tax (like the current graduate contribution system) would be collected by HMRC through the PAYE system and is no more likely to be the subject of tax non-compliance than income tax collection or the current graduate contribution system.

5.  A graduate tax collected from graduates specifically to meet the costs of their higher education, may be ‘hypothecated’. While hypothecated taxes are relatively rare, the idea that hypothecated taxes present enormous practical difficulties is a myth. Rather than a separate means of collection or taxation receipts being held separately, an assessment of the revenues generated by the hypothecated tax would be estimated based on the numbers of students entering higher education, completion rates, graduate employment and earnings outcomes with the amount then set aside for the funding of higher education.

6.  Unlike a more ‘progressive’ graduate contribution system, which might charge differential real rates of interest according to income on student loans (taken out to cover tuition fees), a graduate tax could not be paid upfront thereby removing the option of those from wealthier backgrounds/high earners avoiding higher contributions by paying upfront or making early repayments. It would be truly ‘progressive’.

7.  As with the current graduate contribution system, a graduate tax could be triggered at a particular earnings level e.g. £15,000 per annum (as at present). The million+ report models the effects of different levels of graduate tax based on the assumption that a graduate tax would be levied on earnings above £15,000 per annum and for a maximum of 40 years once people leave higher education.

8.  A system of maintenance loans and maintenance grants (according to household income) would still be required in order to support student while they studied at university. Without this, participation, especially from lower socio-economic groups, would be damaged.

9.  A graduate tax of 1% would deliver the same level of resources as currently available to universities, would make the Exchequer no worse off than under the current system and would have a small negative impact on graduates i.e. the total contribution made by all graduates would increase though some graduates - particularly low earners - would be better off.

10.  A graduate tax is more progressive than any other system. For example, under a 1% graduate tax, men in the bottom income decile would contribute approximately £3,249 less than under the current system, while women in the bottom income decile would be essentially unaffected. However, there are significant impacts associated with the graduate tax for middle income females who would also pay less than is currently the case. (See Figures 9 and 10, page 26).

11.  Although, high earners would pay more, for women, it is only those in the top decile who will contribute significantly more than under the current system (£2,689). The primary impact of a graduate tax will fall on men in the very top income deciles. Men in the 7th decile will contribute approximately £4,762 more over 40 years than is currently the case, compared to £7,669 for men in the 8th decile and £13,043 for men in the top decile. (See Figures 9 and 10, page 26).

12.  The transition from a graduate contribution scheme to a graduate tax could be funded in part by amendments to the current student support scheme e.g. by applying an interest rate of 1-2% on maintenance loans or extending the repayment period from 25 years. However, it is likely that in addition, the Government would need to borrow additional funds until a transition to a ‘steady-state’ income from a graduate tax was complete.

13.  The million+ report is based on economic modelling undertaken by London Economics www.londecon.co.uk. This modelled the resource flows relating to the Hefce teaching grant, tuition fees, student grants, student loans and repayment mechanisms and bursaries. It also modelled graduate lifetime earnings to understand repayment profiles and the cost of the student loan book. The model provides an assessment of the resource flows associated with a cohort of students entering higher education, across the duration of their studies. Download the full report here.

14.  What others say – download a summary of comments from Vice-Chancellors and the NUS here

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