The Graduate Tax and the financing of higher education

by George Hatjoullis

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The debate about a Graduate Tax rumbles on year in year out, even though, as Martin Lewis points out (http://bit.ly/13GUIcr), the present system of financing is in effect just that; a graduate tax. As a rule I keep very quiet when this subject comes up. The reason should be obvious from the attached clipping from the Financial Times dated 12/12/1984. I may have initiated the idea. The clipping has been scanned in from my files as FT Online does not offer easy access to letters published back in 1984 but it should be legible. It serves to emphasise that the debate about the financing of higher education is not new. Moreover, the idea of a Graduate Tax was certainly not current in 1984. I suggested it as an innovative way to finance higher education that answered many of the concerns that Michael Dixon had outlined in his article. It also addressed one of my concerns. The FT kindly published the letter.

My primary motive for suggesting the GT in 1984 was because I wanted the form of financing to be neutral. The form of financing should not materially influence the decision to enter higher education. This should be solely based on the capacity to benefit from it  A correctly constructed graduate tax could be near neutral. Unfortunately, as Martin Lewis has eloquently argued, the present quasi-graduate tax system is non-neutral and is discouraging capable people from entering higher education. It is time to speak up again and emphasise that neutrality is vital in the funding of higher education.

Tax neutrality is an important concept in economics. Taxes need to be raised but in a way that does not distort economic decisions. No tax is completely neutral but a graduate tax of the form that I originally outlined comes close. The key aspect is that the cost is borne by those who benefit and in proportion to benefit. Moreover, there is no charge until the benefit accrues. It is collected through an existing administrative mechanism (PAYE) so it is cost-effective to levy. No individual capable of benefitting from higher education is discouraged from doing so by the mode of financing. The universities can be allowed to admit all students that they judge can benefit. The situation is thus very similar to the system of financing that prevailed when I was an undergraduate at the Godless institute in Gower street (1971-1974), except that the system is not funded out of general taxation but via a hypothecated Graduate Tax. Given the evidence that a loans based, quasi-tax system is putting capable students off I suggest the situation needs to be reviewed.

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