July 16, 2010
Cable’s Fair Tax
This blog post by Conor Ryan has me thinking about Vince Cable’s proposed graduate tax.
Basics first. Higher education provision is expensive, but it’s also beneficial to wider society (a public good) insofar as it results in a better educated, more productive and perhaps even more culturally sophisticated work force. But it’s also usually an immense boon to the individuals who receive it (a private good), insofar as graduates on average earn higher salaries than non-graduates.
Accordingly, it seems right that society should collectively fund the provision of higher education but it also seems fair that the recipients of such education contribute given the benefits they personally receive.
At present, an enormous spending squeeze is about to hit British universities at a time when many institutions were already warning that they needed to raise fees to meet costs.
We know that on average middle and upper class kids are more likely to go to university than working class kids. At present, however, most students pay the same level of university fees, although the poorer are entitled to grants. Fees are financed via The Student Loan Company, which pegs interest to inflation, meaning that the real cost of a degree does not increase over time (making it excellent value for money, in borrowing terms).
However the student loan does not cover (anything like) the whole of a degree cost, and because working-class kids are less likely to go to university, the result is that the state – by subsidising university places – effectively redistributes from poor to richer, albeit unintentionally. Furthermore, there is an after-the-fact problem of fairness with tuition fees: as Cable puts it, people who go on to be top bankers and lawyers after they graduate pay back the same amount as teachers and nurses, and that just seems wrong.
A graduate tax thus looks like an innovative and fair way to begin to solve both the funding issue and the social justice issue.
Looked at this way Vince Cable seems like he’s at the heart of what Stuart White calls the battle for liberalism within the Lib Dems. Against the small-state, pro-market libertarianism of people like Nick Clegg and David Laws, Cable’s plan chimes more with the “other” interpretation of liberalism. The one with a long and dignified English lineage, but most recently developed by American political theorists like John Rawls and Ronald Dworkin, advocating the role of the state as an enabling agent compensating for unfair disadvantage, inequality, and the lack of freedom and autonomy imposed by unregulated market systems.
Accordingly, those on the liberal left ought to welcome Cable’s proposal. Both as a matter of fairness, but also as part of the battle for preventing the Lib Dems become nothing but Conservatives dressed in yellow, enabling their hard-cutting ideological agenda.*
But it may not work out that way. Take Conor Ryan – with banners emblazoned on his site proclaiming him a “Top 100” Labour and centre-left blogger – attacking Cable’s proposal using tried and tested right wing tropes. For example, that the graduate tax may lead to a “brain drain” – a stupid argument beloved of the right that I’ve criticised before. He also – unbelievably – makes noises to the effect that it is unfair for those earning more to reciprocate with greater contributions: “What the Liberal Democrats are looking for is a backdoor way of raising taxes further on high earners.” I guess that tagline – “former adviser to Tony Blair” – isn’t there for nothing.
Having said that all the Labour leadership candidates except David Miliband have backed a graduate tax. This further solidifies my preference against D-Mil, but I’ll be interested to see whether Labour – when it gets a new leader – can resist the siren calls from within the party urging an attack on the Lib Dems, and stick to principle despite tribal lines. I’ll be honest and say I’m not particularly hopeful.
–
* I accept that some Labour people want that to happen so that the Lib Dems are effectively redundant. That’s possibly a laudable long-term aim, but in the short term anything that can moderate a rampant Tory axe-attach on public spending is a good thing.
Tom Kealy said,
July 16, 2010 at 9:19 am
“Higher education provision is expensive, but it’s also beneficial to wider society (a public good)”
No it’s not – public goods have to be non-exclusive and non-rivalrous. I have a degree, which is exclusive to me; you don’t have it (although you have a different one), therfore my degree is rivalrous. Higher education, then, is a private good. Things which (suposedly) have positive externalities need not be subsidised, as people will choose them anyway.
Because the repayments on a student loan are indexed to inflation, they will cost you nothing (as the basket of goods you can buy will be unaffected by whether you have a student loan). That is a very good deal.
“However the student loan does not cover (anything like) the whole of a degree cost” No; the cost of something is what is given up to get it. That includes the teaching time of the professors, the building, how the tax is raised, etc. It is not the financial “cost” to the student, who pay only a fraction of the cost (properly measured) currently.
As I’ve explained – currently the student loan is a great deal. The cost to a student of getting a degree will be the time getting a degree (becuase the repayments don’t alter your consumption). Your tax imposes a true cost upon students, which will futher discourage anybody (but particularly young people born into poorer families) from going to university. That is, this idea is simply self-defeating (whether or not it’s fair).
If you are to comment on economic policy, please try (at the very least) to use terms (which have strict definitions) correctly.
Paul Sagar said,
July 16, 2010 at 9:57 am
Tom, the benefits of having a high number of people who are degree-educated in a society – the economic, administrative and cultural improvements this leads to – are typically non-excludable and non-rivalrous; people at the bottom of the pile benefit (even in small ways) over tim because a rising tide lifts all boats. Sure the example isn’t as straightforward as the usual street lighting example, but the aggregate benefits of higher education to wider society can clearly be considered a public good.
FYI I have a degree in politics, philosophy and economics and although I’ve not done any actual economics for 5 years, so that is a bit of a joke…
cim said,
July 16, 2010 at 10:00 am
“insofar as graduates on average earn higher salaries than non-graduates”
Though, this is not necessarily causation. Darrell Huff pointed out back in 1954 that the people who go to University are generally both more academically able and from richer families than those who don’t, and therefore would be expected to earn more anyway.
It does vary quite a bit with what the degree is, as well. The earning increase from some of the Arts degrees is about zero.
Dave Semple said,
July 16, 2010 at 10:12 am
And if he’s hitting from the Right, I’m going to hit you from the Left. If the issue is redistribution, a graduate tax will not help. Vince Cable’s own figures suggest that, on average, a graduate will earn £100,000 more than a non-graduate over a lifetime. But this is an average figure; I’d guess that this means there were be a majority under the average and a minority over it (some far over it).
Given current political reality, it’s unlikely that any graduate tax will reflect this skew accurately (though when Vince proposes exact figures and an exact plan, I’ll bring the maths). So once again, we’ll see a transfer of monies from lower and middle earners to high earners, as the amount high earners pay back will not be enough to offset the proportional benefit they have reaped from education. It’s going to be unfair either way, with the wealthy being the beneficiaries – getting a more advantageous cost-to-benefit ratio than their middle- and lower-earning counterparts.
If your problem is with low working class uptake, this needs to be addressed through all tiers of the education system, through a concerted effort by civil society and potentially by structural involvement by the State in the economy. It won’t be sorted out via admissions policies or bursaries, because by the time working class kids are getting to university age, a lot of them aren’t equipped to go to university and/or don’t care about university. Universities themselves need serious adjustments to be made relevant to people with jobs, interested in lifelong learning.
But that’s a side issue. If you want to argue for effective redistribution, then propose that anyone earning less than £30,000 per year be exempted from tax and that everyone over it pay a steeply graduated income tax, as well as raising corporations tax and capital gains tax and the rake of other sources the government can tap, to tax wealth. Then design a free, fully subsidised, public education system.
Paul Sagar said,
July 16, 2010 at 10:14 am
cim, it could be correlation…but even so these people have received an expensive degree and surely should pay for some of it. That arts grads typically make less is no problem; a percentage tax of income will reflect this as higher earners will pay more.
Tom Kealy said,
July 16, 2010 at 10:19 am
“but the aggregate benefits of higher education to wider society can clearly be considered a public good.”
Nope – what you’re describing is a good with positive externalities. They need not be private.
The aggregate benefits to wider society of condoms could be quite large (reducing the spread of std’s, fewer unwanted pregnancies etc), but few people would suggest we subsidise them.
Paul Sagar said,
July 16, 2010 at 10:21 am
Dave, all you’re telling me is that no system is perfect, Inc a grad tax. What I need to know is why the grad tax isn’t preferable to other systems – on the fainess point, it looks manifestly desirable.
cim said,
July 16, 2010 at 10:47 am
Paul: Oh, I agree. A system that means that people can take jobs that need degree-level knowledge but don’t pay well (museums work, for instance) without being forced to pay to do it is needed, whatever form it takes.
I don’t know how much difference a graduate tax makes over the current repayment system, though – graduates currently repay their student loan and tuition fees at a rate proportional to their income and average student debt levels are high enough (and will get higher if the tuition fee cap is lifted) that most probably won’t have paid it all back by the time they’re 50 and it gets written off. (Any who take a career break for their family almost certainly won’t).
I do think graduate tax would be an improvement on the current system – because the people who do get 100k+/year jobs as a result of the degree will be able to pay off their student debt very quickly, while people on 25k jobs will essentially be paying a graduate tax anyway until they’re 50, but I’m not sure it’s enough of an improvement to justify changing the system yet again.
donpaskini said,
July 16, 2010 at 11:24 am
Why is introducing a graduate tax a better way of funding higher education than raising income tax?
Tom Kealy said,
July 16, 2010 at 11:26 am
“What I need to know is why the grad tax isn’t preferable to other systems”
Because it levies a cost on graduates that the current system avoids (by indexing interest rate to inflation).
You want to make the system fairer, perhaps by removing an implicit subsidy to righ kids (and getting more poorer kids into uni). The best way to go about it would be to raise the cap, not discourage people from considering higher education in the first place due to a tax.
Nakul said,
July 16, 2010 at 12:29 pm
Tom:
>> The aggregate benefits to wider society of condoms could be
>> quite large (reducing the spread of std’s, fewer unwanted pregnancies
>> etc), but few people would suggest we subsidise them.
That seems like an odd example: in the developing world, e.g. (but not only, see: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1508904/), where these aggregate benefits are especially important, there seem to be many good reasons to subsidise them.
Tom Kealy said,
July 16, 2010 at 1:13 pm
I am chasened, and recant!
Perhaps a better example would be porn (it keeps rape statistics down). Nobody would subsidise that. Surely?
Paul Sagar said,
July 16, 2010 at 1:34 pm
Condoms are subsidised in this country as it is, FFS; you can get them free at the family planning clinic or from your doctor.
As for “porn keeps rape statistics down”, that’s just made up. The research on the relationship between rape and porn (if there is one) is inconclusive at best – we know this because radical feminist groups tried to establish that porn increases rape incidence, but there was just no clear trend to discern one way or the other because it’s very complicated indeed.
Ste For Sure said,
July 16, 2010 at 1:40 pm
“The aggregate benefits to wider society of condoms could be quite large (reducing the spread of std’s, fewer unwanted pregnancies etc), but few people would suggest we subsidise them.”
Condoms are free from the family planning clinic. They give you shitloads in a brown paper bag. The government does this to stop the spread of STD’s and to prevent unwanted pregnancies.
Peter said,
July 16, 2010 at 2:43 pm
I support Cable’s proposal. Yes, it’s a 2nd best solution, and it’d be better if unis were funded entirely out of a highly progressive income tax (as Donpaskini suggests). But good luck getting that out of the ConDems.
A graduate tax is better than the current system because it avoids the situation where an investment banker pays the same amount total back as a graduate earning much less (and in reality, the poor person might pay less back. The banker will pay their debt off quicker, and hence incur less interest. So in that sense, the current system is regressive).
Tom Kealy said,
July 16, 2010 at 2:54 pm
Fine. Chocolate cake has significant positive externalities, shoudl it be subsidised. Blow? Purple double ended dildos? Degrees are private goods, whilst thier content may (or may not) be.
That still doesn’t answer my objection: why do you think that going from a system where a student will face a cost of time + future taxes to a system where the cost to the student is time + future taxes + graduate tax (when the tax is incident on the students) is one that will have the effecs you desire. I claim that it’s a policy that is self defeating on your own terms.
R.e. porn and rape: the US staggered its intial internet usage by state. In each state a 10% increase in internet usage cas correlated with a 7% decrease in rapes. Across all 50 states. There was no decrease for murder, and among the groups statistically most likely to commit rape (unhappy young men) had the greatest decrease in offending rates. They are also least likely to be using dating websites. Tentative conclusion: “the results suggest that, in contrast to previous theories to the contrary, liberalization of pornography access may lead to declines in sexual victimization of women.” Here is the paper:
http://www.law.stanford.edu/display/images/dynamic/events_media/Kendall%20cover%20+%20paper.pdf
Thrasymachus said,
July 17, 2010 at 3:25 pm
Peter:
I’m a fan of a big progressive income tax, but I don’t see why Grads shouldn’t shoulder at least some of the burden in particular too. Insofar as their degrees provide them with increased earning power, it seems fair to have them contribute (in a suitably fair and progressive way) to the costs of providing this education from this private boon of theirs. What am I missing?
PS. The current prevailing view is just to increase the cap. This won’t price poorer students out of the market at all because of bursaries and grant. Because, looking at the socio-economics of universities in general (and the Russell group in particular) that’s worked so well so far.
Ireland and Lib Dem Soul Searching « Bad Conscience said,
July 20, 2010 at 7:32 am
[...] we’ve had out of the Lib Dems is a front bench minister resign over financial impropriety, and a welcome but ultimately timid and non-committal suggestion of a graduate tax. In truth, you’d be hard [...]
Ireland’s example should make the Libdems think twice too | Liberal Conspiracy said,
July 20, 2010 at 10:56 am
[...] we’ve had out of the Lib Dems is a front bench minister resign over financial impropriety, and a welcome but ultimately timid and non-committal suggestion of a graduate tax. In truth, you’d be hard [...]
Lee Griffin said,
July 20, 2010 at 11:11 am
“A graduate tax is better than the current system because it avoids the situation where an investment banker pays the same amount total back as a graduate earning much less”
Why is this myth being perpetuated? Someone earning £100k currently pays back £7650 a year (if I remember my figures right), while someone earning £20k pays back £450 a year.
Both, eventually, pay back the whole of the money they owe, while obviously one pays it back quicker…unless the lower earner reaches retirement in which case they do not have to pay back the full amount. (unless rules have changed for more recent graduates)
blanco said,
July 20, 2010 at 11:46 am
Hi Paul, good post and rebuttal of right-wing Labour tendencies. I would take issue with this however:
“I accept that some Labour people want that to happen so that the Lib Dems are effectively redundant. That’s possibly a laudable long-term aim”
It’s not laudable if Labour wants a Tory majority/led government in the future. You’ve probably read John Curtice’s piece “The Last Post” about why coalition governments are very likely to occur again in the future. Labour should hope the Lib Dems survive, not only so they can ally to keep the Tories out but also because they need the Lib Dems to form a coalition otherwise they won’t have power again. The Lib Dems are pretty much now like the FDP in Germany, the slut who runs between the two bigger pimps, but the pimps need the ho to stay in business.
Unless you’re planning to massively increase the Green Party from 1 MP to the 60ish you’ll need to make a government with them.
Peter said,
July 20, 2010 at 1:56 pm
Lee Griffin,
You ask “why is this myth being perperuated” (ie. that an investment banker will pay back the same total amount as a graduate earning much less) and then go on to explain why it’s not a myth. Egg/face much?
Lee Griffin said,
July 21, 2010 at 1:47 pm
Peter, my apologies, I misread it as the argument I’ve heard from a few recently on twitter, etc.
However I guess I do disagree with the idea that the situation of them paying back the same amount in total is a bad thing, certainly when you take in to account the reality of the tax effect of that investment banker having that job compared to not having it, and that the investment banker has likely paid for 95% of his HE place anyway.
Meanwhile, you need to learn what regressive means (like much of the Left it seems).
Peter said,
July 21, 2010 at 11:18 pm
Lee,
What tax effect are you talking about? Are you saying that the investment banker’s job wouldn’t exist (or he wouldn’t be in it) if there was a graduate tax? Seems doubtful to me.
Care to explain. Either specific taxes (eg. VAT) or the entire tax system can be aptly described as regressive. A specific tax (in this case, the student loans system, which I guess technically isn’t a tax but meh) is regressive just in case the poor pay a greater proportion of their income than the relatively richer.
Suppose Bob the investment banker over the course of his life pays £25000 back to the SLC. His total earnings over the course of his life are £10million. So he pays back less than 1% of his total earnings. Now suppose Alice the less well paid graduate pays back £25000 as well, but only earns a total of £1million. So, she pays back a higher % (this is ignoring the effect of interest, such that Alive would actually pay back more than £25k). When considered over the course of a lifetime, the current SLC-repayment scheme can be considered regressive.
Of course, the whole tax system, all things considered might be progressive. But that doesn’t mean that particular taxes within that system cannot be regressive.