Graduate Tax part two (part one is below)
How to implement it?
Round about 1977 Jonathan Haughton departed to do his PhD in economics at Harvard. I emerged clutching my philosophy degree, and having completed a year as a full time (sabbatical) student union officer at Trinity College. I then found myself under the regrettable necessity of making a living. Finding a post was made less stressful in ways I can only guess by the fact I was not in debt. Over the next few years I held a number of administrative posts in various colleges, both in England and both parts of Ireland. The topic of student finance would occasionally surface and I might mention the idea of a graduate tax, as a possible solution but it rarely sparked any interest. However early on I encountered a Professor of Economics visiting my institution, who over coffee expressed interest. As I had a copy of the original paper to hand I gave it to him. He returned it in true academic fashion having in effect marked it, pronouncing it an excellent undergraduate effort, and recommending, if I was still interested, that I read several of his books. He also mentioned it to a colleague, a visiting lecture in Finance, who it turned out had taken early retirement from being a senior person with the pension fund of the Government of Ontario.
The colleague told me how it could be made to work.
His essential insight was to realise that the graduate tax scheme in the paper was a pension scheme backwards. In a pension scheme you pay in over your working life, and are then at retirement, paid a pension for as long as you live.
Obviously people live for different periods of time so the amount paid out in pension varies. However if you have enough pensioners it all averages out. Those who live a long time are paid for by those who live a short time.
In the graduate tax you are paid an allowance for tuition fees and maintenance which varies as to amount per year (within known limits), for a period of years which varies between known limits. Three year degree in English cheapest, seven year medical course dearest. He proposed that the upfront cost would be met by setting up an independent Graduate Tax agency that would function much like a pension scheme. This agency would pay the fees for each eligible student and pay them their maintenance grant. For the first three years no graduate tax would be collected, then a trickle would start. The agency would therefore start off by running a deficit, this would be met by:-
1. The Government continuing to contribute what they were already putting in (Or in our current circumstances, no doubt, what they put in last year minus 5 per cent over four years).
2. Bonds being issued to meet the rest of the expenditure each year . They would be dated to be repaid in 40 years time, and auctioned off each year for the best price. To start with the interest would be paid by the funds coming from the Government, then the revenue from the tax would be significant. After a further while the tax revenue would be sufficient that the bonds could be managed using a "sinking fund".
As the scheme approached maturity the government contribution (providing the levy was set at the right rate) would wither away, and eventually the revenue coming in from the levy would balance expenditure.
Three points to note about this particular implementation:-
1. The levy collected over forty years. In many professional (i.e. Graduate grade) jobs income rises over the career, so the last few years could be really important to tax. and it allows for a lower percentage levy.
2. This scheme pays for the fees and maintenance without means test; but in many middle class families children would be getting the graduate tax agency payment at the same time as parents paid the levy!
3.The state must determine the level of tuition fees for different courses, and also determine the number of student places, as otherwise accurate calculations not possible. (The liabilities of the fund need to be fixed)
I forget his name I am afraid, but he did say that any civil servant with experience of pensions would come up with the same idea. No doubt Vince Cable has someone working on this as I write...
At the time what ensured that no one in the UK was interested in this sort of scheme was the continuance of the student grant system, which conferred on students, of whom I had been one, the advantages of the graduate tax without the levy. We could indeed have the cake and eat. There was the argument from social justice, but actually there were many other aspects of the system more regressive than student grants...
These days with a student loan system and a funding crisis for the universities thinking may change.