Thursday, December 09, 2010

Why a graduate tax is unworkable

Opponents of the government's tuition fees proposals have put forward very few alternatives as to how higher education could be financed. The total oppositionists simply state that it should be free (ie free for the student) and so should be financed from general taxation. There is of course no explanation whatsoever from any of these people as to how such a gigantic spending commitment can be met from a public purse that is under severe financial pressure.

The other alternative proposal that has been raised is that of the graduate tax. Whilst this is obviously an attempt to paper over a gaping hole in the argument mounted by opponents, it should at least he given serious consideration. So I have done that, and my conclusion is that it is unfair, unworkable, counterproductive and completely mad.

The first point to make about it is that if you believe in free higher education (free for the recipient, but not free for the taxpayer, including the millions who are denied a university education, who have to pick up the bill) there is no way on the planet that you can support a graduate tax. Shackling a student to a lifelong commitment to paying extra income tax means that a university education comes at an enormous price, in many cases vastly more than would be paid under tuition fees. It is interesting that Labour attempts to claim graduate tax as an alternative to fees at the same time as attacking any notion of students having to pay for their education. In other words, Labour are suggesting that higher education under them is free, as long as you pay for it with a blank cheque.

With tuition fees you know what your liability is. You know what you owe. And once it's paid off, you are free of the burden. The liability ends. That is not the case with a graduate tax. Once you graduate, you are stuck with it. Your income will always we liable to it (though see below for the avoidance scheme). Graduate tax means paying for your higher education an amount that has no relationship whatsoever to the cost of your course. You could do a course that is relatively cheap but you end up paying graduate tax far in excess of the costs. Hardly fair.

Graduate tax is unfair as all taxable income is liable. So, as of April 2011, graduates will start paying graduate tax once they start earning £7,000 a year. So there will be no protection whatsoever for low earning graduates. This is much more unfair for graduates on low incomes that the tuition fees proposals.

However, how about a graduate tax avoidance scheme? For this you will need to be a wealthy graduate who can spend their time earning abroad. Successful barristers, educated at the cost of the taxpayer, will be able to earn bag loads on the international circuit and shelter their earnings from tax. And accountants for the rich will be able to find all sorts of ways to ensure their clients avoid their liabilities.

Since higher education funding is devolved, what happens to English graduates who move to Scotland or Wales? Since the graduate tax would apply to England only, do Scotland and Wales suddenly become tax havens for graduates?

The single biggest reason for rejecting graduate tax however is that is will not raise a single extra penny for higher education. A graduate tax raises revenue for the government. They collect the money and spend it as they think fit. There is no guarantee that any of it will find its way to the universities.

Picture the scenario is a few years' time under graduate tax. A government is running short of cash (when are they not?). The graduate tax suddenly becomes an attractive option for an increase in the rate. The graduate tax would rapidly become a cash cow for cash trapped governments to pay for other spending commitments or to bail out a bankrupt government.

With tuition fees, the liability is fixed. You pay back what you owe. You know when you have escaped from it (and after 30 years you do escape from it for good, whether or not you have paid it off). And you know the money has gone to the university at which you studied.

So, graduate tax is unfair, the rich will avoid it, it will raise nothing for universities. No wonder Alan Johnson called it unworkable. No wonder, when Labour were in office, they rejected it in favour of tuition fees. What a pity Johnson is experiencing an opportunistic wobble on it now.

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Wednesday, December 08, 2010

Why Lib Dems have to get real on tuition fees

I guess they can be called growing pains. The rather messy debate in the Lib Dems over tuition fees has well and truely put us in the spotlight. There is a significant lesson here: don't make unrealistic commitments. Given that all our other commitments were properly costed and realistic, questions have to be asked as to how it was that such a generous spending commitment (phasing out tuition fees) was made to an interest group at a time when we were squeezing down on all other spending priorities.

I can't answer for other parties but my perception is that the internal debate on tuition fees by our MPs has not been marked by the venomous state of affairs that can be seen when the other two parties, especially Labour, have an internal debate on an issue where there are significant differences. That said, however, the debate in the Lib Dems has a major part missing: those who oppose the plans put forward by the government have put forward no credible alternative funding proposals. Sometimes, the graduate tax is suggested but most of those in the party who oppose the tuition fees plans simply rattle off the claim that our MPs made a pledge to the National Union of Students that they would oppose any rise of tuition fees.

Frankly, that is not good enough as a policy. In fact, it is not a policy for the country at all. It is simply an oppositionist stance. Frankly, the "pledge" should not have been made. As a party, we pledged to the whole nation that we would behave in a responsible manner in government and we would sort out the financial mess the country is in. So which pledge has top priority - the one made to the whole country to help save it from financial ruin, or the one made to an interest group which is demanding the rest of the country should pick up the tab for their enhanced earning potential?

Higher education is a privilege, not a right. Only the half of young people are entitled to it - those who have reached a minimum academic standard. The other half don't reach that standard or choose not to go to university. Why should they have to pick up so large a share of the costs when they are not direct beneficiaries? Why should those who are the direct beneficiaries by having their earnings potential significantly increased, not pay a fairer share of the cost? I hear some members of the Lib Dems say that university education should be free as of right. But free for those fortunate enough to go to university means someone else pays. And that means an unfair burden falling on those who are not entitled to go a higher education - and they tend to be people from lower income groups within society. Can Lib Dems opposed to the government's plans continue to argue that higher education should be provided entirely at the cost of everyone else? It's time for them to get real.

The package that Vince Cable has negotiated is a significant step forward. It is fair to the nation as a whole and is specifically geared to ensuring students only pay after they have graduated and only pay an amount that is affordable. Anyone earning less than the median income will pay nothing. Those who do best out of the system and become higher rate taxpayers will pay more in interest - everyone else will be charged an interest rate the same as inflation, so the debt burden will not increase in real terms.

Most importantly of all, the money raised from tuition fees goes to the universities themselves. Students will be the customers. This will force up standards and improve results. Popular courses will be able to expand. Universities will be free of interfering governments and won't be on the sharp end of cuts from future Chancellors. Students themselves, rather than governments or institutions will set the pace.

So, to those Lib Dem MPs planning to go through the opposition lobby tomorrow, ask yourself whether or not your alternative will achieve all this. If it does, at least tell us what that alternative is and how it will be funded. If you don't have an alternative however, the moral grounds for voting against what's on offer are somewhat thin.

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Wednesday, December 01, 2010

Is Miliband Labour's IDS?

Another lacklustre performance from Ed Miliband today who succeeded in getting verbally punched up by Cameron in Prime Minister's Questions. The most telling moments were when the cameras caught Miliband's expression of indignant innocence when Government backbenchers asked questions and passed comments about the Labour party. These are early days for him (though they are not a flying start) but he needs to learn not to respond with such pained looks when he's under attack. He looks like he is hurting. He looks weak.

Ed Miliband is up to the job of being a cabinet minister and to be fair to him, he conducted himself competently in that role before Labour's election defeat, regardless of what you think of his policies in government (finding them in opposiiton is a bit more difficult). I don't get the impression however that he is prime ministerial material. It also seems that he is not cutting ice with the voters either. Whilst Labour's poll ratings are much improved on the Brown period, Miliband himself is slipping into negative figures.

I suspect his elder brother would have been on a higher personal rating now had the unions not foisted Miliband Minor onto the Labour Party. David came over as more of a candidate for Prime Ministern than his younger brother.

The question is, have Labour repeated the same mistake of electing the wrong leader for the wrong reasons, in the way that the Tories did back in 2001 when they opted for Iain Duncan Smith. He was chosen for who he wasn't (Ken Clarke) and for a presumption that he was more rightwing that actually he turned out to be.

So, is Ed Miliband the IDS of Labour - chosen because he wasn't David and because some in Labour think he is more leftwing than he actually is? Time will tell but this sluggish start for Little Ed is not good for him.