In a new paper contributing to the debate about higher education funding, the Institute of Directors (IoD) argues that a graduate tax is the wrong policy solution and would damage the UK’s tax competitiveness. Nor would it solve the problem of widening participation.

The IoD urges the Government to opt for an extension of the existing system of variable fees and proposes that a graduate tax would undermine the UK’s tax competitiveness in the following ways:

•       It would encourage a “brain drain”. A graduate tax would increase marginal tax rates and could act as an incentive to the most able domestic students to study and work abroad, thereby depriving the economy of vital skills, universities of income and the Treasury of receipts.

•       A graduate tax would be at least in part a burden on employers. Graduates would expect higher salaries to compensate for the extra tax. This also means increased national insurance contributions from employers. It might seem to be fair to charge employers for the benefit of having highly-educated employees. But to the extent that education is commercially worthwhile, that is already reflected in higher salaries. Therefore a graduate tax could act as a counterweight to the Government’s laudable aim to create the most competitive corporate tax system in the G20.

•       It would be a tax on effort and merit. The more diligently a student spent his or her time at university, and the more effectively he or she laid the foundations for a successful and well-remunerated career, the more they would ultimately contribute towards the cost of their studies. Conversely, a student who enjoyed the same opportunity, at the same university, but wasted it, would likely contribute less.

I must admit that I have always found the whole idea of a graduate tax to be quite unacceptable for other reasons too. The present loan repayment system means that a student can only pay back the total amount of the loan plus a very low interest rate and then only when they are earning a reasonable salary. If they haven’t paid it all back within 30 years the debt is written off. However a graduate tax goes on forever and bears no relation to the amount of the loan. This could easily result in graduates paying far far more than the cost of their education. One wonders what will happen to this profit? Will it be used to subsidise future students, or will it go into the general government income and be spent (wasted?) elsewhere?

There are legitimate criticisms of the existing system of funding, and these need to be addressed. But it is surely easier, and more logical, to build on the system we have already than uproot it and start all over again.

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Read the full Institute of Directors Report HERE 



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