Chapter 7
OTHER PROPOSALS WE HAVE CONSIDERED SUMMARY
This report makes recommendations that we believe are the best way of reforming the higher education funding and student finance system to enhance participation, quality and sustainability. We have looked at many alternative proposals during the past year. In this chapter we describe some of these alternatives and explain why we have rejected them.
7.1 A G r a d uat e ta x h a s s o m e at t r a c t i v e f e at u r e s b u t i t i s u n w o r k a b l e a n d i t w e a k e n s i n s t i t u t i o n a l au t o n o m y a s well as the role of student choice .
A graduate tax would provide an alternative to our proposals. Rather than paying back the costs of learning after they are in work, graduates would pay a supplement to their income tax and these payments would depend purely on income rather than the costs of learning. We have looked closely at this option as it may deliver two benefits: it eliminates the headline fee which some believe acts as a disincentive to participating in higher education; and it is progressive in that high earning graduates pay more. We have modelled future graduate tax revenues and considered the practical issues in implementing it. On the basis of our modelling, a graduate tax does not produce sufficient levels of revenue to fund higher education until ca. 2041-42. With a graduate tax set at a rate of 3% of earnings over the income tax threshold, revenue would not start flowing until 2015-16 (when the first students in the new system graduate) and would only build up very gradually over 25 years. Government will need to fill this funding gap in every year until 2041-42. The cost of replacing fees is ca. £3bn a year. If there is to be more investment in higher education – as our proposals foresee – then the bill for Government is even higher. This means that rather than contributing to deficit reduction, higher education will squeeze out spending elsewhere. In order to overcome this difficulty, we have considered hypothecating a graduate tax to the sector in order to allow universities to raise private sector finance against future tax receipts. The costs of raising finance will be high. Some estimates suggest the private sector may pay as little as 25% of the value of future tax receipts due to the slow build-up over time of the receipts and uncertainty about the amount. It is also likely that such a sale would be considered a tax securitisation, which the Office of National Statistics would classify as Government debt. Hence, even on this model, there would be upward pressure on the deficit from the graduate tax until 2041-42.
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