Saturday 24 September 2011

Ed Miliband's Tax Cut for Rich Graduates

So Ed Miliband has decided that Labour's policy on tuition fees is to reduce the cap in England from £9000 per year to £6000 per year. He says that this will be funded by more taxes on the banks and increasing the rate of interest paid by the highest earning graduates.

The reason? This is what he says, in an ever so pious dig at the coalition:

"We can't build a successful economy if the kids from all backgrounds are put off going to university."

Now we can debate the rights and wrongs about the Coalition policy until the cows come home. But let us look at what practical difference this actually makes. I have used the projections that deduced. I refer you to the red table at bullet point 17 "How much do you pay".

As we have established many times before, the loans repayment programme (thus in practice for a student, their tuition fees) has a 30 year limit, after which any existing "debt" is written off and the system effectively operated as a graduate tax on their earnings over the earnings threshold (currently £21k).

If a student earns less than £35k as their initial graduate salary, and their earnings rise to slightly less than £140k after 30 years, they will not have paid off their student loan, regardless of whether or not they actually chose a course that charged £6k a year or £9k a year. There is no appreciable link between what that graduate "owed" and what they "paid" for their University education.

Contrastingly if a student earns around £50k initial graduate salary and that rises with career progression and inflation etc. so after 30 years they are earning over £200k, they will pay back the whole of their student loan, and will do so well before that 30 year period elapses. In this instance, it therefore matters a lot more how much they "owed" and it correlates much more closely to what they "pay". The difference for that student taking a £9k course rather than a £6k course is that they pay about 50% more, because, funnily enough, they owed roughly 50% more.

So can you see where I'm heading with this? Yep. That's right. Lowering the limit on tuition fees to £6k has ABSOLUTELY no effect on the lowest-earning graduates, but represents a potentially HUGE saving for the most affluent of graduates! Since we have established that the funding system is effectively a kind of graduate tax, this means that Labour are advocating a TAX CUT on the richest beneficiaries of an English University education! The difference between what is owed is substantial enough that the interest rates they'd need to charge the richest graduates to make them pay the same, let alone more, would be of proportions compared to those they pay now.

And of course, this poses the question of where the Universities are going to plug the hole in the finances this creates? Are we to expect more direct state funding? Where is that coming from without increasing the deficit? "Tax the banks" Labour reply. Well here's the thing. Your bonus tax raised absolute pittance compared with the Coalition's banking levy. Just like with the very tuition fees you promised you would never introduce, you command no credibility for delivery.

But that is not even the worst thing about this sordid affair. The worst thing is that Labour, by engaging in this piece of political misrepresentation, are perpetuating the very myths that they have used to scare young people into thinking they can no longer afford to go to University under the Coalition changes. They are doing the very thing that the Lib Dems got crucified for: politicking with the tuition "fee" when they know full well that that headline figure is of zero relevance to the majority of graduates, for whom the repayment matters. They have scaremongered those from poorer backgrounds into believing they can no longer aspire to a University education and all the benefits that brings. Yet their own policy does absolutely nothing to help these people. There is nothing about maintenance grants, which are what really affect the ability of the poorest to be able to go to Uni. This throws money at graduates who are already benefiting in a huge financial way from their degree.

Remember, this is the Labour Party. The Party of Keir Hardie, of Nye Bevan and of Clement Attlee. Those men would be turning in their graves if they saw what this manipulative and regressive cabal led by Ed Miliband and Ed Balls has become.

The Labour Party. Party of the Poor? Words truly fail me.


  1. “... that headline figure is of zero relevance to the majority of graduates, for whom the repayment matters.”

    True. But in the real world where people make their decisions on less-than-full information, students will be deterred by a trebling rather than a doubling of headline tuition fees even if this doesn’t make a difference to how much they would actually repay if they went to university, or else would make a difference, but only if they earn enough that they can afford to pay more.

    One of the most serious problems with the coalition government’s £9,000 tuition fee is that it will deter students from going to university because they will misperceive the affordability of such a fee.

    The lowering of tuition fees, and the funding of this out of the charging of higher interest rates on student loan repayments to those who end up earning more, would bring the ‘sticker price’ headline fee down to something closer to what the average graduate would actually repay. There will therefore be less misperception of its affordability.

  2. “... that headline figure is of zero relevance to the majority of graduates, for whom the repayment matters.”

    It's only of zero relevance to the innumerate.

    Every potential graduate rightly looks at the financial benefit of going to university rather than the monthly repayment. They are bothered about how much their lifetime earnings are going to increase as a result of going to university and how much lifetime payments they will make (together with the loss of income from the years spent at university).

    As such, the coaltion's tuition fee plans hit middle income earners (middle of the graduate income distribution ~35k) the hardest. The table on MSE shows this very clearly - it is those in the band 35k to 40k (of average lifetime earnings - the table is misleading in using the word startig salary - most people associate the word starting salary with the amount earned when first employed, whereas MSE misleadingly use it to mean the average lifetime salary before incrementally adjusting for inflation).

    This is a very important point to make, as the coalition specifically rejected a graduate tax on the graounds that high earners might be tempted to leave the country after graduating - instead they opted for the 9k tuition fee system which hits middle incomes the hardest - i.e. the mejority of graduates - and the kind of salary that most graduates aspire to. An examination of the table on MSE does show how deeply unfair tuition fees are in this regard, with those on average lifetime earnings of just over 35k per annum (in today's money) paying five times as much for their degree as someone on 21k and 20% MORE THAN SOMEONE THAT EARNS 50k IN TODAY'S MONEY. Tuition fees are REGRESSIVE above middle incomes. Why should the rich pay less for their degrees?

    A far fairer system is a graduate tax (that would be at least proportional, and could be made to be progressive above certain bands as a means of levelling the playing field for the younger generations, etc). Tuition fees are nothing like a graduate tax, but at least by capping them at 6k then they won't have the awful effect of the 9k fees on the average salaries of teachers, scientisits and engineers, etc - the people that lose the most under the coalition's plans.

    Capping them at 6k is a move in the right direction at least, but what I find particularly disturbing is the amount of spin and distortion in this article (and most the material put out by the lib dems on this issue). Graduates aren't stupid - nobody is (rightly) going to think that a 6k cap is fairer than a 9k cap (the equivalent of arguing that black is white).

  3. Sorry,

    obviously that last bit should read:

    "nobody is (rightly) going to think that a 9k cap is fairer than a 6k cap "

  4. Thank you for your comments.

    Michael: this is sort of the point, though. It is manipulative and fundamentally dishonest for Labour to mislead students into believing their change will save all but the richest any money. We should be maximising the information available to students trying to make decisions instead of preying on their ignorance. Using higher rates of interest merely serves to rob Peter to pay Paul without making the system any fairer or more affordable for the poorest.

    Steve: The fee level doesn't matter for graduates whose earnings in today's money (adjusted for inflation) BEGIN below £35k in 2015 and don't rise to above an inflation adjusted £52k by 2045. I refer you to "today's money" tab of MSE.

    Contrary to your assertion, they do not present average lifetime salaries as starting salaries. If you do the maths of their assumption of a 2% above inflation pay rise every year from each of the starting figures, you get the end-figure. The "starting salary" is NOT an average.

    The next bit is where you go a bit off the wall as well. What you don't seem to appreciate is that your assertion about the rich paying less for their degrees is actually exacerbated where they take less expensive courses! This is, as I explained above, because what the rich pays for their degrees correlates more closely to what they owe. Lowering the cap makes absolutely no difference to your "middle-income" earners but benefits those who earn over £35k as soon as they graduate.

    Teachers have a starting salary of £22k when they graduate. This rises to £31k after 6 years. They will pay something back, but for these people it's a graduate tax. There's no escaping that. They don't even come close to the tipping point. £6k fees will NOT hit them any less hard than £9k fees. I won't profess to know about scientists and engineers' graduate salaries.

    So in conclusion, capping the fees at £6k has no effect on the bulk of graduate jobs, and those it does affect are those who are already able to pay. This is nothing but a tax cut for rich graduates and there is no escaping that. This is already a graduate tax, with a contributions limit. Ed Miliband proposes to lower the initial limit. A limit which only matters to affluent graduates. The body of graduates are already paying on an ability-based system, and this is actually better than a pure graduate tax which would fail to catch people who move abroad. Capping fees at £6k instead of £9k does nothing to widen access (maintenance payments are what actually affect that), does nothing to assist those who are earning the least and simply represents a tax cut for those working in more affluent graduate jobs like as lawyers, GPs, senior civil servants, and in managerial positions.

  5. "(of average lifetime earnings - the table is misleading in using the word startig salary - most people associate the word starting salary with the amount earned when first employed, whereas MSE misleadingly use it to mean the average lifetime salary before incrementally adjusting for inflation)."

    As far as I can tell, "starting salary" on the MSE table means what it means in ordinary English -- namely, amount earned when first employed.

    Steve Simmons -- would you please point to text on the web page that supports your claim that "starting salary" is being used to refer instead to "average lifetime earnings"?

  6. Steve simmons, 9k IS fairer than 6k. With 6k and no maintenance loan a person earning over 30k starting salary will pay less back than someone earning just the average wage! The 9k cap makes the system an almost de facto graduate tax, lowering the cap means it's a tax for those on average salaries only. You talk of innumeracy but seem to entirely misunderstand the complexities of how this complicated system works.

    I agree some people will see 6k as more palatable, but they are most certainly not intelligent or numerate if they believe they have a better deal rather than with a 9k cap since the amount they're likely to pay back under either cap is EXACTLY THE SAME.

  7. Graeme: I hadn’t yet read your comment when I posted my latest. Thanks for your reply (and I see we’re in agreement about ‘starting salary’).

    I take your point that Labour will be misleading people if it argues that its policy relieves the burden on the squeezed middle, and I think that’s an important point.

    But let’s step away from party politics and ask what would be best as public policy.

    Perhaps it’s too late to make this change now, but coalition higher education policy would have been better than it is if the tuition fee cap had been lowered to £6,000, but the interest repayments on these lower fees had been substantially raised for high earners, in a manner that resulted in these high earners paying about as much as they will pay under the current £9,000 system. (Measures would also have to be taken to deter high earners from opting out of higher interest loans.)

    This wouldn’t be a matter of “Using higher rates of interest ... to rob Peter to pay Paul”, rather, it would be a matter of charging high-earning Peter higher interest to compensate for his lower fees.

    You’re right that this change wouldn’t in fact make the “the system any fairer or more affordable for the poorest”. It would, however, decrease the deterrent effect of the headline £9,000 tuition fee on those who are thinking about going to university, and also make that fee more reflective of what a typical university graduate would actually end up paying.

    I also agree with you that both Labour and the coalition should be devoting more resources to maintenance grants. It would be far better to devote money from a banker’s tax to that than to the plugging of a funding hole that opens up if high earners end up paying less for their university education than they would under coalition policy.

  8. "Perhaps it’s too late to make this change now, but coalition higher education policy would have been better than it is if the tuition fee cap had been lowered to £6,000, but the interest repayments on these lower fees had been substantially raised for high earners"

    Depending on the rate of interest, of course, I imagine this scheme would have a pretty close profile to simply charging £9k in the first place.

    Also, first time commenter here, just wanted to say this is a great blog Graeme - look forward to future posts!

  9. Mike

    What's wrong with the deterrent effect? Surely this is a good thing as it forces people to take into account some or all of the social cost of their life options. Forcing prices under their real level simply distorts production, in this case such that more degrees than are actually demanded are produced.

    If it's the case that certain people are left with too few resources to realistically purchase education, we should give them 'all purpose goods' in order that they make the decisions themselves. Otherwise we have Hayekian information problems.

  10. Seems to me that the Student Fees debate has highlighted the crisis of mathematics in senior schools. I propose that students ought not to go to university if they can't understand the fee system, and further that Labour is benefiting elecotirally from a fundementally mismanaged education system, or what Marxists might call it, from "false class consciousness". I revel in the irony.

  11. Ben: I agree with you that people should make decisions based on what they can be expected to actually pay: I said that people will be deterred by a sticker price -- £9,000 -- that DOESN’T reflect what they can be expected to actually pay back, given the write off terms of student loans. So your first two sentences aren’t a criticism of what I say above.

    Note also that your third sentence doesn’t provide (much of) a defense of the coalition’s policy over Labour’s, since BOTH policies make the cost of going to university lower than it would be on a free market. Both policies cap tuition fees and subsidize loans for their repayment. The coalition’s cap is higher than Labour’s, but its subsidy of loan repayments is also more generous.

    While I’m generally sympathetic to what you say in your second paragraph, I think its application to 17-year-olds is not so clear cut. We don’t let 15 year olds make all their own choices. Schooling for them is compulsory. It wouldn’t be a good idea to give them ‘all purpose means’ – i.e., cash – to spend as they choose on schooling if they see fit, or else extended holidays if they prefer them to schooling. It’s not so clear that the difference between a 15-year-old and a 17-year-old is so great that they should be given cash to make their own choices in so unrestricted a manner.