The fiscal burden Dearing did not consider

October 31, 1997

Graduates have always paid for their degrees - and for many of the subsidies enjoyed by the rest of the population. Timothy Curtin argues that the graduate tax scheme is a con

THE Dearing report's question: "Who should pay for higher education?" and its response, "graduates", is notable for the lack of any consideration of who does pay for it now. The truth is that graduates have always paid not only for their degrees but also for many of the net fiscal subsidies enjoyed by the rest of the population.

Dearing was influenced but misinformed by Bruce Chapman, promoter of Australia's HECS system of graduate taxation, who claims that, pre-HECS, graduates did not pay more in tax than they received in public benefits.

Neither Chapman nor technical reports prepared for Dearing examine the current sources of taxation which finance higher education in Australia and Britain. This is more disturbing when Dearing bases its case for increasing graduates' share of the cost of the education they receive on the higher earnings most graduates achieve relative to most non-graduates.

Higher earnings already attract higher taxation, including a greater amount of VAT on graduates' typically larger consumption spending, and larger amounts of corporate taxation on their typically larger investments, in addition of course to their larger income tax and National Insurance contributions. It follows that if higher education raises earnings it also necessarily raises taxation.

This extra taxation far exceeds the annual public cost of higher education in Britain. Even the lowest earning 25 per cent of graduates yielded an average per graduate lifetime earning surplus of more than Pounds 90,000 over the costs of their degrees from their extra taxation compared with the lower quartile of A-level leavers, rising to Pounds 221,000 for the average upper-quartile graduate.

Of all public services, the only one which graduates receive and non-graduates do not is their higher education. That being so, graduates' higher tax contribution arising from their higher earnings ought to be attributable in the first instance to their higher education. In practice, over their lifetimes it is graduates' substantial surplus above the costs of their higher education from their extra taxation vis a vis non-graduates which largely finances the net subsidies received by the rest of the population.

Advice to Dearing was that much of graduates' higher earnings is due not to higher education but to their innate ability, and that only 60-80 per cent of the graduate earnings premium, especially for males, reflects the skills gained through higher education. This misunderstanding results in the down-sizing of the social rate of return to investment in higher education to only just above the Treasury's six per cent cut-off rate, which appears to underlie Dearing's view that higher education should grow no faster than GDP. This implies that only 60-80 per cent of graduates' higher taxation would be attributable to their education and the rest to their ability.

Universities have never enrolled, and do not yet enrol, 100 per cent of the available population with the "minimum" ability to complete a degree or comparable training. Only when they do will it become difficult to disentangle the contributions of ability and higher education to relative earnings of graduates. Until then there is nothing to be said for raising the financial barriers to that goal being achieved, as through the government's proposals for up-front fees and withdrawal of maintenance grants.

This does not mean Dearing is wrong to call for a higher level of funding, only that his report ignores the option of raising the share of higher education in total public expenditure, or raising marginal rates of income tax. That would not be popular with existing graduates. Yet they are better able to bear the burden than those contemplating whether to embark on higher education, knowing that they will in future bear up-front costs themselves, or be a larger burden on their parents, of whom, as recently as 1995, more than 85 per cent in both Britain and Australia were not graduates.

It is indeed possible to see the whole of the graduate tax campaign as a "con" by the haves - graduates themselves - against the have-nots, those whose parents are not graduates and mostly cannot afford to support their children at college. Means tests and loans are no consolation when it is likely that graduates are the most adept at fiddling the former, for example divorced graduates whose children are deemed to be the responsibility of whichever spouse has the arranged lower income. Loans create invidious net income discrimination after graduation between those who are obliged to accept repayable loans and those with better off parents who are not.

It follows that higher education should again become one of the public services to be funded from the existing contribution of graduates to taxation. Its share of such taxation should be allowed to increase in line with the growth of taxation accruing from graduates: this would ensure both higher unit funding and more rapid growth of enrolments of all qualified to benefit. Only when it could be demonstrated that graduates' existing extra taxation compared with non-graduates is not sufficient to support the requisite growth of the sector would there be a case for resorting to up-front fees. Dearing never even attempted such a demonstration.

Timothy Curtin is privatisation and investment advisor to the Papua New Guinea government and former lecturer in economics at the University of York.

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