21 Comments on Are taxes better than debts?

George Wilkinson on Fri, 13th Nov 2009 5:19 pm


This is a real issue for all of us. I see it both as a parent (three with loan debts and little income, two still going through and trying to avoid too much debt) and as an employer (these days trainees who start with us typically have £20,000 + debt). What concerns me most is the normalisation of personal indebtedness: my children don’t like it, but equally seem too much at home with it. I also agree that higher education (indeed all education) needs to properly funded. Is there an RSA Project on this?

Tom on Sat, 14th Nov 2009 12:29 am


Against the advantages of a tax versus a loan in terms of semantics and less negative associations, though, there’s a disadvantage of loss of certainty. Someone going to university today at least knows how much they will have to pay once they graduate. If replaced with a graduate tax, that won’t be the case – could that uncertainty not be even more discouraging than the current idea of debt?

Will Davies on Sat, 14th Nov 2009 12:20 pm


“In a way this is a semantic point as student loans operate like a graduate tax; the graduate only has to pay back when his or her earnings reach a certain threshold.”

I don’t agree with this for two reasons.

1. Surely there is one very clear technical difference between a loan and a tax, which is that payments on debt cease at some point. Judged as a variant of conventional ‘debt’, taxation would appear like a form of Kafkaesque economic madness, which could never be paid off, leaving the debtor permanently in the red. A graduate tax would surely be paid until retirement.

2. So why do we tolerate tax? Because there is also clear philosophical difference. Taxation does imply obligations (a form of owing, if you like), but mutual ones between state, society and individual. I owe something to state and society, for granting me a level of security and comfort that I couldn’t achieve purely on my own. The state owes something to individual and society in return, which it recognises through granting people representation in the legislature.

We know that states which exploit natural resources for their income, rather than tax, typically have unsavoury forms of civil society and low levels of democracy. If you reimagined our society in terms of debt rather than tax, I think you would end up with something structurally different, not just semantically different (I guess you could add that Keynesian deficits in the 60s and 70s set the stage for the massive power-grab of financial markets in the 80s and 90s; debt can undermine democracy, whereas taxation necessitates democracy).

Mark Ward on Sat, 14th Nov 2009 1:40 pm


I thought the better point you made about debt was it being the difference between aspiration and resource, which I guess to fund a future is acceptable whereas to fund a lifestyle you can’t sustain isn’t.

phil h on Sat, 14th Nov 2009 2:59 pm


This is one of the few things Gordon Brown got right – he argued for a graduate tax.

He was quite right.

We should be ashamed of ourselves that a generation has had to take a loan out for something that we paid for out of taxation. A truly shameful policy, particularly when there was a manifesto commitment not to introduce fees.

Basing it on on evidence that graduates earnt more was snake oil salesmanship of the highest order. Of course graduates earnt more when between 5 and 20% of the population were graduates.

When 50% of the population are graduates the demand reduces as does the ability to earn more. In 50 years time we will look back and see we took a major wrong turn here.

The introduction of student fees is one policy that makes me really angry . If as is suggested the driver for introducing top up fees was so as not to subsidise the middle class then this is madness. It’s like saying we should not fund education as parents are subsidised by non parents.

Chris Cook on Sat, 14th Nov 2009 9:13 pm


I’m not mad keen on taxes and I’m not at all keen on debt.

Maybe there’s another way of doing this with a new take on ‘Equity” and investment?

Students could apply for an investment from the government as ‘Capital Partner’ to fund their further education, (or possibly even a start-up enterprise for those not academically inclined).

The government as “Capital Partner” would receive a proportional share – say a maximum of 5% – for as long as the investment is used. If the graduate is unemployed, then 5% of nothing is nothing.

There are quite a few policy options thereafter.

Perhaps the graduate could be credited with Equity Shares (each one reducing his proportional revenue share liability by say 0.5%) for every year of voluntary service overseas. This is on the premise that he is getting fantastic experience as well as doing public service.

The graduate would be able to buy back “Equity Share” units at any time at an agreed multiple of earnings, and would thereby reduce the government’s “Equity Share”. eg once half of the Equity Share is paid back, then the revenue share would be reduced to 2.5%.

The graduate would be able to apply for more investment in order to increase his qualifications, and therefore his earnings.

And so on.

It’s not a grant; it’s not a tax; and it’s not debt; but rather a new form of Equity….just not Equity as we know it…..

Susmita on Mon, 16th Nov 2009 11:13 am


I’m broadly in favour of a graduate tax; however, there a few groups who might be able to wriggle out of this. Anyone getting a degree for decoration and not working afterwards would not be paying back into the system, and someone taking a degree in (for example) sports science and then opting to work part time as a person trainer may not reach the earnings threshold either.

Should there be an option for tax for those who will be able to pay it back, but a fallback option to recoup the investment from those that don’t come under this category?

matthewtaylor on Tue, 17th Nov 2009 9:46 am


Thanks for teh comment George. No there isn’t an RSA project. We tend to focus on projects which are about practical action rather than trying to change government policy. Although the debate in these pages is very interesting

matthewtaylor on Tue, 17th Nov 2009 9:48 am


Thanks Tom. But is there any reason why a graduate tax system couldn’t set a higher limit for how much people could repay. it might be a higher sum than would have been a loan (in order to help pay for some losses that occur if you move to a tax based system), but not an open ended commitment. There could even be a cut off age or time period, say 10 years of higher tax payments or 40 years of age.

matthewtaylor on Tue, 17th Nov 2009 9:59 am


Thanks Will. On 1. see my reply to Tom below. Point 2. is fascinating. There is a good column to be written on the semantics of borrowing. Borrowing seems like a warmer word than loan which is warmer in turn than debt

Tom on Tue, 17th Nov 2009 10:53 am


I certainly agree that it would need to be limited in some way – the NUS suggestion is for a limit of 20 years. While that’s not totally open-ended, that’s still a pretty big commitment.

I suppose a maximum repayment sum could be possible instead of or as well as a maximum time; I’m just worried that if it were a large sum (and as you say, it will have to be) then that headline figure might put people off even if they’re never likely to earn the sort of salary that would mean they’d repay that much.

Essentially, I think a switch to a graduate tax is a good idea. But given how many prospective students are confused about how the current system works (people thinking the fees are up-front, or not knowing about the income-contingent repayments), I’m on the lookout for anything that could possibly be misinterpreted.

matthewtaylor on Tue, 17th Nov 2009 11:26 am


Thanks Mark. Absolutely agree. Debt for investment is one thing debt for current expenditure is another

matthewtaylor on Tue, 17th Nov 2009 11:29 am


Thanks Phil. These argument are complex. Returns to HE depend of course on the subject you do, where you do it and what degree level you attain. This will no doubt be reflected in differential fees when the system changes after the election. The difference between school and HE is that we believe that the benefits of basic education accrue to the whole of society not just to the individual while the benefits of HE accrue more to the individual than to the whole of society. But this is, of course, a controversial point which can easily be made to sound absurd.

matthewtaylor on Tue, 17th Nov 2009 11:50 am


Hi Chris. I like this idea and it could be linked to the idea of a lifelong learning entitlement which people can draw down flexibly and invest in with tax benefits attached. This concept has been around for ages and there are minor versions of it coverijng cerain groups of workers but ever since the failure of Individual Learning Accounts ministers have been nervous of returning to it a a large scale.

matthewtaylor on Tue, 17th Nov 2009 11:56 am


A system with options would be good and – of course – rich students don’t have to take out a loan now.

matthewtaylor on Tue, 17th Nov 2009 12:04 pm


Good point Tom. I didn’t know the NUS were in favour. Maybe we should have a debate about it here at the RSA – but not until after the election as people will be too guarded right now.

Chris Cook on Tue, 17th Nov 2009 12:06 pm


Hi Matthew

The interesting thing is that the way we propose it, this quasi-Equity model will be a consensual model based upon two way partnership agreements and requiring no change in any law.

That means it can operate as a complement to the existing model, rather than as an alternative. If it works, people will use it: if it doesn’t they may still use existing funding arrangements.

We are working with a Norwegian government agency in relation to prototype ‘youth enterprise’ funding arrangements based upon our partnership model (the development of which was part-funded by the Norwegian government despite the fact we are based in Scotland).

The way you avoid the Learning Account experience is to ensure that the relevant service providers have an interest in the outcome. We achieve this by configuring them as ‘managing partners’ rather than contractors with diverging interests.

Livy on Tue, 17th Nov 2009 1:23 pm


“the tax payer should not be expected to put extra subsidy into provision which still goes primarily to the middle class and from which the individual student enjoys a direct financial benefit in terms of future earnings potential.”

Matthew, and also to Phil’s point,

I have no background in education policy-making, I’m fairly young and green so I’m genuinely trying to understand the HE issue better and not just being obtuse. I wonder if you can help me.

I have never understood the supposed weakness of the obvious counter argument to all this; that the tax payer will get their money back. They will. If graduates do earn more, then they pay more tax back to the treasury even on the same 20% rate, and will definitely pay much more when they hit 40%. It does square off. Their degrees therefore do benefit society as a whole, especially when society needs to take their dogs to the vet, or have a tooth removed or have their computer software problems fixed, or walk across a bridge hoping it won’t collapse and kill anyone. (Ok scrap that last one..)

However, in terms of earnings? University isn’t the be all and end all, and politicians are guilty of perpetuating a myth that degrees are as necessary as having the latest shiny new iphone. There are plumbers in this country who earn more than doctors, and every airline needs plenty of well paid mechanics who don’t go to university. Or you could just look at the difference in earnings between an estate agent who takes a picture and sticks it in a window and the solicitor who spends all the time drawing up the paperwork.

Not to blow my own trumpet or anything, but I have a 2,1 from a good university. I wait tables for a living and can’t get interviews for unpaid internships.

Its also worth remembering that many of the journalists and politicians who are now arguing in favour of top up fees actually benefited from free higher education themselves back in the day. The way that looks to most people out there is basically like someone kicking away a ladder.

Michael on Tue, 17th Nov 2009 1:49 pm


Is it posssible that we are creating a sort of bubble economy in higher education? Consider:
Greater numbers entering the (debt driven) market,
rising prices,
a mini industry of PR and marketing in the sector,
extravagant claims made as competion for customers increases,
maybe ultimately some of these investments may turn out to be worth a lot less than the buyers were led to believe?

phil h on Tue, 17th Nov 2009 7:40 pm


Matthew – I understand your point but don’t accept it.

A thriving HE sector is to society’s benefit. The fact that individuals benefit is great.

We really have to stop thinking in terms of class. It distorts thinking and decision making. If fees were introduced to stop the middle class benefiting, then its class warfare madness with the unintended side effect of putting off plenty of working class kids whose parents don’t like debt. Absolutely crazy!

The Labour party is besotted by class and perceived middle class privilege. They really need to get a grip as class warfare really holds the country back and holds it down. People in business don’t bang on about class -it’s a complete non issue.

A graduate tax would have done the job, with perhaps a slightly lower rate for students taking strategically important subjects – engineering, science, software programming etc.

Livy on Tue, 17th Nov 2009 8:13 pm


Phil.

Agreed. But some subjects are far cheaper to teach than others. Right now top-ups don’t distinguish between subjects and institutions on financial grounds because the pricing would have to be perverse. So charging a lot for cheap to teach but less practically applicable arts subjects, and low fees for very expensive courses in sciences and medicine… just to match the supply of graduates to the demand of jobs? I don’t know, maybe…

Or how about we just give tax breaks to people who don’t go to university… (God I can’t wait to read the barrage of abuse for that idea)

Besides Phil, even with that lower rate of grad tax the PhD physicist will still earn half the salary of a mortgage broker. That’s whats obscene, not the fact that graduates earn more than non-graduates or that most students are ‘middle class’, whatever that even means anymore. According to our increasingly right wing press, a couple earning 15k each qualify as ‘middle class’, and therefore deserve to half their child benefit removed. Just so we can save, what, £10 billion? Which we used to think was a lot of money..

Tell me what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!