Raise corporation tax to abolish tuition fees

Business must make its contribution to removing the fear of debt from our education system.

Did New Labour give big business too easy a time? On tax, the answer is a clear yes. The coalition government has inherited lower corporation tax than even the John Major and Margaret Thatcher governments had.

Our company tax rates are lower, too, than those in the US, France, Germany, Japan and Canada. Has this low taxation persuaded business to invest more in its staff? The answer is no. Expenditure on workforce training and education is lower here than elsewhere, as is the proportion of profits allocated to reinvestment in research and development.

Now, while the coalition government tells us all to tighten our belts, it proposes to reduce corporation tax still further. George Osborne's aim is to give us the lowest profit taxes in the G20, which would deprive the Treasury of £6.4bn a year at a time when new school buildings and free school meals are considered a luxury by Clegg and Cameron.

So why isn't this a major issue in the Labour leadership elections? Why are candidates not raising public awareness of what amounts to the legal pickpocketing of public-sector workers, students, the unemployed and pensioners in order to fund tax breaks for multinationals?

The University and College Union (UCU) proposes that, instead of cutting the tax on company profits, we should raise it to that of the average in the G7. This would raise enough money to abolish university tuition fees and give hard-working families an opportunity to get tap in to a better education without fear of debt.

It is not merely an ideological assault on business. A landmark 1997 report concluded that the beneficiaries of higher education should foot the bill. The report identified the three beneficiaries as the student, the state and business. We have seen both fees and top-up fees introduced to squeeze more money out of the student and sustained increases from the state. We have seen nothing from business.

The current debate on higher education funding has been far too narrowly focused on how to try and squeeze more money out the individual student through higher fees or graduate taxes. Our plans are the fairest way to make business, rather than students or taxpayers, pay for the numerous benefits it gets from UK higher education.

Simply raising corporation tax to the G7 average would raise £3.9bn in revenue and would allow the UK to abolish tuition fees altogether. Furthermore, it would not deprive the Treasury of the billions that Osborne's cuts will.

Access to education is a central driver of social mobility and should be a natural Labour issue. Shifting the balance from individual taxation to a tax on profits is ethical, and would fund public services such as education at a time when cash is short. Yet it would still leave the UK with one of the lowest company tax rates in the G7.

All the polling on student funding shows the country is vehemently against higher university fees, yet the Lib Dems have spectacularly conceded any ground they had gained in the area by reneging on their election commitment to campaign and vote against a rise in fees.

Most of all, for those who aspire to lead Labour, opening up this debate would begin to redress the idea that many people had when the party was in government: that it was on the side of the fat cats, not the people.

Sally Hunt is general secretary of the University and College Union, the largest post-16 education trade union in the world.

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.