There is a lively debate over tuition fees and taxation as the Labour manifesto commits to scrap one – at a cost of £11bn – and to raise taxes on people earning above £80,000. The party plans to introduce a new band of tax at £80,000 and to increase the top rate – to be levied on incomes of £125,000 and higher – to 50p in the pound.
Adding to the debate, the Liberal Democrats have defended their decision to raise tuition fees in the coalition in their manifesto, as the changes secured at the time mean that repayment is more progressive and is time-limited.
There’s some criticism that, taken with the Conservative changes to the tax threshold, there is now a cliff-edge at £100,000 where people pay a higher rate of tax and thanks to national insurance some people will in fact be paying a rate of more than 60 per cent. (When you pass over £100,000, you lose your tax free allowance, meaning that you pay significantly more on your first £11,000 over £100,000 than you do subsequently.)
The second criticism of Labour’s plan is that in order to hit the repayment threshold for the £9,000 tuition fees you have to earn more than £21,000 means that the bulk of the beneficiaries of Labour’s tuition fee change are earning above the national average.
This is true. There will be some earning above £100,000 who will be paying tax at a rate of 60p in the pound and it is also true that the main beneficiaries of scrapping tuition fees will be people earning above average incomes. Just as with Ed Miliband’s reduction of tuition fees, Labour is redistributing from the well-off above 40 to the benefit of the well-off under 40.
But there are a couple of important caveats. The first is that, in practice, tuition fees are a form of income tax. They’re paid through PAYE or after self-assessment and in practice they are no different to an increased income tax.
So if you’re worried about the fact that national insurance and the loss of the income threshold creates a higher-than-advertised marginal rate, you should also be concerned by the fact there is, in effect, a hidden tax threshold for people repaying tuition fees of £3,000 a year at £17,500 and for people paying fees of £9,000 at £21,000.
This works both ways. Taken together, increases in the income tax threshold under the coalition government means that the graduates of 1997 – the last year not to pay tuition fees – were paying roughly the exact same amount in taxation as the graduating class of 2012 – the first to pay the £9,000 fee. So seeing the issue as one of “the last generation didn’t pay for higher education” or “this change is regressive” is missing a wider story of what is going on as far as tax in Britain goes.
Does that mean that scrapping tuition fees is a good or a bad thing? Well, it depends.
In practice, that cutting tuition fees it is in effect a redistribution from people earning above average over 40 to people earning above average under 40 isn’t necessarily an argument against scrapping them. Because of their greater share of asset wealth and savings, there is a strong argument for generational redistribution.
Governments assess tax rises through the prism of behaviour changes all the time – that’s why you can reduce the amount you pay in tax by putting more into your pension, as there’s an obvious public good. If it emerges that the higher £9,000 fee is driving changes in student and graduate behaviour that is socially undesirable – a sense that a degree of a certain quality has been earned solely through the fee, a post-graduation career trajectory that focusses away from jobs in the public realm and towards higher-paying jobs – then there is a case for revisiting whether the fee would be better off paid through income tax. (It is worth noting that the feared decrease in higher education participation from people from a lower-income background hasn’t happened, so that case doesn’t work.)
There are also issues around tax collection to be considered. If I move abroad, the government continues to collect my tuition fees – it doesn’t, of course, continue to collect income tax on earnings in another country. So you may need a greater tax take just to stand still in terms of revenue for higher education.
But the crucial thing is that all of these issues – the most effective way to collect tax, and the fairest system of who pays for it – are not specific to tuition fees. The argument around them makes more sense in the context of a wider discussion about tax.