Interesting suggestions. I would add that a chunk of the opposition in Oxford and beyond is to the idea of creating a market in higher education, and not just to an increase in fees, per se.
Do such proposals include a floor and ceiling? That is to say, a small (but significant) number of graduates have very low earnings for a short time after they leave university, and a loss of 15% of earnings during that time would affect them more significantly than 15% when they are better off (i.e. if I earn only £100 per week, losing £15 is killer, whereas losing £75 a week out of £500 is more bearable). Similarly, it seems reasoanble to say that if someone contributes a huge amount (say £150,000) in returns, they should get to stop paying sooner.
Separately, I can see many common features with a graduate tax – what makes it distinct from a grad tax?
Ronan – Dan has a point; your proposal is similar to a graduate tax but no less potentially helpful. Clearly, we are going to have to engage in an informed discussin on tuition fees. One question: applying an equity/grad tax regime on young people will hit them partiularly hard as (a) they are entering into a costly period of household formation (housing, children, etc) while (b) still only starting their long climb towards maximising their returns on education which only comes full in later years. Will this not hurt demand going forward and shift the burden from older to younger years? This is not an argument against such proposls as yours, only a consideration. If we could somehow shift the burden of repayment to later in the life cycle, this would be economically more beneficial (and socially more equitable) but unfortunately the time lag is too long for a return on costs. If only we had one of the those Star Trek-type time/life-cycle machines.
All that said, an idea worth exploring.
Elwyn
,
Interesting discussion. Professor Caroline Hoxby, an economist at Princeton, who gave the Clarendon Lectures in Oxford this year, argued that this is actually the way some private universities operate in the US. Students there often give back to their home universities and it turns out that in a period of 30 years time the university is earning back their investment in a student, just by these gifts. This is also an example of how these universities see the education of their students as an investment, and take a bit of equity in the success of students, even though in this case the contributions (or: dividend payments?) are voluntary, although there is a social norm that you should give back to your alma mater (which is almost absent in Europe).
Andrew
,
Agree with the other comments. There’s a name for a government taking an equity stake in its citizens, and it’s called “income tax”. And then the time-limited graduate tax you propose is basically the same as the income-contingent debt proposal.
The problem with all these policies is that, in money terms, they’re pretty similar. It’s only in perceptions that the distinctions matter, and that takes it out of the realm of economics and into the real of psychology or PR.
Raoul Philipse
,
I agree with the above statements. My first additional note a bit off topic. You claim that the poor pay for the education of the rich. This is a widely held misconception in the UK. It is true that the UK tax gets pooled in one lump and then redistributed. In that way the poor are not only paying for the education of the rich, but also for the healthcare of the rich, their infrastructure , their culture, ect. A closer look reveals that as about the bottom 70-80% of people are net tax receivers, the poor actually pay nothing to the rich in tax. It is indeed the current rich that pay for the education of the future educated, the poor don’t enter into it (except that they might be the receivers of cheap education enabling social mobility).
The second comment is that your scheme would transfer tax away from the current middle aged/old rich and to the current young (as normally the old pay for education via higher taxes on higher incomes, but now the young must pay for their own education when they are most vulnerable). Seems like a bad idea somehow.
Raoul Philipse
,
Finally, a question we should be asking is: is giving subsidies to education a positive NPV project for the government and society?
Aside from personal development mumbo jumbo rhetoric, the reason for education subsidies is that fewer people take eduction than would be optimal as the externalities of their increased productivity accrue mostly to the state and society. As the state captures about 30% of personal income and education provides a 22% increase in that, the state could ask itself if getting a 7% (22%) increase in tax over a persons lifetime outweighs the cost of providing free education. The answer is likely to be yes. Of course this calculation only goes up for the people who would not have gone into education if it were not for the subsidies. We did however leave out other benefits to sociaty via corporate tax, increased culture/morals ect. In total this is likely to state a strong case for education subsidies, preferably income dependent. The current actions by government are therefore likely to be Pareto inefficient and sure to switch payment burdens from the current old to the current young, increasing population ageing problems.
John Mack
,
At first this sounded medieval to me. Then it sounded positive as I absorbed the details.
But why must the government suddenly switch to equity financing? Why not encourage students to use private companies like Lumni as transitional/perhaps permanent step while policy is debated and discussed?
The “unfairness” argument is dangerous. In the US the right wing consider it unfair that “their money” will be used for “Obamacare,” Social Security, Medicare, active environmental protection and other social benefits that they claim they do not need or want. This leads to a sour, bitter politics, with the right determined to pursue policies that will be economically unsound, all designed to punish individual “parasites” (but not subsidized companies such as oil companies). The left complains that their money is being used for military and war, but the left does not aggressively organize around this complaint.
There needs to be a discussion of the “common good” as well as “fairness.” Isn’t it beneficial for the common good of the UK that it produce university graduates, and make education affordable for the talented from all classes? If uni education serves the common good, then taxes from all citizens should contribute to it as an important, beneficial public service. If you attempt to operate with an exclusive emphasis on fairness, then you may hear, as you do in the US, childless people claiming that they should not have to pay taxes for primary and secondary education.
In governance you need to seek a balance between legitimate values, individual liberty balanced by social justice, for instance.
Hi Ronan. Solid analysis as usual and an interesting proposal though, as others have noted, the equity proposal seems to differ little from a graduate tax (though I note that you mention the possibility of an eventual equity buy-out). You and others might be interested in research we (London Economics) undertook recently for million+ to investigate the merits or otherwise of a graduate tax in the UK as an alternative to the current reforms: http://www.millionplus.ac.uk/file_download/155/GRAD_TAX_REPORT_FINAL.pdf
Dani ,
Interesting suggestions. I would add that a chunk of the opposition in Oxford and beyond is to the idea of creating a market in higher education, and not just to an increase in fees, per se.
Do such proposals include a floor and ceiling? That is to say, a small (but significant) number of graduates have very low earnings for a short time after they leave university, and a loss of 15% of earnings during that time would affect them more significantly than 15% when they are better off (i.e. if I earn only £100 per week, losing £15 is killer, whereas losing £75 a week out of £500 is more bearable). Similarly, it seems reasoanble to say that if someone contributes a huge amount (say £150,000) in returns, they should get to stop paying sooner.
Separately, I can see many common features with a graduate tax – what makes it distinct from a grad tax?
Michael Taft ,
Ronan – Dan has a point; your proposal is similar to a graduate tax but no less potentially helpful. Clearly, we are going to have to engage in an informed discussin on tuition fees. One question: applying an equity/grad tax regime on young people will hit them partiularly hard as (a) they are entering into a costly period of household formation (housing, children, etc) while (b) still only starting their long climb towards maximising their returns on education which only comes full in later years. Will this not hurt demand going forward and shift the burden from older to younger years? This is not an argument against such proposls as yours, only a consideration. If we could somehow shift the burden of repayment to later in the life cycle, this would be economically more beneficial (and socially more equitable) but unfortunately the time lag is too long for a return on costs. If only we had one of the those Star Trek-type time/life-cycle machines.
All that said, an idea worth exploring.
Elwyn ,
Interesting discussion. Professor Caroline Hoxby, an economist at Princeton, who gave the Clarendon Lectures in Oxford this year, argued that this is actually the way some private universities operate in the US. Students there often give back to their home universities and it turns out that in a period of 30 years time the university is earning back their investment in a student, just by these gifts. This is also an example of how these universities see the education of their students as an investment, and take a bit of equity in the success of students, even though in this case the contributions (or: dividend payments?) are voluntary, although there is a social norm that you should give back to your alma mater (which is almost absent in Europe).
Andrew ,
Agree with the other comments. There’s a name for a government taking an equity stake in its citizens, and it’s called “income tax”. And then the time-limited graduate tax you propose is basically the same as the income-contingent debt proposal.
The problem with all these policies is that, in money terms, they’re pretty similar. It’s only in perceptions that the distinctions matter, and that takes it out of the realm of economics and into the real of psychology or PR.
Raoul Philipse ,
I agree with the above statements. My first additional note a bit off topic. You claim that the poor pay for the education of the rich. This is a widely held misconception in the UK. It is true that the UK tax gets pooled in one lump and then redistributed. In that way the poor are not only paying for the education of the rich, but also for the healthcare of the rich, their infrastructure , their culture, ect. A closer look reveals that as about the bottom 70-80% of people are net tax receivers, the poor actually pay nothing to the rich in tax. It is indeed the current rich that pay for the education of the future educated, the poor don’t enter into it (except that they might be the receivers of cheap education enabling social mobility).
The second comment is that your scheme would transfer tax away from the current middle aged/old rich and to the current young (as normally the old pay for education via higher taxes on higher incomes, but now the young must pay for their own education when they are most vulnerable). Seems like a bad idea somehow.
Raoul Philipse ,
Finally, a question we should be asking is: is giving subsidies to education a positive NPV project for the government and society?
Aside from personal development mumbo jumbo rhetoric, the reason for education subsidies is that fewer people take eduction than would be optimal as the externalities of their increased productivity accrue mostly to the state and society. As the state captures about 30% of personal income and education provides a 22% increase in that, the state could ask itself if getting a 7% (22%) increase in tax over a persons lifetime outweighs the cost of providing free education. The answer is likely to be yes. Of course this calculation only goes up for the people who would not have gone into education if it were not for the subsidies. We did however leave out other benefits to sociaty via corporate tax, increased culture/morals ect. In total this is likely to state a strong case for education subsidies, preferably income dependent. The current actions by government are therefore likely to be Pareto inefficient and sure to switch payment burdens from the current old to the current young, increasing population ageing problems.
John Mack ,
At first this sounded medieval to me. Then it sounded positive as I absorbed the details.
But why must the government suddenly switch to equity financing? Why not encourage students to use private companies like Lumni as transitional/perhaps permanent step while policy is debated and discussed?
The “unfairness” argument is dangerous. In the US the right wing consider it unfair that “their money” will be used for “Obamacare,” Social Security, Medicare, active environmental protection and other social benefits that they claim they do not need or want. This leads to a sour, bitter politics, with the right determined to pursue policies that will be economically unsound, all designed to punish individual “parasites” (but not subsidized companies such as oil companies). The left complains that their money is being used for military and war, but the left does not aggressively organize around this complaint.
There needs to be a discussion of the “common good” as well as “fairness.” Isn’t it beneficial for the common good of the UK that it produce university graduates, and make education affordable for the talented from all classes? If uni education serves the common good, then taxes from all citizens should contribute to it as an important, beneficial public service. If you attempt to operate with an exclusive emphasis on fairness, then you may hear, as you do in the US, childless people claiming that they should not have to pay taxes for primary and secondary education.
In governance you need to seek a balance between legitimate values, individual liberty balanced by social justice, for instance.
Greg Sadlier ,
Hi Ronan. Solid analysis as usual and an interesting proposal though, as others have noted, the equity proposal seems to differ little from a graduate tax (though I note that you mention the possibility of an eventual equity buy-out). You and others might be interested in research we (London Economics) undertook recently for million+ to investigate the merits or otherwise of a graduate tax in the UK as an alternative to the current reforms: http://www.millionplus.ac.uk/file_download/155/GRAD_TAX_REPORT_FINAL.pdf
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