A couple of days back I wrote a piece for ConHome (also published below) on Vince Cable, where I accused him of making two elementary, undergraduate-level errors. But he has scored a Hat-Trick with a third error – this one a post-graduate howler. It’s called the Graduate Tax.
His proposal seems to have attracted criticism from just about everyone, in politics and in academia. A whole lot of difficulties have been pointed out. A graduate tax would create a disincentive not only to enterprise and achievement, but also to education. It would land some graduates with a wholly grotesque life-time cost in excess of the cost of their education. It would disadvantage British students by comparison with foreign students. And it would be an avoidable tax, for those who chose either to drop out or, (more plausibly) to work abroad. The tax would be an excellent reason to look for job opportunities in the USA, or Australia (I spent twelve years of my career in Thailand, Hong Kong, Malaysia, Korea and Singapore, for example, where I would not have paid such a tax).
But there are two more fundamental errors associated with the Graduate Tax which perhaps have not been sufficiently aired. If we look at the tax system today, most people pay a maximum marginal rate of 20%, but higher earners pay 40%, and the highest will soon pay 50%. In each case we can add around 10% for NICs (an income tax in all but name), so we are looking at a maximum rate of 60%. Add a graduate tax, and we get to 65%.
I discussed the Laffer Curve in my last piece on Vince – the law of diminishing returns, and ultimately negative returns, as tax rates rise. I have no doubt in my mind that 65% is on the wrong side of the Laffer Curve, and will reduce Treasury Revenues, not raise them. Taxes on higher earners are already too high. Vince has declared his intention to raise them as part of his “fairness” agenda. And now he wants to add a graduate tax on top. This is overkill.
The second problem is simply stated. In the UK, state education has been funded from general taxation. We all agree that the broadest shoulders should carry the heaviest load, and that is already reflected in our tax system. Successful and well-paid people (many, perhaps most, of whom are graduates) already pay a progressive tax reflecting their achievement, their income and their ability to pay. So an additional Graduate Tax amounts to asking them to pay twice.
(In parentheses, I personally support the idea of a flat tax, rather than progressive tax, on both moral and economic grounds. I believe that we should all pay the same percentage, so if you earn twice as much, you pay twice as much. There is considerable evidence that such a structure raises more revenue that “progressive” income tax, and also generates growth, employment and investment. But we’ll let that pass for the purposes of this discussion).
So Vince Cable’s graduate tax is an economic error, because it will reduce revenue, and it is morally wrong, because we are in effect charging graduates twice for the same benefit.
If you agree with me, please write to your MP and ask him to oppose the Graduate Tax. I shall write to mine, and I hope that all Conservative MPs will rise up against it.
A reader Chris Gillibrand posted a fascinating quotation as a comment on my earlier Vince Cable piece, but it’s relevant to the Graduate Tax too. Reading it, I thought at first it was from Adam Smith, but it proved to be my other hero Thomas Jefferson, in an 1816 letter to Joseph Milligan. He wrote: “To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.”
I suppose I should apologise to Vince for going on about him. I’m not trying to persecute him. But if he keeps coming up with daft ideas, he leaves us little option.