A Graduate Tax: Would it work?
Key Report Findings
1. In recent public statements, some politicians (and others) have suggested that a graduate
contribution system is the same as a graduate tax. This report makes clear that the two are not
the same: under the graduate contribution system that operates in England, full-time and parttime students pay fees upfront and full-time students access state-funded fee loans that are
repaid on an income-contingent basis after they leave higher education.
2. Under the current system, students can incur debts of up to £10,000 (based on 2010/11 fee
levels) to cover the costs of their tuition. If fees increase, then there is no doubt that student
debt will increase.
3. Under a graduate tax, fees are not charged and the possibility of a market in fees is removed.
Instead, those who have participated in higher education pay a graduate tax according to their
earnings (once they leave higher education). A graduate tax can be levied for a specified or
unspecified period of time.
4. A graduate tax does have complexities but it is likely to be no more or less complicated than the
current system. While there are theoretical risks around tax avoidance e.g. by the self-employed,
a graduate tax (like the current graduate contribution system) would be collected by HMRC
through the PAYE system and is no more likely to be the subject of tax non-compliance than
income tax collection or the current graduate contribution system.
5. A graduate tax collected from graduates specifically to meet the costs of their higher education,
may be ‘hypothecated’. While hypothecated taxes are relatively rare, the idea that
hypothecated taxes present enormous practical difficulties is a myth. Rather than a separate
means of collection or taxation receipts being held separately, an assessment of the revenues
generated by the hypothecated tax would be estimated based on the numbers of students
entering higher education, completion rates, graduate employment and earnings outcomes with
the amount then set aside for the funding of higher education.
6. Unlike a more ‘progressive’ graduate contribution system, which might charge differential real
rates of interest according to income on student loans (taken out to cover tuition fees), a
graduate tax could not be paid upfront thereby removing the option of those from wealthier
backgrounds/high earners avoiding higher contributions by paying upfront or making early
repayments. It would be truly ‘progressive’.
7. As with the current graduate contribution system, a graduate tax could be triggered at a
particular earnings level e.g. £15,000 per annum (as at present). The million+ report models the
effects of different levels of graduate tax based on the assumption that a graduate tax would be
levied on earnings above £15,000 per annum and for a maximum of 40 years once people leave
higher education.
8. A system of maintenance loans and maintenance grants (according to household income) would
still be required in order to support student while they studied at university. Without this,
participation, especially from lower socio-economic groups, would be damaged.
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9. A graduate tax of 1% would deliver the same level of resources as currently available to
universities, would make the Exchequer no worse off than under the current system and would
have a small negative impact on graduates i.e. the total contribution made by all graduates
would increase though some graduates - particularly low earners - would be better off.
10. A graduate tax is more progressive than any other system. For example, under a 1% graduate
tax, men in the bottom income decile would contribute approximately £3,249 less than under
the current system, while women in the bottom income decile would be essentially unaffected.
However, there are significant impacts associated with the graduate tax for middle income
females who would also pay less than is currently the case. (See Figures 9 and 10, page 26).
11. Although, high earners would pay more, for women, it is only those in the top decile who will
contribute significantly more than under the current system (£2,689). The primary impact of a
graduate tax will fall on men in the very top income deciles. Men in the 7th decile will contribute
approximately £4,762 more over 40 years than is currently the case, compared to £7,669 for
men in the 8th decile and £13,043 for men in the top decile. (See Figures 9 and 10, page 26).
12. The transition from a graduate contribution scheme to a graduate tax could be funded in part by
amendments to the current student support scheme e.g. by applying an interest rate of 1-2% on
maintenance loans or extending the repayment period from 25 years. However, it is likely that in
addition, the Government would need to borrow additional funds until a transition to a ‘steadystate’ income from a graduate tax was complete.
13. The million+ report is based on economic modelling undertaken by London Economics
www.londecon.co.uk. This modelled the resource flows relating to the Hefce teaching grant,
tuition fees, student grants, student loans and repayment mechanisms and bursaries. It also
modelled graduate lifetime earnings to understand repayment profiles and the cost of the
student loan book. The model provides an assessment of the resource flows associated with a
cohort of students entering higher education, across the duration of their studies. Download the
full report here.
14. What others say – download a summary of comments from Vice-Chancellors and the NUS here
Contact: Victoria Mills, Public Affairs Officer, million+
victoriamills@millionplus.ac.uk T: 020 7717 1659 M: 07900 277819
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