Everyone benefits from education. So why make students pay?

The funding of university education is controversial.

It has been it seems from time immemorial, but all the more so now when the government is proposing substantial additional fees for all students from England (but not Wales and Scotland) who wish to attend university, and is proposing massive cuts in universities budgets to match.

I have recently argued that the proposed increases in fees, with increased debt obligations to match is not an education policy: it is, I suggest, a policy designed to provide the financial markets with a new form of collateralised debt obligation that they can trade now that mortgages are not available to meet the demand for such products.

This is a contentious view, but one which accords with rumours about the need for such products that I hear in the City of London. Those who challenge that view demand that suggestions for alternative funding systems be made if this debt mechanism is not to be used to fund university education in England. I think such alternatives exist. More than that: I think there is compelling argument for their use.

Education is, in my opinion, a human right. More than that, it is a necessity if the knowledge of one generation is to be passed to the next. This inter-generational compact is one that I argue is fundamental to the modern economy. Indeed, the transfer of capital, whether financial, human or social is essential if the fundamental pension equation that must exist in society is to be fulfilled at a time when the elderly can no longer rely on their families to support them during retirement. That pension equation is that one generation, the older one, will through its own efforts create capital and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.

This equation suggests that the benefits endowed by a university education are not just for the benefit of the recipient of that education. Far from it in fact: the provider of the capital that endows the education is, according to this equation, as likely to benefit from it as the recipient is because they are bound in an unwritten but essential contract that ensures duties arising from mutual obligation, each to the other, are being fulfilled within the collective transfer of knowledge, wisdom, intellect and capacity to enquire that a university education should endow.

This suggests that the idea that the student pay for their own education, with the ownership of the debt that they owe belonging (inevitably) to the older generation who should be party to the transfer of knowledge that a university education requires, but who by charging are absent themselves from this relationship, is a fundamental failure of this contract within society.

The inevitable consequence will, at some point, be an at least partial break down in the pension contract of which this transfer of knowledge is a part, with those who are still paying for their education denying at some time in the future their duty to care for those in old age who should have provided them with an education as of right without their making additional charge. If at that time the elderly do not have capacity to pay what is demanded of them by generation who owe them nothing the consequences could be severe and this should be a matter of considerable concern for all in society.

So what is the alternative?

Clearly no one expects the contract between generations to which I allude to be personal: that would suggest parents should be sole providers for their children. But this makes no sense: some chose not to or cannot have children. They are still party to the fundamental pension contract and so they too should provide for the cost of university education. That means the payment has to be funded by taxation.

But which tax? A graduate tax fails, once more, to reflect the social contract in society: the recipient ends up paying. A higher rate income tax could meet the purpose. When about 50% of all young people go to university and just 15% or so in society pay higher rate tax then the chance of significant overlap between those going to university and those paying higher rate income tax is high. This provides an immediate, effective and extremely cheap to administer source of funding. But, there are objections, not least that this increases the incentive to tax avoid (and even evade) in society because differential tax rates are increased as a result.

Thankfully there is another alternative which is that the agents of those who do, perhaps, benefit most from the transfer of knowledge pay on behalf of those who should be footing the bill.

This needs explanation. The suggestion I am making is that companies should pay an additional tax to provide university education for all those wishing to participate, and that they do so from payment of an additional corporate tax payable only by large companies in the UK (the UK corporate tax system is already split so that large companies – basically those making profits of more than £1,500,000 a year). According to the theory of tax incidence companies do not actually pay tax at all, but do only do so as agents for their shareholders.

Since, however, the shareholders of large companies are, almost invariably, amongst the top 10% of income earners the suggestion I am making creates a progressive tax alternative which meets the needs of society, and which also reflects the fact that large companies are the biggest beneficiaries of students trained by the state because they employ more of them than anyone else to enhance their own profits.

There is no doubt at all that the largest companies in the UK have the capacity to pay such a tax.

This is demonstrated, in no small part, by the work that I’ve undertaken on behalf of the TUC. In a report published in October 2010 I showed that the effective rate of corporation tax paid by the largest companies in the UK has fallen by an average of more than 0.5% for a period of over a decade and is now little more than 21%, as indicated by the graph above.

The decline is so dramatic that because corporate tax rates for large companies in the UK are set to increase by 4% over the next four years we will end up with a situation where large companies based in this country have on effective tax rate of about 17% on average, which will be lower than that of small companies, will be paying 20% (or more) and lower than the rate at which the vast majority of their staff will be paying tax when the basic rate of income tax is 20%. The rate will also be lower than the standard rate of VAT by then, which is also said to be 20%. In other words we are creating a progressive tax system in this country in favour of the very largest corporations, and this is wholly unjust.

If further evidence were also needed of the extent to which large companies have been able to exploit the current tax system, the scale of the losses available to the UK’s high street banks provides it.

As a result of the losses they incurred during the course of the financial crisis in 2007 – 2009, which losses were entirely underwritten by the UK government and in turn the UK taxpayer, they now have losses available to them to carry forward against their future profits which have a cash value of about £19 billion meaning that they will avoid this sum in tax payment over the coming years. They, therefore, have received subsidies amounting to many years of the total cost of providing university education in the UK whilst the students of this country have to beg them for credit. The paradox is only too readily apparent.

It is for this reason that I propose a tax on UK corporations to pay for university education in this country.

They have the capacity to pay. Each additional one per cent of corporation tax for large companies in the UK is likely to raise an additional £800 million a year in tax revenue. As such a 5% increase in corporation tax would more than meet the needs of the university sector and of students in this country whilst leaving the effective tax rate little above that of small companies and the rate paid by most income tax payers in this country.

The large companies of this country can afford to pay this tax – which would simply cancel most of the concession granted to them by the Coalition government and at most restore tax rates to what they were a decade ago – before successive rounds of tax avoidance abused our tax base.

But most especially our largest companies cannot afford the alternative to this tax rate – which is a reduced supply of trained students coming from universities of the highest calibre in the world where research equal to that of any found in the world is undertaken.

They need that supply of graduates, research, and business opportunities more than they need reduced tax because our students and universities increase their profit to greater degree than the loss of tax revenue will harm their bottom line. And this, therefore, is another fundamental relationship like that essential intergenerational pension contract that they cannot afford to ignore.

Richard was debating: Fees are the answer. Now, what was the question?

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