The Government has got quite a reputation in terms of nicking students coursework. Tim Curtin, a visiting fellow at the Asia Pacific School of Economics and Government, Australian National University has written one they probably won't bee looking at as he points out that the comparisons made by the Australian example are just plain wrong. If anyone does want to take advantage of a the fact the government took students work so seriously, send your essays to 10 Downing Street, London SW1 1AA, or mail them to webmaster@pmo.gov.uk. Don't forget to mark them 'Top Secret'. First though is the article he wrote for the THES.
The case for fees is unsound
by Tim Curtin
As the period for consultation on the government's higher education white paper ends, two issues central to the strategy remain open to serious challenge.
Have British universities really failed to attract enough students from "underprivileged" social groups? And is it justifiable to load yet more of the cost of a university education on to graduates in the shape of higher fees when higher earners already repay more than the cost of their studies over a working life?
The bottom 63 per cent of income taxpayers (mostly non-graduates) paid £21 billion in 2002-03, while the top 37 per cent (mostly graduates) paid £91 billion. The difference of £70 billion indicates the extra income tax contribution of graduates relative to non-graduates, and is 12 times larger than the £6 billion to be spent on higher education in 2003-04. This suggests that graduates already make a much larger contribution to all public spending than was ever spent on their degrees.
Under-representation of lower social class groups is assumed in both the precursor report by David Greenaway and Michelle Haynes to the Russell Group (2000) and the white paper itself. But both fail to compare the social structure of the student body with that of the population at large.
For at least the past 30 years, the proportion of the lower-skilled classes in the population has been falling. In reality, the lower social classes in the student body represent a larger proportion of their source population than ever before.
Professor Greenaway's own figures show declining shares for the top "professional" category by as much as 25 per cent, and "intermediate" by 10 per cent. The shares of all the others - especially the skilled non-manual category - increased. The white paper's claim that "young people from professional backgrounds are over five times more likely to enter higher education than those from unskilled backgrounds" is without foundation.
While 15 per cent of applicants in 2000 were from professional backgrounds, and only about 3 per cent from unskilled, the proportion of professionals in the whole population was also five times larger than the proportion of the unskilled in the whole population. Students from the lowest three socioeconomic groups make up a rising proportion of the student population, while their home households are declining as a share of the total population. It is clear therefore that students from the lowest skill households are a rapidly rising proportion of their source population - contrary to the impression conveyed by the white paper.
The white paper's evidence fails to support the claim that "the proportion of the student body coming from lower-income families has not substantially increased" since the upper group's share of the student body increased by 70 per cent only while the lower group's share tripled. The rhetoric that "this state of affairs cannot be tolerated in a civilised society - it wastes our national talent; and it is inherently socially unjust" is a stirring call to arms but completely misplaced.
A rise in the absolute numbers of students from all lower skilled households since 1980 means that their own numbers much more than doubled.
This occurred during a period when the lower income group's share of the total population, which increased by 5 per cent only between 1980 and 2000, was falling. This lower overall share of the student body is consistent with both their very rapidly rising proportion of their source households and the falling share of those households in the total population.
Students from upper-income households increased tenfold from 1960 to 2000, while lower-income students increased 28 times. With the lower-income household group progressively reducing at this rate, the need for the government's proposed access agreement and regulator is, to say the least, open to question.
So what about the case for fees? Even if the total average costs of tuition are about £12,300, the extra taxation from graduates' higher lifetime incomes, compared with non-graduates with the next highest level of qualification, is likely to be at least £160,000. This ignores extra national insurance contributions of £6,000 per graduate, the extra VAT from graduates' extra spending and the extra taxation on savings (more than 50 per cent of graduates' lifetime extra savings of about £80,000 if these are invested in equities).
The probability is that the total cost of a university degree is quite likely to reduce the number of applicants from middle-income households by as much as, if not more than, the potential success of the Office for Fair Access in securing new applicants from the vanishing lower-skilled households.
The Paper
Introduction.
The White Paper is at first glance an impressive document, wide-ranging, and even liberal in its proposals for significant increases in public support for higher education (HE). But it bases its case for some of the new proposals on two wholly false assumptions, first that the socio-economic mix of the student population is not representative of that of the population as a whole, especially in the case of the lowest socio-economic groups, and secondly, that the government does not already receive a much higher quantum of taxation accruing from existing graduates than from non-graduates by virtue of their higher incomes than it spends on higher education.
These premises underpin the decision to introduce the so-called graduate contribution, in other words, a graduate tax at a rate of 9 per cent of graduates' incomes above £15,000, taking the all-in top marginal rate of income tax and national insurance for new graduates to above 50 per cent until they have repaid notional tuition fees of £9,000 plus interest. But they are not true: first, students from the lower socio-economic groups have been increasing their participation at a very high rate, with their absolute numbers doubling since 1980, while those groups' share of the total population has fallen sharply and secondly, by 1993 graduates were contributing around £30 billion more in taxation than non-graduates, far in excess of the £3 billion then being spent by the government on higher education.
The most remarkable feature is the intention to re-introduce capitation grants directly payable to universities of up to £3,000 per student enrolled in HE, 20 years since it first became the policy of the Thatcher government that increases in the level of public funding for HE were simply unimaginable.
One hates to be churlish, and on the contrary can only applaud this reversal of the long-standing policy of starving universities of funding commensurate with successive governments' professed support for major increases in enrolments. But cavil one must, if only because of the White Paper's perverse commitment of the Government to introduce a wholly unnecessary "graduate tax" to "pay" for the new capitation grant.
The reality as opposed to rhetoric of the proposed new funding formula is that it is the universities which may now charge the government so-called fees of up to £3,000 a year for each course embarked on by students, as the actual cash payments received by universities are to be made by the Government; and successful graduates will incur additional income taxation of 9 per cent of their income above £15,000 a year until the sum of the grants paid by the government as notional fees (£9,000 for a 3-year degree plus interest at the rate of inflation, say 3 per cent p.a.) has accrued to the Inland Revenue.
The rationale for the proposed graduate tax is one that has been propounded over many years by an array of self-serving economists, presumably driven mainly by the way the pay they command as university teachers has fallen far behind that of their peers in business, commerce, and most other professions. Led by Nicholas Barr (LSE) and David Greenaway (Nottingham) amongst others, their arguments have been uncritically endorsed by the White Paper, including the wholly false assumption that graduates in general do not already by virtue of their higher incomes vis à vis non-graduates legally and mostly unavoidably pay much more from the extra taxation incurred by those higher incomes than their less fortunate peers who have not had the benefit of higher education. Such extra taxation can easily be shown to be much more than the paltry sums expended on their higher education by the government.
Even if the total costs on average of their tuition are around £12,300, as stated by the White Paper, the extra taxation accruing to the government from graduates' higher lifetime incomes vis à vis non-graduates with the next highest level of qualification, which are stated by Greenaway (2003) to be £410,000 is likely to be at least £160,000, without taking into account extra National Insurance of around £6,000 per graduate, nor the extra VAT accruing to the government from graduates' extra consumption spending out of their higher incomes (say 18 per cent of £320,000 over their lifetime) and the extra taxation on savings (over 50 per cent of graduates' lifetime extra savings of about £80,000 if those are invested in equities).
Access for students from lower-income families
A further major assumption of the Greenaway school of economists, channelled through the equally self serving entities known as the Russell Group and Universities UK, and uncritically accepted by the White Paper, is that existing funding arrangements for students in HE have failed to promote adequate enrolment in the student body by the "under-privileged" (defined by Greenaway and the White Paper as those from households whose heads are unskilled):
The social class gap in entry to higher education remains unacceptably wide. While many more people from all backgrounds benefit from higher education, the proportion coming from lower-income families has not substantially increased. It means a waste of potential for individuals and for the country as a whole.
The White Paper offers a graph that purports to show under-representation of lower social class groups in higher education. This is a simplified version of Greenaway's Fig.3 in his February 2003 article in the Economic Journal, claiming to show the same phenomenon. Both graphs commit the crass error of failing to compare the social structure of the student body with that of the population at large. The White Paper's graph fails to allow for the fact that the share of the lower classes in the total population has been falling for many years. Thus the apparent low share of the lower classes in the White Paper's graph masks the fact that those enrolments are in reality a larger proportion of the source population than ever before.
Greenaway's Fig. 3 plots the percentage distribution of university claiming that the graph shows that "the shares of students from low income backgrounds remained more or less unchanged from 1980 to 1991" yet the graph shows declining shares for both 'Prof I', by as much as TWENTY-FIVE per cent, and 'Inter II' by TEN per cent.
The shares of all the others but especially the skilled non-manual increased. It is true that the share of the unskilled remained about the same, at around 2-3 per cent of all students. But unskilled households comprised just over 3 per cent of the British labour force in 1993! The really stupid error here of both Greenaway and - with respect - the White Paper, unworthy as it is of first year economics students, is the failure to compare the socio-economic mix of the student population with that of the population at large.
For the record, the proportion of economically active men aged 25-69 unskilled, with no qualifications, and not in full time education, fell from 3.8% in 1979-80 to 3.4% in 1992-93, while all persons unskilled and no qualifications fell from 6.7% in 1979-80 to 4% in 1992-93; unskilled males aged 16-64 were 3 per cent of the population in 1993 (the last year such data are generally available).
Evidently there is no disproportion between the proportion of unskilled households in the general population and that of students from such households in the student body have averaged around 2.2 per cent from 1981 to 2001 (had he provided the underlying data in a table, one could be more precise). Given the large number of students (15 per cent of the total) whose socio-economic background has not been reported by Greenaway's source (UCA), the shortfall of 0.8 per cent is hardly significant.
A further point to note is one made by the last comprehensive General Household Survey (1993, p.55) - the gradual fall between 1975 and 1993 in the proportions of men and women in semi-skilled manual jobs (from 24% to 18%) and a corresponding growth (from 9% to 15%) in the proportions of employers and managers. Coupled with the trend shown in the White Paper's Fig. 2 for students from the lowest 3 socio-economic groups to be a rising proportion of the student population, whilst their home households' share in the total population has been falling, it is clear that students from the lowest skill households are a rising proportion of their source population -the exact opposite of the claim in the quotation above from the White Paper.
In short there is no basis for the White Paper's claim that "the proportion of the student body coming from lower-income families has not substantially increased" (that tripled while the upper group's increased only by 70 per cent), nor for the White Paper's ringing rhetoric that "this state of affairs cannot be tolerated in a civilised society. It wastes our national talent; and it is inherently socially unjust" - fine words, but completely misplaced.
Happily, and contrary to the conclusion of both Greenaway and the White Paper about under-representation of the poor - the rise in the absolute numbers of students from low skilled households since 1980 (their apparently constant share of the student population while that doubled means that their own numbers also doubled during a period when the total population of Great Britain increased by only 5 per cent between 1980 and 2000) indicates that their low share of this category in the student body is consistent with a rapidly rising proportion of those students in their source households.
More on Graduate Taxation
The White Paper's statement that "the principle that it is right for students to make a contribution to the costs of their course was established by Lord Dearing in 1997" is incorrect, in the sense that nowhere in the Dearing Report was it established that graduates were not already more than recouping the public costs of their higher education. That is because Dearing uncritically accepted the contentions of some venal economists that whilst there is no doubt that graduates earn substantially more than-non-graduates - on average at least 50 per, according to the White Paper - those higher earnings allegedly do not generate any extra tax receipts for the government.
That claim is moonshine. Graduates are not exempt from income tax, or national Insurance, or VAT on the their higher consumption spending vis à vis non-graduates, or the double taxation of dividends (at a rate of over 50 per cent) earned on their higher savings. Given that graduates do indeed earn 50 per cent more than non-graduates, or over £400,000 more than non-graduates over their lifetimes, it is a matter of law, not economics, that they will pay not merely commensurately but progressively larger amounts of tax over their lifetimes. Greenaway's own earnings data confirms the truth that it is mostly graduates who achieve earnings high enough to pay the top rate of income tax (40 per cent), and mostly non-graduates whose earnings leave them in the standard rate band of 22 per cent.
The White Paper is therefore wrong to comment that "currently students who pay the full £1,100 fee are only contributing about a quarter of the average cost of their university teaching and education - the taxpayer still pays the rest" without adding that the contribution by "the taxpayer" derives disproportionately from graduates. Difficult though it is for economists like Greenaway to grasp the arithmetic, the sum of all graduates' incomes is so much larger than that of non-graduates in total, and the average tax rates incurred by graduates so much higher (at least double), that it is in fact graduates in their role as taxpayers who already contribute all of the funding of higher education and much else beside.
Here it should be noted that all studies of the net distribution of fiscal transfers in Britain show of course that the lower income groups are net recipients, and the higher income groups are the net payers, even after allowing for the benefits their children receive from state education. For example, the old CSO's data in Economic Trends (Dec. 1984) showed that the lowest decile of households obtained its total income of £3,776 in the form of transfers (direct and in kind) though the fiscal system, whilst the average gross income of the top decile of £23,339 was reduced by taxation to £15,433 even after including in-kind education and health benefits. Indeed all the lower four deciles of households ranked by their own income received more from fiscal transfers than they paid in taxes. The idea that the poor make any net contribution to the cost of public services is a fantasy.
Likewise it is highly implausible that the sum of
· extra National Insurance (over 1 per cent of £400,000);
· income tax (40 per cent of £400,000);
· VAT at 18 per cent on the higher spending (say 80 per cent of £400,000) out of graduates' higher incomes, and
· the effective tax rate of over 50 per cent on dividends yielded by graduates' probable larger holdings of corporate shares, bought with their lifetime savings (say 20 per cent of £400,000),
could be less than 50 per cent of graduates' total extra income.
Even if one credits the Inland Revenue in Britain with merely 40 per cent of graduates' extra lifetime earnings of £400,000, that £160,000 yields an undiscounted benefit:cost ratio for the government of around 12:1 (if the public direct costs per degree are on average £12,300 as stated by the White Paper). Not many other private or public sector projects provide such handsome returns. To be noted is that existing graduates in the labour force are already contributing to this income tax surplus of around £148,000 per graduate above the £12,300 cost of their degrees.
Conclusion
The White Paper's proposal for the introduction of a capitation grant of up to £3,000 per student per year is welcome provided in practice the new capitation grants paid to universities are additional to the funding the universities would have received in the normal course of events. But the justifications offered for the new graduate tax are entirely spurious, since it not the case either that current arrangement have led to under-representation of the lower-socio-economic groups, or that existing graduates in the labour force do not deliver annually by way of the extra taxation on their higher incomes about 12 times the total current cost to the budget of higher education. The possibility that some perhaps many qualified applicants for entry to higher education are likely to be deterred by future marginal all-in income tax and NI rates of over 50 per cent cannot be wholly discounted.
