By Claire West

In a new paper contributing to the debate about higher education funding, the Institute of Directors (IOD) argues that a graduate tax is the wrong policy solution and would damage the UK’s tax competitiveness. Nor would it solve the problem of widening participation.

The IOD urges the Government to opt for an extension of the existing system of variable fees.

Why a graduate tax would undermine the UK’s tax competitiveness:

· It would encourage a ‘brain drain’. A graduate tax would increase marginal tax rates and could act as an incentive to the most able domestic students to study and work abroad, thereby depriving the economy of vital skills, universities of income and the Treasury of receipts.

· A graduate tax would be at least in part a burden on employers. Graduates would expect higher salaries to compensate. This means increased national insurance contributions from employers. It might seem to be fair to charge employers for the benefit of having highly-educated employees. But to the extent that education is commercially worthwhile, that is already reflected in higher salaries. Therefore a graduate tax could act as a counterweight to the Government’s laudable aim to create the most competitive corporate tax system in the G20.

· It would be a tax on effort and merit. The more diligently a student spent his or her time at university, and the more effectively he or she laid the foundations for a successful and well-remunerated career, the more they would ultimately contribute towards the cost of their studies. Conversely, a student who enjoyed the same opportunity, at the same university, but wasted it, would likely contribute less.

Commenting on the report Miles Templeman, Director-General of the Institute of Directors, said:

“Introducing a graduate tax would be extremely impractical for reasons that we and others have set out, but what has been lost in the debate so far is the negative impact a graduate tax would have on the UK’s tax competitiveness. It makes no sense to create a funding model that encourages a brain drain, puts new cost burdens on employers and financially penalises students who work hard at university and demonstrate merit.”

He added:

“There are legitimate criticisms of the existing system of funding, and these need to be addressed. But it is surely easier, and more logical, to build on the system we have already than uproot it and start all over again.”

Mike Harris, Head of Education and Skills Policy at the Institute of Directors, said:

“Advocates of a graduate tax should abandon their argument that it would solve the problem of widening participation. The single biggest factor determining access to higher education is not social class, not worries about variable fees, but earlier educational attainment.”

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