The Graduate Tax Challenge (Part I)
whether you support HECS or free university, i've got a question for you…why not support a graduate tax instead?
This is the first part of a two part series. I’ll post the second part a week after this one and link it here. This was originally going to be a single post introducing what I call the ‘Graduate Tax Challenge’, arguing that many common objections to graduate tax proposals fail because they apply just as much to the alternatives, that the ideal forms of HECS/a graduate tax/free higher education converge on each other to a significant extent, and then providing my own answer to the challenge. The post was too long for my liking and I’d be interested in seeing what readers have to say about the ‘challenge’ before releasing the second part.
Part 1 - The Graduate Tax Challenge 👈 You are here
Part 2 - What's Really at Stake in the Debate Over Financing Higher Education?
This year the Albanese government decided to recalculate HECS indexation based on CPI and WPI, whichever is the lower one, and backdate it to last year. This means that last year’s record high 7.1% indexation will be lowered to 3.2%. That’s led to a new wave of discourse surrounding the HECS system. This is as good a time as any for everyone to start arguing about HECS vs alternative ways of financing higher education again. The two salient policy ideas in Australia are:
Income-contingent loans (HECS) - students take out a government loan to pay for their education and repay it through the income tax system if their income exceeds a certain threshold.
Free university - higher education is completely subsidised (down to $0) by the federal government.
One alternative that rarely gets discussed in Australia is a graduate tax. A graduate tax is a fun thing to mention in discussions about HECS vs free higher education because most people haven’t heard of it and it’s a good way to challenge their beliefs. Readymade arguments against the graduate tax are not easy to find. Graduate tax proposals combine things that people like about HECS and about free university in ways that make it difficult to criticise. More than that, thinking about the higher education debate as a matter of choosing between HECS, free university or a graduate tax reveals what’s really at stake. It really clarified things for me and hopefully it might clarify things for you too.
A graduate tax would be a small surcharge tax levied on the incomes of university graduates (and people who have completed university courses in general). The idea would be that graduates would pay a slightly higher rate of income tax than non-graduates. For example, someone earning $70,000 a year would currently pay around $13,217 in income tax. This means their income tax rate is roughly 18.88%. If they attended university and we imposed a graduate tax of 3%, then their income tax rate would jump up to 21.88% and they would pay an addition $2000 a year in tax. You could implement the graduate tax progressively by introducing different tax brackets (e.g. a tax-free threshold and higher rates for higher income earners).
A graduate tax would be, in some ways, HECS on steroids. It would function in much the same way as HECS because HECS is already levied through the income tax system. Students would be expected to pay for their degree, contingent on their current level of income, over a long period of time. While HECS advocates like to say that HECS is an equitable system because it makes high-earning graduates pay for some of their own education, the graduate tax destroys HECS on equity grounds. It ensures that graduates with high lifetime incomes must ‘pay it forward’ to the future generation of graduates. A millionaire graduate could end up paying a lot more under a graduate tax system in the long run than they ever would under the HECS system.
A graduate tax would also avoid the problem of students from wealthier backgrounds paying their fees upfront (or rather their parents paying their fees upfront). Paying upfront allows one to avoid indexation and eliminates the EMTR cliffs you encounter once you start earning money.
In a world where HECS debts have ballooned and take much longer for graduates to pay off, some people are already effectively paying a graduate tax. If this trend continues, then HECS will effectively become a graduate tax for everyone except the very wealthy. Taking the existing HECS system and banning voluntary repayments would get very close to my idea of a graduate tax.
The main difference between the graduate tax and HECS is that one is a tax and the other is a debt. The graduate tax applies forever, only going away at times when you’re earning below the minimum income threshold.1 The HECS debt goes away as soon as you can pay it off or die.
HECS supporters occasionally tell me that a graduate tax would be disastrous because it would have negative effects on work effort, but this could easily be avoided by keeping the graduate tax rate as low as possible and having graduates pay slightly more over the long term.
People also feel slightly differently in a psychological sense about debts and taxes. But outside of that, the differences are mostly verbal. A HECS debt is something that you incur because you took out a loan to pay for a service but a graduate tax involves no such loan. I suspect people feel strongly about this for largely ideological reasons – HECS looks like a ‘user pays’ system and has neoliberal vibes while the graduate tax looks like a tax and has soft left vibes.
If a graduate tax would be HECS on steroids, then it probably doesn’t sound appealing to people that want university degrees to be free. But supporters of free university also tend to give puzzling objections to the graduate tax. I have had many conversations about it that end with the objection “That isn’t really free education because you’re making students pay a tax”. True, but how do free university supporters propose we pay for the cost of higher education? By raising taxes (on the rich). Progressive versions of the graduate tax would do exactly the same thing, only they would involve raising taxes on high-earning graduates instead of the general population.
As far as I’m concerned, the best versions of each system are very similar. My ideal version of HECS would involve a lower repayment rate, higher repayment threshold, no steep EMTR cliffs and no voluntary repayments. My ideal version of a graduate tax would be much the same except there would be no upper bound on compulsory ‘repayments’, so the richest graduates would be paying it forward to future graduates. Free university, when conceived of as a privilege and not as graduate’s just deserts, could serve to justify higher progressive taxes and ‘pay for itself’ in a similar way. There’s not much to choose between them.
Or when you leave the country permanently. This was an old loophole in the HECS system but it might be a little more complicated for a pure graduate tax system.