Are taxes better than debts?

A very enjoyable morning at an event convened by the Bishop of Salisbury. It’s not often one gets to speak in a Medieval Hall. In a conversation around the themes of my annual lecture and the impact of the recession, the issue of debt emerged. Someone said:

‘one of the worst things Labour has done is persuade young people that it is normal to have loads of debt’.

The reference was to student fees and loans. I was a supporter of top up fees (indeed my old think tank, IPPR, helped design the top up policy), and I will support the removal of the top up cap when it inevitably occurs after the election. Higher education, which continues to be a major national strength for the UK, needs more investment but the tax payer should not be expected to put extra subsidy into provision which still goes primarily to the middle class and from which the individual student enjoys a direct financial benefit in terms of future earnings potential.

But this morning I realised that, could we go back to the debate about top-ups, I would argue more strongly for a graduate tax. In a way this is a semantic point as student loans operate like a graduate tax; the graduate only has to pay back when his or her earnings reach a certain threshold. But the words are important.

In 2003, when top ups were being debated the idea of a ‘loan’ seemed quite benign;  after all, just about everyone in society was being encouraged to take out more and more loans. On the other hand, politicians were still allergic to the idea of explicit tax rises. Could a graduate tax be portrayed as Labour reneging on its manifesto tax pledge, we wondered.

Now, things are different. Tax rises may still be unpopular but they are no longer taboo. Meanwhile, we have come to associate loans with irresponsibility, debt and danger. Surely it would be better for graduates, and for their general attitude to debt, that they see the price of getting a degree as committing to a higher rate of income tax for a defined period rather than being saddled with debt?

There are other problems with a graduate tax. It means that those who earn a lot after university pay more even if their earnings have little to do with the degree. But if top ups are to rise again, it may be worth overcoming these problems in order to avoid normalising even greater personal indebtedness at the beginning of an adult’s life.