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Graduate tax would harm UK competitiveness

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A mooted tax on graduates would be damaging to the tax competitiveness of the UK economy, the Institute of Directors (IoD) has argued.

The government is currently considering how best to finance higher education in the UK. One touted option is an increase in tuition fees. Another is introducing a tax on graduates, calibrated according to their earnings.

The IoD has claimed that such a tax would not only harm the economy but would fail to solve the problem of widening participation in higher education.

Instead, the IoD wants the government to opt for an extension of the existing system of variable fees.

According to the business group, a graduate tax would have a number of adverse effects.

It could prompt a ‘brain drain’ as the increase in marginal tax rates runs the risk of encouraging the most able domestic students to study and work abroad.

A graduate tax would also be, at least in part, a burden on employers because graduates would expect higher salaries by way of compensation. This would mean increased national insurance contributions from employers. That education is commercially worthwhile is already reflected in improved earnings, the IoD said.

Lastly, the proposal would impose 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, the IoD concluded.

Miles Templeman, the IoD’s director-general, commented: “Introducing a graduate tax would be extremely impractical, 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.

“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 IoD added: “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.”