Since Labour decided to make the abolition of tuition fees a central piece of their election manifesto, we have been treated to a healthy stream of articles arguing for and against the proposal. There are lots of different arguments to be made here, but this post is just going to focus on one: whether abolishing tuition fees would be regressive.
This seems to be a popular line of criticism among centre-left commentators and Tory politicians alike, and they appear to have some heavyweight backing in the form of the IFS. However, since “regressive” is a poorly defined term and routinely abused in public policy debates, it’s generally a good idea to be suspicious this sort of claim. So let’s take a closer look at how tuition fees (and the idea of scrapping them) hold up against different definitions of “progressive” and “regressive”.
Tuition fee repayments raise more money from richer people
The IFS has done some modelling of tuition fees to work out how much graduates with different levels of lifetime earnings will repay. They find that higher fees mean that most people will never repay all of the money they borrow, so graduates who go on to earn more end up paying more for their tuition. Here’s a chart they published a couple of months ago comparing lifetime repayments under the current system with Labour’s proposal to scrap tuition fees and reintroduce maintenance grants:
It’s fairly clear from this chart that tuition fees are, under a certain definition of the term, progressive. People who go on to be richer pay more into the system while those who go on to earn the least pay no more than they would under Labour’s proposals. So if we define the term progressive to mean that richer people pay more then this is clearly a progressive way to raise money to fund our universities.
As a proportion of income, the richest 10% of graduates pay less than the next 40%
It’s no great surprise that rich people pay more, since repayments are proportional to earnings. In fact, the IFS notes that “for [the] majority of individuals, student loans are almost indistinguishable from an additional 9% graduate tax on their earnings” (or more precisely, their earnings above £21,000). But if we are going to think about student loan repayments as a kind of income tax then this suggests another definition of progressivity. Taxes are often called progressive if richer people pay more as a proportion of their income, not just in absolute terms. This definition sets the bar a bit higher – so do tuition fee repayments clear it?
The IFS doesn’t show these figures as a proportion of lifetime income, but I was able to cobble together a rough version based on the charts in their latest briefing note on the subject. The charts below show the difference in repayments between the current system and Labour’s proposal (i.e. the distance between the top and bottom lines in the IFS chart above) in absolute terms and as a proportion of lifetime income.
Now the picture looks a bit more complicated. Student loan repayments remain progressive at lower end of the income distribution. This is because repayments aren’t taken from the first £21,000 of your income and many graduates with the lowest lifetime incomes never earn much above this threshold. However, repayments now begin to look faily regressive at the top end of the income distribution. The richest 10% of gradutes contribute a smaller share of their income than the next richest 40%. This is because if repayments are a graduate tax, they are a tax with capped lifetime repayments. Once the full loan has been paid off, you stop paying tax. A significant proportion of the top 10% of earners pay off the full loan well before the 30-year limit (when it is written off), so they pay this tax for a shorter amount of time than everyone else.
So student loan repayments are progressive at the bottom of the income distribution, but under certain definitions they are regressive at the top end. But of course, that’s not really the question we are trying to answer here. We want to know whether abolishing tuition fees would be regressive. The IFS seem to think they have answered this question with the chart above, saying that “as high-earning graduates repay the largest share of their student loans, they benefit the most from the removal of tuition fees”. This, however, is nonsense. Unless they believe that we are going to replace the funding that universities lose with money that we have conjured out of thin air, they simply haven’t done the analysis that is required to prove or disprove this claim.
There are other progressive ways to fund university tuition, such as taxes
To work out the impact of abolishing student loans we need to have an idea of what will replace them as a funding stream for universities. The answer is of course that universities will get more direct funding from government, which will in turn be funded by higher taxes now or in the future, or by reductions in other areas of government spending. If the net effect of abolishing tuition and raising whatever taxes (or cutting whatever services) will pay for it leads to rich people doing better and poor people doing worse, then it seems reasonable to call the change regressive.
There are countless different ways to increase taxes, but since we are equating loan repayments to a sort of income tax, let’s focus on that. The chart below shows how the distributional effects of tuition fees compare with income tax.
(Since the IFS charts are based on the graduate income distribution – and graduates are richer than the rest of the population – they understate the progressivity of tuition fees in the population as a whole. I have roughly mapped the figures onto the population-wide income distribution so that we can make a better comparison with income tax figures. The mapping is very approximate, so please take the numbers with a pinch of salt.)
Compared to income tax, tuition fee repayments take less money from the people right at the bottom of the income distribution. This makes intuitive sense: income tax kicks in at £11,500 but tuition fees don’t kick in until £21,000 – plus there are more non-graduates at this end of the distribution who don’t make any repayments at all. At the other end of the distribution, tuition fees also take less money from the richest. The top decile pays around 40% of all income tax, but only around 30% of tuition fee repayments. Again it’s not hard to see why: marginal tax rates increase with income under income tax but not under tuition fees; and many of the richest graduates pay off their loans early and then stop paying their 9% “tax”. The people who do worse under tuition fees are those in the top 40% of the income distribution but outside the top 10%.
So what would be the distributional impact of abolishing tuition fees and raising the same amount of money through income tax (in a distributionally identical way to current income tax take)? Well you would take some money from the richest 10% and some more from the poorest 60% and give it to those in between. Is that progressive or regressive? Well it’s kind of both: regressive with respect to poor people and progressive with respect to the rich. Either way, it’s quite different to the IFS claim that high-earning graduates would benefit the most from the abolition of fees. If the money was raised by increasing income tax equally for everyone then the richest 10% would be the biggest losers.
Of course, there are lots of other ways to pay for scrapping tuition fees and some clearly are regressive. The tax system as a whole is less progressive than income tax and if the policy was funded by a hike in VAT, for example, poor people would end up paying much more than under the current system and rich people much less. If other areas of government spending were cut you could generate just about any distributional profile you wanted, but since a large part of government spending in the UK is targeted to low-income groups, many options would be less progressive than tuition fees. The point though is that you can’t say whether scrapping one funding stream is progressive or regressive unless you consider its replacement.
Labour’s tax proposals are more progressive than tuition fee repayments
As it happens, the Labour manifesto – in which scrapping tuition fees was the biggest spending item – set out a number of tax rises to pay for their spending commitments, including an increase in income tax. However, the Labour policy wasn’t to increase income tax equally for everyone, but to increase it for the top 5% of earners only. We don’t need to draw any more charts to see that this is a much more progressive way to raise money than tuition fee repayments: 100% of the revenue is raised from the top decile. This would only cover a bit more than half of the cost of scrapping tuition fees, but the manifesto also included promises to reverse recent cuts in inheritance tax and capital gains tax, and charge VAT on private school fees. Scrapping tuition fees and paying for it by making these sorts of changes to the tax system would mean poor people paying less and rich people paying more. It would be progressive.
So what have we learned from all this? Well, tuition fee repayments are a progressive source of funding for higher education, insofar as rich people pay more for the same product. The system is great for the poorest, who may not end up paying anything back at all. However, if you look at how much people pay as a proportion of their income – which is how we usually assess the progressivity of a tax – the system starts to look quite regressive at the top end of the income distribution and the richest 10% seem to do rather well.
But just because tuition fees are fairly progressive, this doesn’t mean that scrapping them is regressive. This would be true if loans were scrapped and people had to pay current tuition fees out of their own pockets, but that is not what is being proposed. If taxes are increased to pay for the change then there are plenty of ways that the net effect could be progressive – and plenty of other ways that it could be regressive. But with the sort of tax increases that Labour set out in their manifesto, it seems clear that the net effect would be to increase the overall progressivity of government activity.
Now I don’t mean to suggest that we should scrap tuition fees just because we can find a more progressive way to fund university education. Distributional effects are not the only criteria by which we need to assess policies. Moreover, unless we think that the state currently does too little redistribution, it’s not clear that we would want every policy change to be progressive – and if we do think that, shouldn’t we be rectifying it by reforming the tax and benefit system? The aim of the university system is to educate, not redistribute, and any effects on access for people from poorer backgrounds seem much more important to reducing inequalities than the direct distributional consequences of choosing between tax-based and loan-based funding. So let’s talk about whether higher levels of debt will put some groups off applying to university, or whether a move back towards tax-based funding would lead to caps on student numbers and exclude poorer applicants. Let’s ask whether scrapping fees would lead to lower per capita funding for our universities, and whether this is a good or bad thing. There are many valid arguments to be made for and against tuition fees, but the claim that scrapping them would be regressive is not one of them.
The analysis in this post is very rough. I don’t have access to the IFS model so I’ve read numbers off charts in their reports, mapped graduates very approximately onto the population-wide income distribution and conflated lifetime and in-year repayments. It wouldn’t be hard for someone at the IFS to do this analysis properly – and I would argue they should have already done it if they are making claims about who benefits from scrapping tuition fees. I’m pretty sure that the results would be similar to mine, but I would be delighted to be proved wrong. The point of this post isn’t to defend scrapping tuition fees. It is to insist that before we use words like “regressive” to describe a policy, we need to do the distributional analysis properly.