I’m not sure I agree. But it begs the question what is progressive? I’m not very good on the big questions, so I’ll focus on something in the news this week.
I always thought free university education was a solid progressive cause. But if you look at the structure of the labour market, you can make a sound case this isn’t true and certainly wasn’t when HECS was introduced in the late 1980s.
Basically, if you go to university, you’ll (on average) earn additional money over your career from this activity despite giving up income to attend. While you will pay higher income taxes and while you could also argue education is a public good, there is definitely individual gain from university, in the form of greater income.
Now, if most people don’t go to university and its free, this is regressive as poorer people end up paying for richer people. Those that go to university accrue a private benefit funded by the government. Another way to look at this is to ask why university should be free? You might persuade me if the public good argument – higher education making everyone better off – was strong enough, but I don’t think current evidence supports this.
Simply put, there are too many people who don’t attend university to allow it to be free. From a cost perspective, that sounds silly but from an equity perspective, it is important. Perhaps many years into the future, the vast majority of people will receive some form of higher education, meaning the argument to provide it for free to will stronger. Until then, some form of student payment strikes me as a progressive policy response to university funding given the current benefit of university to the individual.
The current system – HELP funding – means university students pay about 30 per cent of their way through a deferred, interest-free loan. The other 70 per cent is government funded. The 30 per cent student fee is likely the best loan one will ever receive. Payments are only due above a threshold (currently above $50,000) and the debt only increases in line with inflation.
I’m going to assume the current system is broadly supported, with a minority on the left arguing for full-government funding of university education and a minority on the right arguing for privately funded university education. Therefore we should be debating the best way to ensure the current system is both equitable and efficient.
Helpfully, on Sunday the Grattan Institute released a report on higher education, calling for HELP reform. This is to derive more income from former students, lowering the level of student debt the government holds:
The Commonwealth Government could save more than $800 million a year by 2017 if it recovers outstanding student loans from deceased estates and people living overseas.
Total doubtful debt – loans that are not expected to be repaid – is likely to be as high as $13 billion by 2017. The Higher Education Loan Program (HELP) lends students more than $6 billion a year to finance their education, as much as the Government spends on funding higher education tuition.
This is exactly the kind of discussion we ought to be having about higher education student fees.
The main point of the report is that the $800m per year could be better spent supporting more teaching and research, than being accrued as ‘bad’ government debt. The greater the percentage of ‘bad debt’, the less sustainable current policy is. I think the two solutions promoted – recouping debt from estate taxes and overseas repayments – are both valid and should be pursued on the proviso the cost to administer such collection is not exorbitant.* Obviously there is the risk a government will seek to raise more revenue from these measures and simply sit on it, arguing Australia can’t afford more resources for teaching and research. This requires a strong counter-argument from higher education advocates.
I see the HELP system as extremely effective. It allows people to attend university without paying up-front fees and has expanded the number of people attending. Andrew Dempster says since the introduction of HECS/HELP “the proportion of young Australians who hold bachelor degrees has increased from an anaemic 12.1 per cent to an impressive 36.8 per cent”.
You don’t need to mortgage your future to attend university in Australia, unlike the U.S. Keeping this policy environment sustainable will allow this to continue long into the future. If “progressive” policy makers are wary of these reform ideas to limit bad debt, perhaps they can be coupled with an expanded youth allowance system, where the incentive to work while at university is slightly discouraged by providing some income in the form of a deferred loan, incorporated into the HELP system. This may better assist students from low-income households to engage and prosper at university.
(Sidenote: the Grattan report also looks at “securitising” government held HELP debt – Appendix 3 – and doesn’t think much of it. When you can’t convince Andrew Norton on a question of funding efficiency, you’re probably doing it wrong)
Finally, a comment to those who argue this generation of politicians got their education for free and are now charging everyone else, naming plans such as this as ‘grave robbing’. This is a ridiculous argument. Times change, its called progress. The realities of university funding reform have allowed literally hundreds of thousands of low-income people to attend university who otherwise wouldn’t have been able to. HECS, now HELP, is a good, solid, progressive policy. It’s not perfect, but instead of snarky comments, think about the consequences and provide something more than outrage.
Away from policy for university funding, the report raises an interesting question about the intersection between estates and government revenue. An estate tax raises government revenue by taking a fixed proportion of a deceased person’s estate. Australia abolished this tax in 1979. Wikipedia helpfully notes stamp duty will kick in when assets are transferred one person to another, however forgets to mention this is typically exempted in relation to estates. Even the U.S., the bastion of individual liberty, has a form of estate tax, as does France, Germany and the United Kingdom (see this helpful EY report, designed to minimise tax payments, for a primer on different countries).
A bequest tax would be a relatively efficient means of taxing savings. Decisions to save taken solely to fund consumption later in life would be unaffected. But decisions to save motivated by the desire to leave a bequest would be affected and this would impose some efficiency costs. In aggregate, though, bequest taxes are not likely to introduce large biases into donor behaviour. A bequest tax could increase labour supply and savings by recipients and prospective recipients, though the effects would be limited.
Such a tax could also be a progressive element of the tax and transfer system. Because the distribution of wealth in Australia is so uneven, most of the revenue available from a bequest tax could be raised from the top 10 per cent of households by wealth.
The key point is the distribution of wealth being so uneven. I believe income taxes were reduced too far in 2006-08 however there are clear behavioural impacts on income taxes above certain thresholds. An estate tax is both relatively efficient and highly equitable. A win-win argument for a progressive policy tweak in our tax framework. It’s not going to raise tens of billions of dollars, but it will assist at the margins and could stave off a less progressive tax change.
If the Grattan Institute can recommend something akin to an estate-type payment in relation to higher education, surely there exists the basis for renewed interest in a limited proposal for a progressive estate tax in Australia. An argument centred around a boost to government revenues while putting a slight dent wealth inequality in Australia should try and carve out a level of support in the electorate.
* There is a third solution outlined – revising the threshold indexation from AWOTE to CPI – designed to captured more people in the threshold over time. I disagree with this as I err on the higher side of the income threshold and the ability to repay debt.However this solution is relatively small in terms of capturing additional debt repayments.