Wednesday, 9 November 2011

We are the 70-100%. Tax the 40-70%.

While writing my thoughts on Occupy, I was thinking quite a bit about how revolutionary and protest movements are often either explicitly about the interests of the relatively-privileged upper-middle and middle classes, or end up co-opted towards their interests anyway.

And then an example comes along.

I wrote about the tuition fee plans last year when the original Browne Report was published. At the time I thought they were surprisingly good, all things considered - though with some potentially very dangerous and largely ignored consequences.

Political changes to the report's proposals in the process of turning it into legislation took away the most dangerous consequences - but at the cost of taking away most of the proposals' internal logic and consistency too.

My general assessment, though, remains about the same: a surprisingly good deal for students and universities. The protests against the tuition fees - and they're mainly about the tuition fees - are effectively a protest by the rich against the poor. That's not to say that the participants think that's what they're doing - but the protest and anger has been quite effectively co-opted by upper-middle-class interests.

Lets look at the current system first.

A student on a typical undergraduate course will pay around £3.5k in fees a year, and take out around £4.5k in maintenance loans each year, for either 3 or 4 years. This will leave them with a maximum payment requirement of either £24k or £32k (indexed to inflation), to be repaid at a rate of 9% of all gross earnings over £15k. Because that £15k earnings figure isn't indexed to inflation, just about everyone will repay all of it - in 25 years, when the debt is written off if not repaid, the median wage is likely to be around £40k in absolute terms (assuming an average 3% nominal inflation). Repayments will therefore be over two thousand a year even for that salary - and a graduate 25 years after graduation is likely to be earning considerably more. Total real-terms payments are therefore going to be approximately the full value of the maintenance and fees "loan".

Furthermore, if this scheme were to continue, the gap between £15k and nominal salaries would increase, so repayment sizes would rise.

Now compare this with the new system.

Repayments are now at 9% over £21k, but the repayment threshold is itself linked to changes in median wage. This means - using this calculator, which seems accurate - that, depending on the exact assumptions made1, to repay more than (real terms) £24k under the new system would require a salary greater than around £29k in real terms. A slightly higher salary would be required to repay more than £32k.

On the one hand, £29k is not a huge salary. On the other hand, it's quite a bit higher than the median income - it's currently around 70th percentile of income. It's also higher than the median income for almost any age-band, gender and region combination: that is, the majority of people2 will not earn more than £29k (in real terms) at any point, never mind as a career average salary!3

So under the new scheme: The bottom 30-40% don't pay anything under either scheme. The next 30-40% or so pay less than now both in total and per year. The top 30% (by income) pay more in total (though still less in the early years). The ones who have to repay the greatest additional amount under the new scheme compared with the old are the top 10-20%4.

Very approximately, therefore, the protests are about trying to persuade a right-wing mostly-Conservative government that it should charge the rich less and the middle more for their education. Even more strangely, the government is refusing: tax rich graduates instead, they say.


1 I pinned personal salary growth in the simulator to equal the average earnings growth (both at RPI+1 or RPI, it makes little difference) to mimic having a fixed real salary over the whole time period. That's not realistic, but it allows a comparison with median wages.

2 Now, graduate salaries are generally higher than non-graduate salaries, and there's nothing like a bit of self-interest, but even then it's mainly benefiting the richer graduates. It's very tricky to assess by how much and there are several conflicting sources (and the premium varies by degree, too) - but it probably works out, on average, at only around £3-4k additional gross earnings a year. Even the median graduate is therefore unlikely to be earning much more than £29k in real terms.

3 And this is also assuming continuous employment for the full 30 years after graduation. Take time off to raise children, or become unemployed for more than a couple of months, or become ill and spend a year off work on long-term sick leave, etc. etc. and the likelihood of repaying more than £24k falls further.

4 Above a very high threshold - in to the top 5% or so - total repayments start falling again because their earnings clear the loan before the higher interest rates only charged on higher earners have much effect. But they'll still even in the absolute best/worst unrealistic case (walk straight out of university into a £400k corporate directorship) repay almost twice as much under the new scheme as they would under the old scheme. And someone with that sort of immediate earnings potential probably has sufficient family wealth and connections that the cost of university is largely irrelevant anyway.