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What’s fair? University graduates pay their way with a tax double-whammy

Graduates already pay far more in tax than non-graduates, says a Canberra economist.

ECONOMICS / GEOFF MASLEN | June 23, 2004

Australia’s university graduates pay far more in tax during their working lives than the cost of their education and therefore should not have been charged for their tertiary studies, a Canberra-based economist said last week.

In a biting critique of the Labor government’s decision in 1988 to introduce HECS, and the Coalition’s approval for universities to increase the charge, Tim Curtin said the average graduate pays at least $350,000 more in lifetime taxes than non-degree holders.

“This is far above the cost of a degree at around $20,000 to $40,000,” he said. “Graduates number only about 16 per cent of all income tax payers yet they contribute over 30 per cent of total income tax.”

Curtin’s controversial paper, prepared for a seminar at the ANU last Thursday is backed with graphs and statistics supporting his argument. In it, he calls for university education to be free, noting that as a result of graduates’ lifetime tax payments, the Commonwealth actually earns a 20 per cent return on its investments in higher education.

A former economics lecturer in England with an MA from the London School of Economics, Curtin has spent most of his life as an economics adviser to various African governments and, more recently, the Papua New Guinea Government. He is currently a visiting research fellow at the ANU.

In his paper, Curtin attacks HECS designer, Professor Bruce Chapman (who attended the seminar), and the committee chaired by former NSW premier Neville Wran that persuaded Labor Education Minister John Dawkins to adopt the system.

“It is precisely this refusal to acknowledge that graduates pay back through their higher taxes much more than the cost to taxpayers of their degrees that is the basis of the generally misleading presentations by Wran in 1988 and Chapman ever since,” he said.

Ideally, HECS should be scrapped and university education again made free, Curtin said. Failing that, universities should be allowed to charge full cost fees – but only if both the fee and any costs such as the interest payable through HECS are tax deductible.

HECS was based on the Wran committee’s claim that although graduates’ average starting salaries placed them in the top 22 per cent of all income earners, they – as direct and large beneficiaries of higher education – “contribute very little directly to the costs of provision”.

Therefore, the committee argued, “the advantaged who use and benefit directly from higher education ought to contribute more directly to [its] cost”. But, as Curtin points out, this ignores the fact that graduates end up paying double their share in tax.

He describes Chapman’s claim that “a no-charge public university system” (that is, financed by all taxpayers) is regressive as nonsense and seriously misleading. Similarly, Curtin said the arguments by Chapman and others that deferring the HECS charges does not affect demand from lower socio-economic groups is deeply suspect.

“It is true that the share of the lower SE groups in university enrolments has remained steady at about 15-17 per cent,” he said. “But it is also true that their share of those completing year 12 has risen. Thus [all] the studies... fail because they focus only on those who have attended university and not on those who have not, despite having valid entrance qualifications.”

Curtin said it is simply not credible to claim, “like Chapman”, that while fees payable upfront would have a deterrent effect, fees that are deferred by repaying HECS after graduation would not have that effect.

Accepting that any government is now highly unlikely to abolish fees, he said students and their parents (if they meet the cost) should be able to claim a tax deduction on the costs of going to university.

“It is certainly a society with uncertain values that by its tax policy allows those who borrow to buy investment homes to claim tax deductions (of up to 48.5 per cent on both the cost via depreciation and the financing charges) whilst those investing in their children’s education obtain no such relief,” he said.

One method would be to allow tuition fees paid to be treated as “tax credits”. This would mean a graduate’s annual tax liability would be reduced by the amount of documented university fees he or she had paid.

With the number of potential students whose parents already pay enough tax to be able to claim credits for the full cost fee, Curtin predicts a large increase in up-front fee payments. He estimates this could rise from the 8000 students who paid full-cost fees in 2002 and the 30,000 commencing students who pay HECS fees upfront, to perhaps more than 200,000.

The one in five students whose parents would not earn enough to be able to claim fee credits should receive Commonwealth grants or scholarships “as they did before Wran”. Grants would also be available to cover the extra costs of degrees such as medicine.

“The ethical justification for the combination of tax credits for those able to claim them and grants for the rest is that it re-invents free higher education for all students whilst at the same time it privatises the universities, by making them wholly dependent on cash income from fees for their teaching,” Curtin said.

The government’s role would then be limited to providing grants for the minority of students whose fees did not attract tax credits – and paying for university research.

“Thus this strategy recognises and nearly completes the gradual withdrawal of government from higher education, fulfiling an unspoken but probably unintended implication of the Wran report and of subsequent revisions to HECS in 1997 and 2003, all of which reduced the government’s commitment.”

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