Graduate tax – The thinking behind it

Following reports of a proposed graduate tax to help cover university tuition costs for students, Justmoney contacted Universities South Africa, the organisation that put the idea forward.

Professor Ahmed Bawa, CEO of Universities SA (USAF), highlighted that the proposed graduate tax was only one of the proposals put forward by USAF. When considering the proposals, Bawa pointed out that the structure of the university budget was an important consideration.

A university’s budget is comprised of three parts: the subsidy from the State, student fees and private income.

“The question is, if the presidential commission was going to come up with a fee-free model, how would we make up that student fee component? Because that is a very substantial amount, it is about 40% of the total budget of the university sector. First of all what it meant was that you had to find extra money somewhere because you couldn’t just remove that, if you remove that the university would ultimately collapse. So the question then was, how do you generate that extra income?” said Bawa.

How to address university funding

According to Bawa, one option to address the university funding needs would be for government to reprioritise the national budget. However, this would require taking money from other government departments.

“Of course that is a very difficult thing to do because all the budgets are stretched. So the idea then was that you had to find a way of generating some additional income and the one thought that came to us was that the one thing that we could do is say that everybody who has higher education qualifications should contribute back into the public purse for the funding of higher education,” explained Bawa.

In essence, the proposal is that any working graduate who earns enough to pay tax should contribute to university funding. When asked if those who have already paid for their education would be paying a second time, Bawa answered: “Well the numbers that we are talking about is fee-free studies, so they haven’t paid yet. So it is really about saying, how do you make up the gap that used to be student fees?”

The graduate tax

Justmoney made the argument that the proposal refers to working graduates regardless of when they graduated. This would include people who graduated 30 or more years ago and are currently paying tax. These people would most likely have previously paid for their studies, and would in essence be paying again to fund another person’s studies, i.e. they will be paying more than once.

Bawa responded: “Yes that is correct, but the point is that the graduate tax is not meant to be the payment just for your own personal qualification.”

To further make his argument, Bawa said: “Higher education produces public goods which are the goods that are valuable to society as a whole, we produce engineers, doctors; we produce educated people so that democracy works better.

“Then there are what we call the private goods, which are the individuals who have had the advantages of higher education, also have a privileged access (if you like) to the labour market, so they have a much better return in terms of earnings and so on, a better quality of life basically. It’s about saying, how do we try to ensure that this group of people who have generated a better quality of life for themselves, contribute to it. That is the logic.”

While not a tax expert, Bawa explained that the graduate tax would work on the same basis of the current tax system. This means that people will be taxed according to their income brackets. “The way I would think about it is that it would be worked in the same way as the normal tax system, so it would be graded, so if you earn a lot then you will be contributing slightly higher, depending on what the percentage is. It’s a graded [system], because people who are not working and do not have income will not pay anything, those that are working will pay.”

Other proposals

Another proposal put forward by USAF was to implement a better financial aid system. Bawa said: “Our primary proposal was that we need a much better financial aid system, which ensures that young people who have been admitted to universities, irrespective of whether they are poor or rich, can have access to higher education. And that includes the missing middle. So we are very committed to that idea as well that we need a much better financial aid system which caters both for the indigents (very poor) and for those who are in what we call the missing middle, and that the grants to the indigents are grants and not loans.”

According to Bawa, banks and the Department of Higher Education are currently working together to overcome the needs of the missing middle.

The proposed graduate tax may be a bitter pill for to swallow for those who took out finance and struggled to pay it back to finance their studies, if students going forward get fee-free education and then are only taxed later in life.

On a final note, Bawa said that if universities are denied another fee increase this year, it would be damaging to the institutions. “If the student fee components of the university budgets is decreased, for example if we have a 0% increase for 2017 that would place enormous strain on all universities, to an extent that universities will find it very hard to balance their budgets, and there will have to be fairly dramatic steps taken to address that.”

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