What would Adam Smith think of a graduate tax?

The Institute of Directors reports that a graduate tax would be bad for the UK’s competitiveness. How well would a Graduate Tax fare when scrutinised by Adam Smith? He developed his four Canons of Taxation to determine how ‘good’ a tax will be. The four are: 1. The cost of collection must be low relative to the yield 2. The timing and amount to be paid must be certain to the payer (It should all be open and above board and clearly set out so that people know what their obligations will be.) 3. The means and timing of payment must be convenient to the payer 4. Taxes should be levied according to ability to pay However much the undergraduates of the future may dislike the idea, a direct tax which is collected with standard income tax and based on the level of income generated by those with degrees would seem to meet those pretty well.

Modern economists have added three more canons to these to update and extend them:
5. A tax must not hinder efficiency or should involve the least loss of efficiency
6. A tax should be compatible with foreign tax systems (in the UK’s case, with Europe’s)
7. Tax should automatically adjust to changes in the rate of inflation (particularly important in high inflation economies)

Nuimber 7 seems to be pretty well dealt with – if salaries adjust for inflation, the tax would automatically adjust. Those who object to the idea of the tax might need to focus on 5 and 6 here. ‘Efficiency’ might be measured by the risk of government failure that results from a tax, How easy would it be to avoid a tax like this? What effect would it have on business costs and SRAS, if graduates demanded higher salaries in order to compensate for the extra tax that they would be paying? And what would the long-term effects be on the economy if many people decided not to bother with university education, in order to avoid the need to pay the tax in future? Is there some way in which a black market for graduates could be developed?

And finally, compatability with foreign tax systems might be measured by the effect on tax competitiveness. The NUS, who support the idea of a graduate tax, say that “The unsupported assertion that a graduate tax would cause a brain drain is the last resort of those who are losing the argument. To raise the prospect of an exodus from the UK is baseless scaremongering,” However, perhaps they should look at the example of Greece – from where there were reports this week that the combination of spending cuts, lack of prospects and higher taxation are driving 7 out of ten young graduates to consider leaving the country to work elsewhere.