Tax Them Until They Squeal…Or Move Abroad

If you took the U.K. Business Secretary Vince Cable at face value in his interview carried in yesterday’s Sunday Telegraph, you would think that he is unaware that Britain already has a graduated or “progressive” tax system where the wealthier pay a larger percentage of their earnings to the government than those less well off.

Take this remark from Cable yesterday in an interview full of his mantra about “fair taxes”: “What we are trying to inject into the argument is that if you become a very highly paid investment banker you finish up paying more than if you’ve gone off and become a voluntary worker or become a physicist in the National Physical Laboratory, or whatever. I want to make it progressive in that sense.”

The “it” in question is Cable’s graduate tax proposal that now seems worryingly to have secured some support from the Coalition’s David Willetts, the Universities Minister, who is now saying that more university finance should be met by graduates “after they are in well-paid jobs”.

Recommendations for how to cope with Britain’s universities funding crisis will soon be forthcoming from a review headed by Lord Browne. Despite disapproval from many Conservative MPs, the independent review into university finance was asked by the government to include Cable’ graduate tax idea in the mix of solutions to be considered. The review reports in the autumn.

What is strange when reading or listening to Cable explaining his graduate tax is that he seems less interested in finding a solution to Britain’s university funding crisis and more interested in using the opportunity it presents to increase taxes. The graduate tax is motivated by his wealth redistribution obsession – taxes, as far as he is concerned, are just not high enough.

In the interview, he avoids saying that directly but then how are we meant to interpret his position differently? When asked what he would consider success after five years as Business Secretary he responds: “a tax system that means people at the bottom end of the scale pay less and at the top end of the scale pay more.” Again, Britain already has such a system and will continue to have one with or without the graduate tax. The only conclusion is that Cable wants even higher taxes on the middle-class and the wealthy. So how high should they go?

The top rate of U.K. income tax stands at 50 percent. Impose a graduate tax of, say, 5 percent and will that be enough to satisfy the Coalition’s Business Secretary? Will that be enough redistribution? And how many Britons will emigrate as taxes rise?

What adds to the shock of the Sunday Telegraph interview is how uninterested Cable is with his ministerial portfolio as Business Secretary. Success in the post for him is to increase taxes – not to improve Britain’s corporate competitiveness, not research and development, not commercial or product innovation, not productivity and not even – at least in this interview – corporate governance. There is no discussion of industrial policy and what the right balance is between government intervention and the free market or whether government should avoid trying to pick winners and losers or instead focus on creating the right environment and circumstances for enterprise and the free market to flourish.

No, as far as this Business Secretary is concerned success will be determined by having imposed even higher taxes. One can only assume that Prime Minister David Cameron is prepared to let Cable talk as though he’s the Chancellor the Exchequer and Universities Minister and Business Secretary all rolled into one because to do otherwise will prompt a breach and a row in the Coalition government.

On some many levels, the graduate tax is a bad idea – as are higher taxes in general. On the fairness scale the tax doesn’t pass the smell test, as a study released today by the University and College Union shows. Yes, a graduate who went on to be a highly-paid investment banker would pay a ton of cash over his working lifetime for his degree but so would those lower down the income scale. A nurse, for example, could end up paying three or four times the actual cost of tuition fees and a doctor seven times. How is that equitable? The burden on the nurse, for example, is going to be heavy and much harder to cope with than the burden faced by the investment banker.

The graduate tax would have the inevitable consequence of encouraging a brain drain on the scale of what hit Britain in the 1970s and young Britons would have greater options and ease now of moving overseas and securing jobs because of their work rights in the European Union and because Asia and the developing World is competitively keen to secure talent and skills.

And those British graduates who did so and remained abroad would in effect get their higher education for free – they would never pay the graduate tax.

Second, the universities sector is now global and big business. As the Economist pointed out this week, the number of students enrolled outside their home country has trebled since 1980. America is the World leader in this global higher education market with Britain in second place. But that could change and the U.K. could lose its place easily because of increased and aggressive competition. There are now many continental universities that teach wholly or partly in English, American universities – and British ones – are opening more campuses overseas, in Europe, the Gulf and Asia.

The government not only has to ensure that British universities remain excellent and well funded in order to attract foreign students (who represent a revenue stream) but it will need in future to do everything it can encourage Britons to stay and study in the U.K. because increasingly they will have easier opportunities and maybe cheaper ones, if the proposed graduate tax is taken into account, to study for their first degrees, let alone their graduate ones, abroad.

That will certainly be the case for British students from wealthy or affluent families but the market is changing so fast that there will be a global education loans market developing quickly and available for students to tap into and free themselves from the constraints and restrictions imposed by individual countries and governments.

This is something that doesn’t seem to have occurred to Cable and others in the Coalition government. The brain drain could start involving Britons who have not even graduated yet. Britain is only an island when it comes to geography.

In the brave New One World we live in, education and the retaining of the best and brightest is going to determine the winners and losers when it comes to national economies. Instead of obsessing about wealth redistribution, the Coalition’s Business Secretary should be thinking along these lines and worrying about how to keep Britain competitive.

All So Obvious — UK Brain Drain and Taxes

Back in April I blogged on what the consequences of Britain’s tax hikes would be: businesses packing up and leaving. Today a survey published in the Daily Telegraph suggests that hundreds of businesses are thinking about exiting and setting up overseas, and one-in-five entrepreneurs say they would not consider starting up in the UK again.

When will politicians learn that we live in a wired world and that tax competition strengthens the link between diminishing returns and high taxes. Meanwhile, Britain pours out money for military adventurism abroad — Iraq and Afghanistan — and is planning to spend billions on an updated nuclear weapon — all to prove Britain still rules the waves. And we lecture Putin that national greatness should not nowadays be equated with military greatness.