Date created:27/8/04
Last modified:27/8/04
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John Quiggin

Fine fix for taxing issue

Australian Financial Review

1 July 2004.

The Higher Education Contribution Scheme, introduced in 1989, has been one of Australiašs most notable policy exports in recent years. Governments around the world have been grappling with the problem of financing a greatly expanded higher education system. The obvious solution, that of up-front fees creates major problems of unequal access, which are particularly evident in the United States, where fees have risen greatly in recent years.

On the other hand, even in the absence of financial constraints, the superficially appealing idea that higher education should be free Œa right not a privilegeš has major problems. Unlike school education, higher education is hardly ever Œfreeš or Œa rightš in the sense of being universally accessible.

Places in the more attractive programs are almost invariably rationed on the basis of entry scores. Those who get in will, in general, earn substantially higher lifetime incomes than those who do not, which makes the idea of a subsidy to them ethically unappealing.

The idea of HECS is that students can defer payment of tuition charges until they have graduated and are earning an above-average income. Repayment of the HECS debt is handled through the tax system, with costs much lower than for a personal loan. The effect is to provide automatic insurance. If university education does not pay off in the form of a good job, repayment of the debt can be deferred indefinitely.

The insurance component of HECS was eroded in the 1990s, most notably by cuts introduced in the Kemp-Vanstone period, when the threshold for repayments was lowered to around $20 000. However, it has been restored in the latest changes introduced under Brendan Nelson.

Ideologically, HECS defies easy categorization. The idea of a graduate tax was first proposed by Milton Friedman, the most eminent, and also the most reasonable, representative of the free-market Chicago school. But the idea of using the tax system to spread risk is characteristic of modern forms of social democracy. Not surprisingly, advocates of free markets more rigid and less imaginative than Friedman have viewed HECS with suspicion and have sought at every opportunity to revert to up-front fees.

The success of HECS has led to a range of suggestions for extending it. Most obviously, it would make sense to extend the system to cover TAFE and make it part of a universal right to post-secondary education. For young people who do not want to continue in formal education, it might be possible to provide an equivalent loan that could be used to start a small business. And there have been suggestions that the First Home Owners grant could be replaced by a more substantial payment, with deferred repayment through the tax system.

A radically different application is to the collection of fines from criminals. The Australian criminal justice system does not do a good job of handling crimes of intermediate severity - those that are too serious for a caution or bond, but not serious enough for a lengthy term of imprisonment.

It is now widely recognised that short spells in prison (anything less than a year) usually do more harm than good. But the alternative of a fine is effectively unavailable because difficulties in collection make it impossible to impose substantial fines. The average fine imposed at present is around $600, or less than a weekšs pay at average weekly earnings, which is scarcely more than a slap on the wrist for an employed offender.

A HECS scheme for criminal penalties opens up two main possibilities. First, fines could be collected more effectively, over a long period, through the tax and social welfare system. Second, and perhaps more significantly, penalties could be made partly or wholly proportional to income. This would permit the collection of substantial penalties from employed offenders, while allowing for realistic penalties for those dependent on welfare benefits, or with no regular income.

As well as providing a new sentencing option for less serious crimes, a system of income-contingent penalties could provide substantially enhanced revenue from fines. This could be allocated to improved police services or compensation for victims of crime. Assuming fines for motoring offences were excluded, it seems reasonable to suggest that additional revenue could be as much as $100 million per year.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland. He is the author, with Bruce Chapman, Arie Frieberg and David Tait, of a paper on using the tax system to collect fines, to be published in the Australian Journal of Public Administration.

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