Is HECS a tax?

Commenter Charles objects to HECS as

an exotic tax aimed at passing education costs to the next generation

Though until 2004 I thought that HECS could reasonably be classified as a tax, that analysis would have been disputed by the courts. Under the Constitution, there is a distinction between taxes and fees for services, and arguably HECS was a fee for service, in that the person who paid it became entitled to a specific service in return.

However, HECS had other attributes of a tax: it was set by the government, it went to the government, and was mostly collected by the Australian Taxation Office (up-front payments went direct to universities, but as money owed to the Commonwealth, with an adjustment to the government income of universities as a result). It made the Australian tax-welfare system mildly more progressive than it would otherwise have been.

But since the student contribution amount system came into force in 2005, I do not think ‘tax’ is the best description of this payment.

Though the government still sets the maximum student contribution amount, the precise fee is now determined by universities and goes to universities. There is a direct financial relationship between universities and students that did not exist (with the exception of the amenities fee) before. Indeed, it is possible that students may now have scope for legal action against universities under contract law. Before this system, that was not possible because there was no consideration (because students weren’t actually paying the university, and therefore there could be no contract).

There is unexploited policy potential in this change. Being more like a tax than a fee, the old HECS system was incapable of sending price signals to universities to guide the content and quality of their course offerings. It was part user-pays, but without the microeconomic benefits a pricing system can provide. But with the price cap set so low in 2005, nearly all universities went to the maximum to make up for real funding cuts in previous years, and no university currently has a policy of generally pricing below the maximum. So there is no price competition. And the quota system means that price competition would be pretty pointless anyway, since enrolment share would be much the same even if different prices affected market share of applications.

Though I am not an egalitarian, I do not like the regressive implications of free education. But the strongest argument for fees is not their mildly progressive effect, but the potential for microeconomic reform of higher education.

20 thoughts on “Is HECS a tax?

  1. When there is no price competition and quotas that can always be filled how can it lead to reform? And I’m curious, why is free education regressive?

    I would say the only advantage of the current system is you now have the option of say handing our scholarships to students willing to be country doctors for 5 years, or maths teachers for two.


  2. It doesn’t lead to reform in itself, but it is one part of what is necessary for reform.

    Free education is regressive because it is a benefit paid to people who, on average, earn more than those who do not go to university. However, I think an argument could be made that a significant amount of churn goes on under free education: the same people who go to university also have to pay higher taxes to fund ‘free’ services. That’s what we observe in Europe; higher education is cheaper than here but people pay more tax.


  3. “Indeed, it is possible that students may now have scope for legal action against universities under contract law.”

    That would be interesting to see. What does a student have a right to expect from a university?

    What would make it even more interesting is if employers were able to take legal action against universities when graduates turn out not to have the knowledge and skills the award of a degree suggests.


  4. Don – Hopefully there will be commenters who have studied contract law more recently than I did (1985, I think). But if students are offered a major in a particular field and then it is not delivered then I think international students at least would have clear legal rights. I think universities should be careful about their promotional materials, and the more general claims they make about campus life.


  5. “When there is no price competition and quotas that can always be filled how can it lead to reform?”
    I think you’ll find that many subjects areas can’t get enough students, which is one of the reasons you are seeing all the redundancies now in Victoria (universities in WA even gave places back). This will occur more and more as the number of Year 12 students shrink (and perhaps even more if the perceived value of a degree declines or people become even lazier). I think you’ll find that in many areas (science, engineering, arts — basically everything except the popular courses like medicine) many departments are trying as hard as they can to get students at all but the top universities (and even the top universities have problems in some areas). So there already is competition.

    “What would make it even more interesting is if employers were able to take legal action against universities when graduates turn out not to have the knowledge and skills the award of a degree suggests”
    I love how people think they should be able to sue for everything. You could have the same argument for anything. The milk on my breakfast is supposed to be the best in the world, and the TV show I watched last night wasn’t funny. Can I sue the makers of them? In any case, most universities statements about their graduates are so vague it’s hard to find any meaning at all in them.


  6. There is a fair bit of competition in the system for students, mainly for international students. I think this is one of the reasons why student satisfaction with teaching has been steadily heading up since the mid-1990s. But universities are so constrained in how they can respond to the domestic market that such competition that exists is only likely to be having a modest effect.


  7. As regards promotions etc. Universities are (apparently) covered by the Trade Practices Act and we are often told to be careful in what we promise students to avoid litigation on those grounds. As far as employers go, I don’t think they would have standing in a court of law. Also universities do not provide an individual guarantee with each student. The best case here I cn see is if a university issued a fraudulent transcript – but I’d be surprised to see that happening (please note, I’m not claiming that transcripts always contain all the information they should do).


  8. Free education is only regressive if the rich use the service more, and that is probable the case. We have much more regressive taxes, as an example, the rich tend to make more from capital gains, capital gains tax is lower than the tax on wages.

    The question is; which system encourages higher education for those with merit; but no family history to encourages them.


  9. I wrote a post for Catallaxy giving 7 reasons why free university education was a bad idea. I would modify point 3, though: the lifetime income of graduates is more significant in this than the income of their parents.

    The paradoxical answer to your question is that charging for education encourages higher education for those with merit. This is because in practice governments always ration funds to higher education (even Whitlam). When there is an element of user pays, those public funds can be spread across a larger number of people. And it is access to places that has driven up low SES attendance (including those with ‘merit’). There are numerous posts on this blog showing how the HECS deters theory has repeatedly been proven wrong.


  10. Charles, the old Commonwealth Scholarship scheme (pre Whitlam) did more or less what you want, or at least it provided the most assitance to the most needy. They were awarded on merit and a good HSC used to earn a scholarship which paid the fees plus a means-tested allowance. Some middle class/middle income people complained that they fell in a hole, they got next to nothing of the allowance but they were not rich enough to support students without feeling some pain.


  11. No 9.

    It is a very good argument, my counter argument would be; it is better to ration the following years with standards. I still argue HECS is a tax and I haven’t been convinced otherwise ( I’m interested in a political and social view, not a legal definition).

    Yes HECS has funded additional places, but so would any other tax, including a small increase in the capital gains tax, a far more regressive tax than consolidated revenue funded education will ever be. If your going to start looking at secondary effects to justify views, be fair, apply them to the entire tax system.

    I went through when Whitlam’s policies were being implemented. They did not effect me, but I had many friends that would not have done degrees without them, bright people, they just didn’t come from families that would have otherwise considered that sort of career. Yes I also saw a lot try for a year and drop out, but the cost of taking a large first year intake is not great.

    It would seem I have lived long enough to see the future, ( if things continue on their current path we will no doubt go back to the scholarships mentioned by Rafe). I doubt the young realize how fortunate we are to have had this financial crash, it will moderate the market, market, chant.

    Andrew I am not an academic, I still have a lot to do with Tradesman. I know how difficult they find it to fund a young adult through Uni. It takes a lot more commitment from the family to get the student through if money is tight, you talk about future income, they worry about today’s income.

    Having the student accumulate a debt is just another disincentive. HECS removes a pool of possible bright student’s, it is better to be teaching them than rich dills. I still hold the view HECS is a poorly designed TAX, it is a TAX against the counties future.

    My problem is , I can also see your point of view, you need some way of getting market signals into the system.


  12. Been thinking about i some more. i think the best place to look to judge the validity of the argument “part payment provides market feedback” is the medical system.

    I don’t think it has worked.


  13. It does in the medical market: if I want a doctor to properly look into something, I go to a GP where I pay more and get more time, where they will sometimes even ask whether there is anything else. When I just want to them to sign a prescription form when I already know what I need I go to bulk biller. I had serious medical problems in the late 1990s, so I learnt how the system worked. And of course when I needed surgery, I went private so that I could have the surgery done at a time that suited me and slightly reduce the misery of a week in hospital by having my own room.

    On the tradesemen, there is (uniquely) negative correlation between family income and university attendance for male children. The poorer they are, the *more* likely they are to attend university. For female children, uni attendance rises very slightly with income. For the guys, my hypothesis is that if their father does ok on a blue collar income they follow him. If not, they go to university. But overwhelmingly for this group, the issue is that their school results preclude university attendance.

    I know it is counter-intuitive, but study after study has refuted the view you are putting. Low SES attendance is much higher now than it was during free education. It went up thanks to the extra HECS places, and kept going up after the 1997 fee increases, and after stalling for a while it has gone up again in recent years.


  14. “Low SES attendance is much higher now than it was during free education.”

    I’ve asked this before and as I remember there isn’t information to disprove my hunch that these low SES students by and large get low university entrance scores and end up in courses for very ordinary wage occupations that didn’t exist or didn’t require university degrees in the days of free education. So it’s not a valid comparison.


  15. I grow weary of pointing out that progressive income tax acts just like HECS – the marginal increase in income from your education is taxed at a higher marginal rate if you do indeed have higher than average income. Some simple calculations using normal rates of return to education shows this mechanism pays other taxpayers for the education several times over.

    HECS is therefore an additional and discriminatory tax against those who’ve increased their income by study rather than increased it by other means (such as working longer hours). You might justify it on the grounds that working longer hours doesn’t cost other taxpayers while education does, but you can’t then paint it as adding to progressivity. And all else equal it must lead to a suboptimally small amount of such education.

    And anyway if the HECS principle is a good one, why don”t we apply it to ALL education? Let today’s kids repay us for the cost of their preschool, I say. Which they will of course, the same way we did – through progressive income taxation.


  16. “And anyway if the HECS principle is a good one, why don”t we apply it to ALL education?”

    For compulsory education, with universal participation, I think a reasonable case can be made that paying by grant at least some basic entitlement is sensible reshuffling of expenses around the life cycle. But for post-compulsory education, I agree, apply this principle to all of it. A good chance for young people to improve the quality of their final years of school and their post-secondary studies.


  17. Fair enough – but then you’ll see what I mean about a discriminatory tax on education creating a suboptimally small amount of it.

    I fear it would improve the average quality of participants’ final years of schooling by a selection effect – that is, by reducing the number of such participants.


  18. DD – Say we assume that some people’s behaviour is influenced by HECS charges. The main reason that it is likely to be affected is that because they think that even with an investment considerably below the cost of delivering the course in many instances they think that their returns will be negative or below alternative courses of action, such as acquiring workforce experience or vocational education. Even if your basic assumption is true, an opposite conclusion to yours could be reached, that this is prices operating as they should, in steering people away from suboptimal investments.


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