Crampton on Labour supporting regressive policies

Eric Crampton writes:

Chris has things entirely backwards here, in a way that has me not sure if he knows what the word regressive means, or whether he doesn’t know how the student loan repayment system works. Or maybe it’s just a fingers-in-the-ears “If I say right-wing enough times maybe nobody will read the report” thing – I was a bit surprised by the twitter traffic following Labour’s playbook on that one.

First off, we never assumed that the returns to education are entirely private. We noted that students currently cover 16-18% of their costs of study, but we didn’t say that should go to 100%. Reallocating some of the money currently spent on tertiary subsidies back into secondary schools, as we recommend, would increase the private contribution towards tertiary education a bit. If we thought it was entirely private benefit, we would have recommended scrapping the remaining tuition subsidies built into the system. We didn’t do that though.

The regressive part is at least as odd. We recommended taking something that’s currently universal and targeting the spending in highly progressive fashion. Means-tested funding can include debt forgiveness for hard-cases down the track, as the UK does when it wipes out student debt that has no chance of being recovered. The reallocation of spending toward secondary schools with poor track records of sending kids to tertiary would disproportionately go to schools serving poorer kids. And the benefits of better guidance counselling, which we also recommended as part of the package, would disproportionately go to kids whose families don’t know how to navigate NCEA and tertiary – again, not my family.

In my experience Labour MPs are very happy to support what they call regressive policies such as universal support instead of targeted policies that assist those most in need.

The reason for this is they wish to get as many voters as possible dependent on state support. The more voters who get cash from the government, the more who will vote for a party that promises more cash.

They put this political imperative ahead of using taxpayer dollars to do the most good by targeting those most in need.

And remember too that loan repayment under the income-contingent repayment scheme is highly progressive. On leaving study, student debtors are charged 12 cents on every dollar earned above $19,084 until the balance of the loan is paid off. So the marginal tax on every dollar above that threshold is 12%, but the average tax rate starts off very low and then rises. A person earning $19,085 pays 12% on the last dollar earned, but only pays $0.12 in loan repayment tax on $19,085 in earnings: a 0.0006% average tax rate. A person earning $119,084 on graduation pays 12% on the last dollar earned, but pays $12,000 in tax: a 10% average tax rate.

A tax schedule where the marginal tax rate is always above the average rate is the definition of a progressive tax. The income-contingent student loan repayment scheme is then rather progressive. If you take out $100,000 in loans and only ever earn $19,000 per year, you will never pay off your loan, but neither will you ever make a payment on your loan. The effective burden (on the debtor, but not the taxpayer) is zero, except in cases where the existence of the student debt makes accessing other credit more difficult. Those on the *lowest* incomes wind up paying nothing back.

I’d have thought that our policy proposal, which takes money that is currently given indiscriminately as interest rate subsidy to every person taking out a loan for tertiary study, regardless of their means, and targets it instead to poorer cohorts and poorer schools, was really rather strongly progressive. But Hipkins calls it ‘inequitable’.

Hipkins means it is politically inequitable in that it may not create enough Labour voters.