Deriving a Universal Income from the Student Loan Scheme

Keith Rankin, 12 September 1998

New Zealand has two income tax scales: one for people who have participated in tertiary education in the 1990s, and one for the rest. The following table gives the marginal tax rate for various levels of annual income for both scales.

ex-student scale

standard scale

$0 +


$0 +


$9,500 +


$9,500 +


$14,716 +


$38,000 +


$38,000 +


The simple accounting rule for deriving a universal income from a graduated tax scale is to represent the upper tax rate as a flat (ie proportional) tax, and to present implicit tax concessions in dollar rather than in percentage terms. Thus for the standard tax scale we get:

For persons grossing at least $38,000 per annum:

Net Income = Gross Income less 33% plus $5,130

For persons without income support who gross less than $38,000 per annum:

Net Income = Gross Income less 33% plus $X, where X < $5,130

That was the crucial accounting step. The other step is to grant sufficient benefits so as to ensure that for every adult tax resident (ie including beneficiaries):

Net Income Gross Income less T plus $5,130

I have calculated that T would have to rise to 35% to fund the increased benefits required.

The result is an integration of the income tax and benefit systems, and a universal income (UI) or social dividend of $5,130 per annum, which is $99 per week. Indeed, this constitutes a UBI (Universal Basic Income) system.

If we do the same exercise with the ex-student tax scale, we would derive a UI of $6,602, or $127 per week. We could create a UBI system around the formula:

Net Income Gross Income less 43% plus $6,602

Interestingly, the universal "student loan living allowance" provides students with $5,500 plus expenses for textbooks etc, which comes to an amount comparable to $6,602.

From this point of view, the student loan scheme can be fully reinterpreted as a universal basic income based on a universal income of $6,600 and a tax rate of 43%.

Why not just put everyone on the student tax-benefit scale? To complete the process we would need to raise the corporate tax rate to 43% and we would need to define existing benefit entitlements in excess of $6,600 as supplementary benefits. Supplementary benefits would be income-tested; eg abated at 20%.

In fact, a tax rate of 43% may be too high. Using fiscal estimates from the May 1998 budget, it would be possible fund a UI of around $6,600 per annum ($127 per week) with a flat rate of income tax (including corporate tax) of 39%.

So the solution to the student loan problem is not to abolish the living allowances and repayments; rather the solution may be to universalise them. In doing so, we could eliminate the student allowance, with its iniquitous 5-year rule and its parental/spousal means-testing provisions. Provision for student accommodation benefits would be paid in the same way as accommodation assistance for everyone else.

The problem of student fees remains. Dealing with the fees component of student loans is another story from that I am telling here. But if the user is to pay, then the users of tertiary education are the employers (private and public, explicit and implicit) of graduates, rather than the graduates themselves. I favour a fee structure in which students pay a flat 5% of their course costs, with the remaining costs being invisible to students, supported by the graduate-using community. At present, much tertiary training constitutes a huge subsidy to the international private sector. (See "When Tertiary Education is not a Public Good".)

I think it is important that students pay something; otherwise tertiary education providers will be subject to 'moral hazard', meaning that they will be tempted to ratchet up their prices. Indeed I am sure that many of the newer tertiary education providers do just that today. The present student loan scheme is like Father Christmas for them.

With a bit of lateral thinking, our policymakers can turn policies like 'student loans' and 'education user pays' on their heads, creating innovative solutions out of past mistakes.


© 1998

Rankin File | 1998 titles