Orwell’s Dream Becomes Reality

Is punishing private schools the politics of envy or progressive social engineering? It’s time to take The Sniff Test.

The Parent Tax

My MP faces an uphill battle for re-election. He represents an unpopular government and boundary changes skew the electorate against him. His trump card is an unusual one.

Around half of the children in the constituency attend private schools. Nationwide this figure is about 6%. There is no way local schools cope with a sudden influx of students. Greg Hands MP is taking a strong stance against the “Parent Tax”, Labour’s plan to add VAT to school fees.

On one level this is class war. On another it has the ripple of consequences beloved by economists. On a third it is an experiment in whether the modern politician’s favourite strategy may be used for social engineering.

Orwell’s Other Vision

Eighty years ago George Orwell made the case for abolition of both private schools and the House of Lords. This was necessary to dismantle the class structure and introduce a socialist society. I expect he’d be amazed both are alive and well today. That’s about to change.

Orwell attended private school on reduced fees thanks to family connections. He was aware of being among the poorer pupils and loathed the initial experience. He won scholarships to Wellington and Eton and seemed happy at the latter.

Orwell took his stance on principle, although there are grounds for envy in his experience. Far better for his opponents, he may be accused of the highest political crime. Hypocrisy.

Politics lends itself to hypocrisy. Politicians adopt strong views to get elected and compromise to govern. Their public character changes behaviour once among the elite. Trump broke these rules, providing another reason he is despised.

Starmer’s colourless character diffuses the explosive potential of a large Labour majority. His deputy disagrees with him in public, playing to the hard left gallery. This delicate balance is the breadth of Labour’s appeal and its periodic undoing.  

An Excuse for Principles

It's not clear that Greg Hands’ opposition to VAT on school fees is going to help him. This issue fires up the base on both sides. When a policy has no direct impact, you are liberated to take a stand on principle. There are few differences between party policies, which makes the election about personalities. VAT on school fees is an exception.

The chart shows how people feel about taxing school fees. There are a lot of categories but the most important is at the top. Almost 40% of people strongly support the tax while only 10% oppose it vehemently. That’s a political landslide.

Public opinion about adding VAT to school fees (source: YouGov)

Despite feeble protestations to the contrary this is a class war issue. If your child attends private school or you did, then you are most opposed to introducing VAT. If you vote Labour, don’t have kids or they go to state school, you are most in favour. This is a punishment beating for privilege.

The Case for the Offence

There is much to be said for Orwell’s view that private schools entrench social stratification. This has nothing to do with the guess that the tax will raise £1.6 billion, made by the left wing Institute of Fiscal Studies. The right wing Adam Smith Institute argues the extra burden on state schools may end up costing £1.6 billion. Tax take in the UK is almost £1 trillion and these numbers are irrelevant. Which means we can fight on principle.

Private schools are a headache if you believe in equality of opportunity. If you favour equality of outcome they are a pulsating migraine. In 2023, 33% of students at Imperial College London came from private schools. This is above both Oxford at 31% and Cambridge at 28%. Oxbridge and London universities turn out the highest paid graduates.

A survey from Tutorful reveals over a third of former private school pupils believe their education boosted their career. For state school students it’s a fifth. Three times as many believe it made no difference. That indifference does not mean those people won’t vote this issue on party lines. After all, if only private schools impact career outcomes that’s evidence of elitism.

Integrating private school pupils into the state system may have social benefits. Students might bring a work ethic that rubs off on others. Aspirational parents may encourage schools to do better. A general mixing of the population may improve the understanding of both rich and poor. This would breakdown the class structure as Orwell intended.

A few years ago I was arguing education with an advisor to a Labour leader. I argued the right to choose and dispose of your money as you saw fit. He argued that private schools prevented equality and had to go. That does not mean they must be banned.

Show Me The Money

Warren Buffet’s long-time collaborator said,  

Show me the incentive and I will show you the outcome - Charlie Munger

Politicians nowadays don’t like bans. Leave those to wild-eyed climate campaigners and immigration hotheads. Politics is about the nudge.

Tony Blair obsessed over opinion polls. This is interpreted as abandoning principled politics in favour of populism. But Blair’s team monitored polls to measure how effective they had been at influencing people.

By the time nudge theory was popularised by Thaler and Sustein’s 2008 book, the practice was well established. Next time you pass a bike stand look at the posters warning off thieves. The eyes staring down impact behaviour. Integrity is doing the right thing when no one is watching. For those without it, a pair of eyes reminds them Big Brother always is.   

Smiley Activated Message cameras have operated in the UK since the early 2000s. Drive past at the speed limit and the sign grins green. Speed past and it’s a red frown. The idea is that people respond to the nudge to behave better. If they don’t, the data is passed to the police who put in a speed trap.

That’s the problem with nudge. It is slow to work and there are bigger weapons in the armoury. Tax is the biggest manipulator available to government. Local authorities with little tax raising power resort to fines and levies, but central government uses the big guns.

In 2020, the insolvency rules were updated. HMRC became a preferred creditor. This means when companies go bust it is among the first to get paid. But only for certain taxes, such as VAT.

HMRC is aggressive pushing companies to close when they are behind on their dues. This could be a big win in the fight to finish off private schools.

Where This Leads

Fee paying parents argue they are doing the state a favour. They pay taxes that support schools and pay again to go private. There is a similar argument for health insurance.

The principle of nudge is that people must be encouraged to be altruistic. Parents are not paying for education out of the goodness of their hearts. Private education and health are luxuries. Such things get taxed.

A similar argument can be made for single people living in big houses. Those unoccupied rooms could serve society better. It’s a coincidence that the residents are old and Tory voters.  

What about savings accounts or pensions? People have more than they need. There are institutions to recycle deposits and investments for productive purposes. That may not stop a populist. Taxing school fees is a slippery slope. How far we slide depends on what happens next.

A Naïve Answer

My friend borrowed money to pre-pay fees. The interest rate on debt is far below the 20% tax. VAT is charged at point of sale and there is none now. But this can change.

A benign introduction would mean VAT on fees paid after the law is passed. But parents prepaying riles those pushing the policy. They have a number of options.

Laws may be retrospective. This means they impact actions taken before the law was passed. You must be mindful of current incentives and how they may change.

This type of legislation is frowned upon. The courts, however, have shown sympathy to the government where tax avoidance is involved. When keeping money in the bank returns more than the discount for pre-paying fees, judges will assume avoidance.

An incoming Labour government may, however, want to appear nice. Law changes may kick in only from the time the policy is announced. Then HMRC gets to work.

Its first argument is that pre-paying fees is an investment not a sale. In effect, parents give the school money for an unspecified return. When the fees fall due then so does VAT. If you’ve paid five years in advance you will get four.

HMRC takes its own sweet time. The cogs of court are slow to turn. By the time a closure notice is served on schools, paying pupils may have left. VAT is payable when the notice is issued and repaid only if HMRC loses in court. Schools may be scrabbling for cash from parents who either don’t have it or have moved on.

HMRC wants money and it’s not in its interest for schools to struggle to tap parents for VAT. Hence it may be quick to negate pre-payments. The one fifth rise in fees will push pupils back into the state system. Are there enough school places?

A Plan Afterall

It is compulsory to go to school. Therefore places will be found. Classrooms will become crowded, and teachers and parents protest. The government will shrug and point to the behaviour of private school parents. It’s their choice causing this.

The Education Policy Institute reports that demand for schools in London is falling. This is due to shrinking birth rates and high living costs preventing inward migration. Labour constituencies are most effected and risk losing funding.

Change in demand for school places 2021-2 to 2026-7 (Source: local governments)

A quarter of the 628,000 private school pupils reside in London. Forcing a few of them into the state system while raising taxes is an appealing policy. Making the posh kids from Fulham and Chelsea travel to find schools is an inconvenience only to them. It might address declining pupils elsewhere and allow Sadiq Khan to tax parents for driving 4x4s outside their neighbourhood. And to think Rishi claims Labour does not have a plan.

In the meantime, the ideal of schools as a socio-economic melting pot will struggle. Property Price Advice says parents are prepared to pay £26,000 more for a house near a top-performing school. Affluent parents provide social and financial support and schools will welcome them. It is the children of poorer families who feel the squeeze.

An Overseas Alternative

Orwell did not call for the abolition of the monarchy. That’s a step too far and an active monarchy is a tourist attraction. To survive, private schools may become the same.

If British pupils leave, the schools may recruit more foreign students and their family money. This only works if the schools deliver superior access to higher education. You visit Britain for the experience and to feel the history. You go to its schools for results.

Those results may be obtained overseas. Top independent schools establish franchises in the expanding international hubs. It’s a UK education close to home and without VAT. The smaller schools don’t have the pull to do this.

Adding 10% students may strain resources but removing 10% is also bad. The costs of teaching, utilities and administration do not adjust down. Sensing problems, HMRC make strike sooner rather than later to increase the chance of being paid.

Some politicians say that the state will take over failed private schools. Many of them are far from the commuter belt. Without enough local children this idea is a non starter.

Health, Housing and Savings

For all the Conservative Party’s woes, Labour must still win an election. The politics of envy has never worked in the UK. Bans raises hackles in a country with a long tradition of individual autonomy.

Tax is a much easier sell. VAT on schools fees extends the principle that the wealthy pay more. Progressive taxation is the bedrock of a fair society.

Despite the kerfuffle in Chelsea and Fulham this policy will pass. If schools close Labour’s left will smile. They might turn their attention to health, housing and savings.