The Guardian does this morning make reference to a government plan to create a new tax. Given the Conservative Party's reluctance to tax this is, in itself, news. But, it would seem that there are major flaws in what they are proposing.
The idea is to have a new tax to tackle the problem of care in old age. Everyone (and the stress is on everyone) over the age of forty will, apparently, be required to contribute to this tax unless they can prove that they have got insurance to cover the costs of any likely care that they will require.
The flaws in this proposal become almost immediately apparent. Firstly, if, as suggested, the tax will be at 1.5%, this will be a flat tax. That is grossly inequitable, not least because those on low incomes have much lower chance of making a significant claim for care costs given that they have lower life expectancy.
Second, this is designed as a hypothecated tax, and they have massive flaws inherent in them, including the possibility that payments will not be made in the future because there will be 'insufficient in the pot'. This, then, it becomes an exceptionally easy way to impose cuts in spending.
Third, as the national insurance system has long proved, supposedly self-insured funds created through taxation do not work: our ability to predict long-term risk is simply not good enough to ensure that tax can be used in this way.
Fourth, this tax includes an opt out provision for the very wealthy. The precedent is extremely uncomfortable. The message is ‘tax is for the little people'.
And, fifth, there is a much better basis for raising additional funds, if that is necessary, which is not proven in the current environment, when every pound withdrawn from consumption is going to simply increase the scale of unemployment. That alternative would be to increase the taxes due on investment income to address the flaws that already exist in the national insurance system which does not apply to unearned income from investments, meaning that this system does as a result unduly penalise income from work. It so happens that such a tax on investment income would also be progressive, and charge those most likely to make use of long-term-care.
I welcome the fact that the government recognises that it has an obligation to deal with socially important issues. I do, however, regret the fact that it is proposing to do so in a way that is, in itself, deeply regressive. This proposal does not reflect good tax design. We can do much better than that.
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I imagine this government can be relied on to tax workers and leave the wealthy comfortable. As the Guardian reminds us today half of UK wealth is inherited so that is where to find resources for social care. Tax capital not workers.
But instead, “over-40s would have to pay more in tax or national insurance, or be compelled to insure themselves against hefty bills for care when they are older.” This looks doubly regressive as if you are wealthy you will pay the insurance so there is essentially a cap on the maximum contribution. It will end up as regressive as council tax.
With an opt out provision (now added to the piece)
As always, bang on the money, this time on the question of hypothecated tax..
BUT – the problem is on the surface, many people who are unfamiliar with terms like “regressive tax” may see this as a fair proposal, especially if it gets picked up & promoted by the Sun/Mail/Express, etc…
Hence the reason for pointing out that it is not…
They will also say, as the article points out, “this is what they do in Germany and Japan very successfully”.
Who cares?
It’s a bad tax, and it has not delivered in either place as I know, as yet
[…] must have arrived. Crazy ideas are in the air. I just finished writing a blog about the wholly inappropriate and regressive tax that the government is proposing to use to tackle […]
Good morning Richard
Is my understanding that taxation is a method of cancelling money out of the economy incorrect?
Surely money cancelled out of the system through taxation cant be re spent?
You are right
So hypothecation does not work
But this post did not make that point as it is aimed at mainstream journalists who will find it and I am not seeking to raise too many issues at once
All that proposing a hypothecated tax proves is that the proposer believes in the ‘household budget’ model of government financing. Furthermore, hypothecated taxes in Britain simply prove the fallacy of the proposition. There is one bucket into which tax falls; there are no funds representing the hypothecated taxes. Vehicle Excise Duty (originally a Road Tax) in 1920 began as a hypothecated tax, with the money to be paid into a separate fund. It did not last long; in hypothecation only the tax is hypothecated.
“Historically the Road Fund was used for the building and upkeep of roads. The Road Fund received the money derived from the taxation of motor vehicles, collected by county councils, and it paid it back to local authorities to finance expenditure incurred on road maintenance. The Fund was in practice never spent in full and was notorious for being raided for other purposes. Hypothecation was formally ended by the Finance Act 1936.” (House of Commons Briefing Paper; Number SN01482, 23 November 2017: Vehicle Excise Duty (VED); p.6)
The contemporary politicians did not understand what they were doing, and the ‘Road Fund’ (so abused Churchill called it the ‘Raid Fund’) ended where it inevitably must end, in the Consolidated Fund. The total organistational muddle the hypothecated tax created was, I suspect because the politicians just did not understand how real government money and taxes actually function in government. They could not make their ‘household budget’ model (with little tins of separated budgets of taxes neatly squirreled away to pay for pet projects) work in real world government.
Precisely….
Excellent article. Left me wondering how HMG propose to treat the long term unemployed, or those with no settled status and therefore no recourse to public funds.
Hello Richard
I think perhaps you should read the article more carefully before commenting on it.
1.5% is the rate charged in Germany. There is no mention of a proposed rate for the UK.
There is no suggestion of an ‘opt out for the wealthy’.
I read it, and the clear implication
Couple of quick thoughts in addition to the above – which is good, and thank you Richard.
1. Why over 40s? Why not everybody? Are they suggesting only people currently aged over 40 will go on to need long-term care? Nonsense if they are of course. The more years the proposed additional tax would be spread over, the less impact it will have each year. (Of course that could not be spun as anything other than “increasing income tax”.)
2. You rightly point out this would be a regressive tax. In fact it’s doubly so because low wage earners tend to die earlier than high earners – so they are less likely to live long enough to develop dementia in the first place – and will need care for feweer years if they do.
Regards, and thanks again for your efforts.
Pete
I think the idea is that there is already an inter-generational imbalance in the UK that penalises the young – which is indisputable
Don’t forget that many will also have a student loan to pay off. So a double whammy.
My preference would be to tax an inheritance as if was income.
There are many better ways of achieving this goal
[…] a day we have a proposal from the government for the introduction of a regressive tax. This morning I noted their plan for a flat-rate tax to fund old-age care. Now we have another flat-rate consumption tax which will be charged without consideration of the […]
Agreed hypothecation is bad, and there must be no “opt out”. Make it an income tax, not NI (which is capped).
In which case, it wouldn’t look too bad, and would be progressive. High income earners would be paying for a service that they might not use. C/f education.
Increasing current expenditure on social care will require some additional taxation to create the fiscal space. Obviously not needed now, but in order to be long-term sustainable.
Awful, awful. The boomer generation is flatly divided between those who accumulated equity, whose wealth has escalated courtesy of the market property booms, and those who did not. Many of the latter in their fifties and sixties, facing punitive levels of private rent with redundant skills, are facing a bleaker future than the young, who at least have a future to adjust, mitigate and adapt. Some have raised families as single parents. They are being hung out to dry. Dreadful.
I agree
I know some in that situation
Joanna, I believe that in order to transfer spending resources to the state you MUST transfer private sector demand (and as a surrogate for this, private sector income) to the state.
Taxing hoarded wealth doesn’t cut it. By definition, hoarded wealth is not income, demand or expenditure. By contrast, income tax works since somebody’s income = somebody else’s expenditure.
So taxing income reduces private sector demand, and allows the state to occupy the fiscal space created in order to pursue its policy objectives.
We should tax hoarded wealth because it corrupts or withholds scarce resources. I’m up for that, but only for these reasons. It won’t fund social care.
And where did I say that some should be hung out to dry? The whole point of a tax levied on the entire population is to provide mutual insurance.
Of course, we have to see the details.
Tax from wealth is about reducing income inequality
Not sure of the funding numbers however the whole idea of social care needing another tax seems wrong to me. Why can’t we simply take people’s pensions if they go into care or take equity from their home assuming they own it up to some statutory maximum say X%? I believe we effectively do both today but not sure all such monies actually make it to the social care system. Perhaps this could be supplemented if need by taxing all pension pots each year a small of the average gain if any.
On health and social care the issue is how to give legitimate rights to people to demand health and social care.
If those rights are made contingent on decisions by people administrating a fixed and inadequate budget then you get problems.
the best solution is to shift the budget from the departmental expenditure basis to the Annually Managed Expenditure (AME) basis ie on the same basis as benefits.
That means as soon as the individual is categorised as sick or requiring social care the money is paid out of Treasury coffers.
how the treasury manages its finances can remain mysterious but there is no reason why sick and elderly people should be made personally liable for funding their health and social care needs.
The potential problems are in health and social professionals exploiting the system (which is why it must remain within the public sector and the public sector remain largely monopolistic(there could be some sub-contracting as now without too many problems)) and in incentivising individuals to accelerate their decline into receiving social care. But these problems can be managed.
The bigger problem is in persuading people that the state is a reliable funder and provider. History shows the state skimps in its care for its citizens, particularly the poor and politically weak. Again historically the richer have been given opt outs to pay for their own education and healthcare and they pay for their own social care already. What they object to is paying for others out of higher taxes.
The hypothecated tax concept may be bogus but its benefit is that it reinforces the rights of individuals to claim a benefit and the confidence that resources will be there when benefits come to be drawn. It also reinforces to the richer that poorer people are making an effort.
We shouldn’t dismiss the crutch lightly. It may not be a sufficient condition to establish a perfect taxation system but it may give confidence to many to progress in that direction.
Some ideas here are interesting – hypothecated tax never is
Every tax has its pros and cons. Its the overall package that counts.
Or that’s what I was taught when i studied taxation and public finance.
As I said hypothecated tax has its problems but may be a tactic worth deploying to get proper provision of social care over the line.
I presume you would just provide it , but asking for it is not enough.
Tax does not fund government spending
Read modern monetary theory
The claim that is implicit in every hypothecated tax proposal, that a tax funds a spend, is simply false
Read Stephanie Kelton, The Deficit Myth
Your assumptions are simply wrong
I know and I have.
But the game is to justify extra spending.
For some extra taxation is a justification for extra spending.
For others lack of taxation income is a reason for not spending.
I dont think MMT gives an answer to how to justify spending money on social care.
It will not create inflation although there are supply constraints in social care so extra spending might create some cost pressure.
It would deliver extra benefits but some see this as a cost not a benefit , draining resources away from an export , production orientation.
there is an argument that the multiplier effect is greatest in low wage , high labour content sectors of the economy and extra spending would create more jobs, which are good arguments.
there is a persistent myth (which isn’t wholly wrong for those with funded pensions and savings) that people do save for their old age, pensions and the like so no matter the theory we have to deal with where people are coming from and the fact that some people have funded their care and others haven’t.
Sorry, but using false claims to justify spending us never a good idea
You will then find insufficiency of tax is a reason for nit spending
Your argument does not stack at any level
And you don’t need MMT to justify spending on care. You need to be an empathic human being
Taxes do not “fund” public spending (and you don’t need MMT to know that) but are necessary to transfer private sector demand (for consumption and investment) to the state so that the latter can pursue the manifesto upon which it has been elected..
So not while not directly linked, in the long-term state revenues and spending are pretty closely linked and, if they are not, there’s another problem.
A persistent and elevated state budget deficit is not the problem, but it is the canary in the coal mine.
Your claim is not true, except in the broadest possible terms
I have shown spending has rarely been covered by tax, and nor need it be
And the canary in the coal mine for what? Indicating a state where need is met? Why wouldn’t you want that? Please tell?
I think that a private sector with a persistently high demand for savings in excess of investment does not sound like a happy, secure, private sector.
I am prepared to concede that hypothecated taxes are not a good idea but countries that have opted for Social care taxes , like germany , have better provision.
https://blogs.lse.ac.uk/politicsandpolicy/german-approach-to-long-term-care-funding/
Waiting for everyone to feel empathy for our fellow citizens may be Good in theory but not very practical.
Managing literally means the ability to ride a horse. Sometimes you have to tug hard to force the horse in the right direction. It may not be nice but it sometimes has to be done.
What you are saying is that countries who have agreed that tax must pay for social care have done better
I agree
But that does not mean we need a hypothecated tax
It means we must accept the government duty to provide
We agree
But how do we persuade other people that the government has a duty to provide when a large number of people have been forced to sell their houses and run down their lifetime savings because no one else wants to pay for their care?.
After a long career in healthcare I am cynical about waiting to persuade people/politicians to be empathetic to others.
Enrolling them in a quasi -funded Social care insurance scheme worked in Germany , the social insurance scheme model seems to work across Europe and the National Insurance Scheme was a bedrock of the welfare system in the UK as a means of justifying additional state backed welfare spending. We both know that its a pretence in that there is no necessary and direct link between state spending and taxation levied but imperfect means can justify positive ends.
Its a slippery slope but so is waiting for enlightenment. the matching principle of receipts and payments , costs and benefits not only has an appeal to accountants…and notions of self-sufficiency and financial responsibility should not be lightly dismissed as protestant self-flagellation.