David Willetts will set out today why the growing burden of paying for health, pensions and social services is unfairly distributed. By 2040, income tax will need to rise by 15p in the pound, or else public debt will be on its way to being 230 per cent of GDP to pay for them, he will say. Richer older retired people are already doing better out of the system than younger poorer working ones – previously, they gained final salary pensions and free university education; now, they possess the lion’s share of savings and housing. Willetts will argue that intergenerational justice requires that they fund a larger share of services that they themselves use.
This view is as conventional as it is correct. And the former Cabinet Minister has done more than any other politician to help make it so, writing a book, The Pinch, to set out his case in formidable detail. But, as ever, analysing problems is less controversial than posing solutions, and Willetts has two: first, high value properties should provide more council tax and, second, more better off people should pay more inheritance tax, albeit at a lower rate. Indeed, he goes further by arguing that “politics is going to be very different as the baby boomers age. The age of tax cuts is over. Instead politics will be about who pays more and how much they pay.”
Three distinct but related questions are posed by these ideas.
The first is whether the transaction that Willetts suggests is the best way of funding the need that he identifies. Essentially, the choice for funding welfare boils down to two models. First, those who can afford to pay do so collectively through tax or social insurance. Second, people meet costs as they go – though the state will inevitably, and rightly, play a role in shaping the rules and system, for example by trying to create an insurance market. Andrew Dilnot’s plan and the Conservative Manifesto proposals of last year were nearer the second model.
The latter bombed. But it might be that had a cap on payments been proposed in the first place, and the pitch for the idea been rolled better, that it would have won voter support, over time. The political risks of spreading the burden of an already unpopular tax, inheritance tax or hitting asset-rich, cash-poor, Tory-inclined voters may be no less great or even greater.
However, Willetts undoubtedly has a point when he suggests that to fund public services, and especially those for which needs are rising, one has to tax something – or many things. That’s why this site ran a three-part series last week on what Tories should tax. As Mark Wallace reminded readers when summing it up, no tax is both popular and good, and some are neither. And as Paul Johnson of the Institute of Fiscal Studies has put it, council tax is “deliberately designed to be regressive”. Reform is bound to come sooner or later. Mark Field has made a very solid case on this site for additional bands at the top. The trick of making Willetts’ specific proposal work would be to ensure that funds raised go to help pay for social care.
The second question that his speech raises is what other taxes, or combination of them, might cover the needs that he identifies instead. Our authors last week preferred to tax consumption than income. But we may be near the limits of what can be raised through, say, “sin taxes” without encouraging smuggling further. An alternative to plucking feathers from geese gradually, in Colbert’s phrase, is to grab at a lot at once – the opposite of what he advised. So instead of going for new council tax bands, say, government could remove some of the capital gains tax exemptions from property.
From one point of view, these are grossly unfair: if the value of your property rises, it has done so through no merit of your own. From another, removing these exemptions would penalise people from seeking to do the right thing – save, relieve the taxpayer of burdens, and pass on their money to their children. Change would risk the backlash that the Tory manifesto social care proposals receieved, but squared. Instead, government could seek to raise more money from those who don’t vote – in other words, who come from other countries. There may be enough empty foreign-owned properties in London to raise some more funds from. Or else more tax could be squeezed out of the social media giants.
Theresa May once said that taxes are the price one pays for living in a civilised society. She was right. Willetts makes the same point indirectly through the proposal that he outlines today. But it doesn’t follow that one can simply tax one’s way out of a problem. Part of the answer to the rising burden of care for the elderly – or the need to spend more on defence – is to seek to push up the rate of growth of the economy.
Which leads to the third question that Willetts’ ideas suggest. Obviously, doing so depends upon a great deal more than competitive tax rates – such as providing more infrastructure, transport and housing. None the less, tax is a vital part of the mix. Is there a grand tax bargain with the electorate to be made, whereby some taxes fall while others rise? Might new and higher council tax bands be traded off against tax cuts for poorer workers – such as reductions in national insurance contributions? Should cuts in business rates or corporation tax be prioritised instead?
Such a bargain, of some kind, is our preference. For if the age of tax cuts really is dead, the economy risks falling terminally ill. Delivering reductions would of course require spending control. But that’s another story.