Kristensen

Why the Conservative's Social Care Tax is the Right Idea

Summary

A proposed mean testing policy called the social care tax and in the media renamed the dementia tax, was proposed by the Conservative government during the 2017 general election. The policy proved so unpopular that it was almost immediately retracted, but not before doing enough damage to the Conservatives to be counted among the primary reasons for their subsequent poor election result.

This article looks a bit closer at the proposition, and argues that the policy on its own represents bad economics, but that it may well represent the fairest option for financing Britain's social care.

Social Care Tax

The social care tax was a program of means testing proposed by the Conservative party in their manifesto released during the 2017 general election. Means testing being the term used to describe policies that make subsidies contingent on the wealth of the recipient, a typical example would be housing subsidy which is only available to people below a certain income threshold.

Under the social care tax older people with assets but little liquid wealth would be expected to contribute to their own social care costs by posthumous liquidation of said assets. Think of someone with no savings but a house worth one million pounds. After death the house was to be sold and parts of the proceeds taken by government to cover late life care.

Election Debates

The question of the social care tax got much media coverage, and during the election debates on Sky an older gentleman asked the Prime Minister directly why his generation should support such a measure. The Prime Minister, and government in general, responded to the question by stating that the UK has spiralling, unsustainable social care costs and by digging in to some minutia about caps and floors in the policy. While all these things were true, and good reasons for the proposal, they did not really answer the question of why the oldest generations should support a policy that would indisputably cost them money.

Means Testing

Before answering the question, it is worth exploring means testing more carefully. The gentleman asking the question, and indeed everyone, is right to be sceptical of mean testing policies.

On the face of it means testing sounds like a reasonable proposition. We offer a subsidy to some group, such as medical cover for the older generation, but since some will be very well placed to pay for themselves, we can save public money by excluding them from the subsidy. After all they don't need the help.

To see why this is an immoral approach, consider the example of two people with identical lives. Both born on the same day, educated identically, working the same jobs and paying the same taxes. Imagine that the only difference in the lives of these two people is that one saves all the money available while the other spends is on parties. When these two people get into old age and, again, need exactly the same medial care, a means testing policy says that the saver has wealth and must pay for himself, while the profligate spender will be subsidised by the taxes they both paid equally. The net effect being that the life of partying results in a higher lifetime income, off the back of those who save.

There is an argument to be made that the savers get other benefits and should just accept having to cover for those who made poorer decisions earlier in life, but since you get more of what you subsidise this is bad economics. By subsidising consumption in this way government creates an incentive to consume, this means fewer savings and more importantly more people qualifying for the subsidy for every generation. Evidently, this is not sustainable.

Why the Social Care Tax?

Having just argued that means testing is terrible economics, surely the answer to the central question is that the older generation should not support this policy, and all is well with the world. Alas, it is not that simple.

Since nobody accepts a solution that leaves old people to die in the streets it is given that money must be found to provide care. The question then boils down to who should finance it. Consider what is really being asked of the government - to fund care for the generation which has had the longest influence on policy leading up to this point without taxing their assets.

The only three ways to comply with this request are to raise taxes on the current generations, to borrow against the labour of future generations or to pay out of savings, public or private.

There are clearly no private savings to cover the care costs in question, if there were the whole reason for the policy and subsequent questioning would disappear. So, has the current generation of retirees saved publicly, via government? According to numbers from the Office of National Statistics (ONS) current UK public sector net debt1 stands at 2,053,155,000,000 pounds at the time of this writing. This is a staggering number, but we can subtract 434,961,000,000 pounds since the asset purchase facility2 is effectively the government owing the government. This still leaves a debt of 1,618,194,000,000 pounds, an amount that would take the entire workforce3 of 31,010,000 people earning 503 pounds per week on average4 101 weeks to repay. Clearly government does not have any money to spend.

Since the generation in question has failed to set money aside for their own old age and want to keep their assets untouched, what is really being asked is that government tax another generation to cover this generation's care.

Inheritance

Here we have to pause and consider why any generation would care about the proceeds from selling off their assets after death. The only reason is inheritance, the desire to pass on assets to the next generation. While this is an admirable goal, consider the full implications of passing on a house under these circumstances.

Imagine a seventy year old couple with a home and no savings, let us say that they can expect another ten years of life during which they will need care. They also have two children to whom they wish to leave their property. Government agrees to safeguard their assets and so the money to pay for ten years of care will be raised in one of two ways, either by raising taxes on the children or by taking on debt and spreading the tax over several generations of children. Clearly the couple is passing on both a house AND a tax burden, and by safeguarding the house they are increasing the tax burden. In effect the value passed on to the children is eroded no matter which option is chosen. The price is simple hidden from view.

Fairness

Since all roads lead to the children paying, why not just scrap the policy, tax the kids and be done with it? The answer to this is fairness. Not all parents will have properties to pass on to their children, and so this amounts to taxing everyone to allow relatively wealthy families to retain their wealth. It should be clear that taking money from all to safeguard the wealth of property owners is bound to increase wealth inequality and presents a barrier to improvement for the poor. Anyone, who pays even cursory attention to the news, will know that Britain is in the midst of an affordability crisis in the housing market, with even average income earners priced out of London.

The economics challenges facing the current and coming generations of workers include the debt burden, productivity, private debt, globalisation and many more that all deserve their own coverage. Suffice to say that the current trajectory is unsustainable and that making those who enjoy a service, including social care, pay for that service is an excellent place to start changing the trajectory.

The older generation should support this policy because it represents an excellent opportunity for them to give something really valuable to their children - a fair and prosperous Britain.

  1. https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/timeseries/bkqk/pusf
  2. http://www.bankofengland.co.uk/markets/Pages/apf/default.aspx
  3. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/timeseries/mgrz/lms
  4. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours