The unprecedented affluence of millions of older people is in stark contrast with a stagnant economy and a society in which millions of younger people cannot afford the basics of independent living. Change is long overdue and needs to start with the UK tax system, writes Carl Groves, former Further Education College Principal, and IF supporter.
An incongruity exists between the financial success of millions of affluent older people and a stagnant UK economy in which millions of younger people can no longer afford the basics of an independent existence. A change in UK tax policy is needed as a first step in promoting intergenerational fairness and a more successful and sustainable UK economy and society.
Wealth gap between generations
You would expect older people to have more wealth and financial assets than younger people. The former has had more time to accumulate this wealth, and, as we know, wealth makes it easier to make more wealth. But what you wouldn’t expect is for the government of the UK to use the tax system to help older affluent people to build even more wealth at the expense of younger people; yet this is exactly what has been happening during the past 40 years and has created an ever-larger social and economic opportunity gap between the generations. It is extraordinary to observe people in their 80s and 90s today who are even more affluent than when they first retired and much wealthier than when they were working for a living.
Of course, there is a sizeable minority (17%) of pensioners who are both income and asset poor and for whom the many means tested, and non-means tested, benefits available to them is the difference between a very modest existence and extreme penury. However, it is always cases such as these which are wheeled out as soon as any suggestion is made to revise the system of pensioner benefits, or the “triple lock” promise on state pensions. It is very clever how, whenever pensions and pensioners are mentioned, the higher-income/asset-rich older-age group hide themselves behind the skirts of the proverbial elderly widow who has only the state pension to live on and is being “threatened with having to leave the family home”. In this way the older affluent continue to secure a host of non-means-tested benefits which they simply don’t need. Very clever and very devious but this is not a victimless deceit; it uses a huge volume of resources which could, and should, be re-directed at creating opportunities for younger people to develop their potential, enjoy a reasonable living, and to accumulate a reasonable pension for their own eventual retirement. The generosity and bias of the UK tax and benefits systems to affluent older people means that younger people, just trying to get started in life, must face higher taxes, higher prices, and lower incomes than would otherwise be necessary.
Are universal benefits needed?
Let’s take the example of an affluent elderly couple returning from their annual winter holiday in a warmer climate. Why should they come home to a “winter” fuel allowance? If they can afford to regularly cruise the Mediterranean and the Baltic, let alone the Caribbean and other exotic destinations, why do they need a free bus pass? If they benefit from windfall shareholder dividends from their (so-called) investments in no-risk monopolistic energy companies, why do they need taxpayer support to pay the inflated energy prices they are imposing on everyone else? If they wish to receive their raft of NHS consultations, health checks, and medications in time for the date of their next holiday, why can’t they help pay for their extensive and prolonged use of the NHS through – my proposed – “Common Personal Income Tax” which incorporates a national insurance element?
The Silent Generation
There are two overriding factors which make it possible for a majority of today’s pensioners to live well. Firstly, it is the sacrifice made by their own parents’ generations in demanding very little in later life in the way of accommodation, food, clothing, holidays, transport, and healthcare, and in their very modest expectations for the length and quality of their own lives. These generations were also satisfied with modest returns on their lifetime savings and investments, realising that the older they became the poorer they would – and indeed should – become. This sacrifice enabled the Silent and Baby Boomer generations to pay low taxes in their younger working years; to benefit from a fully functional Welfare State (from their birth or, at least, from adulthood), to have access to millions of new-build council houses for rent and private homes to purchase, and to begin to accumulate their future wealth from a remarkably early age – mostly from property and ‘final salary’ occupational pensions. In the five decades following the end of the Second World War in 1945, a perfect congruence of economic, social, and political factors combined to create a period of profound upward social mobility which has followed the entire lives of the Baby Boomer generation, and which has also improved and hugely extended the lives of millions of people from the previous Silent Generation.
Secondly, and perversely, it was the pivot by UK governments towards neo-liberal economics in the late 20th and early 21st centuries – with its accompanying policies of privatisation, public sector austerity, and regressive tax policies – which systematically favoured those who were: already established in their own homes; already established in safe well-paid jobs; already in a position to set up a business; and already in a position to accumulate savings in the form of private housing equity and shares in newly privatised public utilities. Note that, starting from the 1980s, the purchase of equity assets (private housing and company shares) was made remarkably safe and almost risk free by the sale of council houses at huge discount on market values, the privatisation of public corporations which were natural monopolies, the political prioritisation of capital over labour, and by decades of ever decreasing interest rates which kept the housing market and the stock market almost continually buoyant. And the main beneficiaries of all these factors are the millions of people who are now in their 60s, 70s, 80s, and 90s, many of whom have never been more affluent than they are today! A cynic might even say that once the advantages of post-war progressive government policies had been secured and pocketed, the Silent and Baby Boomer generations increasingly supported the politics of neo-liberalism to gain a new set of advantages and, in the process, they pulled up the drawbridge of opportunity and social mobility to future generations but only after ensuring their own safe passage.
Perhaps the best example of intergenerational unfairness, was the way in which the UK government dealt with the Covid-19 crisis. To fund their much vaunted “Furlough Scheme”, which enabled the UK authorities to morally force millions of workers to stay at home for months on end, the government engaged in a huge programme of Quantitative Easing. This had the predictable effect (well known to economists and government advisers) of increasing house prices and the values of investment portfolios without any effort being required of their owners and ensuring that the main beneficiaries would typically be older affluent people. So at huge psychological and economic cost to the lives and prospects of children and young adults the older demographic, those who were the most susceptible to Covid-19 itself, were protected from the disease and then prioritised for vaccination whilst the value of their homes and investment portfolios rocketed. Yet at no point since has there been any attempt to reclaim some of this “wealthy pensioner windfall” and redirect those resources to the needs of millions of young people whose education, mental health, and prospects have all been damaged.
I wonder how many times we have all heard people in their 70s, 80s and even 90s assert that “I’ve worked all my life for what I’ve got now”, yet with seemingly no economic appreciation of what it takes for any society on planet earth to be able to provide an individual (or a couple) with 15, 20 or even 30 years of very comfortable affluent retirement. In the stark absence of any compensating economic growth or a fair tax system Britain’s growing millions of older affluent people condemns our society, at the most basic level, to higher taxes, higher food prices, higher energy prices, higher transport prices, higher rents and housing costs as well as continually increasing pressures on public services and ever decreasing real terms wages. You might think that just a little bit of humility towards younger generations would be in order, perhaps even a “thank you”?
How to play fair
So where is this argument leading you may well ask? Well it leads to several policy actions which, until the patience of younger generations finally does run out, can still be surprisingly modest and reasonable:
- Recipients of any form of income – be it: wages, pensions, interest, rents, dividends, profits, and capital gains i.e. both earned and unearned income – should be treated the same within a newly defined “Common Personal Income Tax (CPIT)”.
- The UK’s many income tax exemptions, loopholes, and additional allowances – which favour older taxpayers – should be stopped.
- “Fiscal Equality” should be given equal status with Gender Equality and Race Equality.
- Pensioner-specific benefits – such as Winter Fuel Payments, Free Bus Passes, Travel Discounts, Entertainment Discounts, and (until they are universally free) Free Medical Prescriptions – should all be means-tested.
In the early decades of the twenty-first century there have already been several spectacular financial windfalls for wealthier people which have resulted from government responses to financial crises, pandemic, and wars. This has led to a debate about the fiscal necessity of taxing wealth, despite there being no tradition of wealth taxes as such in the UK, and a growing acceptance of the moral case for some kind of wealth tax.
One of the problems in proposing any form of wealth tax is that it is very easy for opponents to characterise the proposal as a “jealousy tax”. Indeed, are we as a nation prepared to tax an individual purely because she/he is a wealthy person? Our collective answer to the question may at last be “yes we are”, if for no other reason than that so much of the wealth accumulated today is “windfall wealth” and has little to do with the efforts, skills, and foresight of wealth holders themselves and much more to do with family inheritance and the policy choices of successive governments. This still leaves us with the difficult task of how best to do it.
Inheritance Tax should be a Gift Tax
Although it is not defined as a wealth tax, as such, Inheritance Tax (IHT) has some of the features of one and is probably the nearest thing to a wealth tax that we currently have. To support the aim of intergenerational fairness IHT should be reformed under the nomenclature of “Gift Tax”, to better reflect the nature of passing on an inheritance. Inheritance is not mandatory so why not call it what it really is, namely, a gift from a deceased person’s estate? In effect a newly defined Gift Tax would incorporate two categories: Living Gifts and Estate Gifts. This would also acknowledge the fact that lifetime gifts are often used by wealth holders as a device to avoid potential IHT liability later. The size of any gift would be defined in terms of its unencumbered (net) value. To make Gift Tax more progressive than IHT, the nil rate band should be limited to the average price of a house in the UK (approx. £300k currently); however, there is a case for an initial 20% tax rate after the nil rate band progressing to the usual 40% tax rate above, say, a £500k gift threshold. Gifted family heirlooms, such as high value jewellery and paintings, could be exempt from Gift Tax as such but as soon as they are sold or re-gifted outside of the family, or otherwise used for commercial purposes, they would immediately be subject to CGT. CGT, itself, would be set at the same rates as Income Tax as previously discussed.
Charge CGT on all assets
At this point it is important to recall that non-real estate assets would be subject to CGT within my proposals for Common Personal Income Tax, however, it is high time to recognise the unique nature of real estate assets i.e. land and any permanent structures on that land including homes. Whilst an individual’s possession of valuable assets such as jewellery, artworks, cars, pension funds, shares, cash etc does not prevent another person from owning these classes of assets an individual’s ownership of real estate, because of the nature of its finite supply, directly restricts another person’s opportunity of owning real estate. This becomes more obvious when we consider that the purchase of a house or flat is often “location restricted” due to a purchaser’s need to find and sustain employment in a particular location and to live, not unreasonably, in the same home as their life partner and dependant family.
Homes Wealth Tax
When we consider that ½ million houses in the UK are owned as second or third homes we can also appreciate the problems created for aspiring homeowners, often young people, who need to live and work in areas with large numbers of second homes and must face the inflated house prices and rents which result. Furthermore, an individual’s ownership of a house or flat imposes what economists call “externalities” upon the wider society, such as the related costs of transport infrastructure, environmental damage, policing and protection, and fire and rescue services. The larger and more expensive a property is then the greater are these externalities. It is easy to imagine how a state of lawlessness and the absence of transport and emergency services could render domestic private property, and especially the most salubrious houses and flats, quite literally unsaleable and therefore of little use as a store of value. In this context a “wealth tax” on domestic property, in addition to a reformed council tax system, seems very reasonable indeed.
It is therefore proposed that, in addition to a revised Council Tax based on current valuations and some additional tax bands, a Property Tax is levied on all properties at a zero rate for the first £300k of value (the average price of a UK domestic property) and thereafter at the rate of 0.5% for the remainder of the property’s value with, most importantly, no upper limit! In the case of second, third and subsequent homes there would be no zero-rate band as this would only be applicable on the “primary residence;” and upon sale such homes would also be subject to Capital Gains Tax at normal income tax rates. These proposals constitute a substantial disincentive to own second and subsequent homes thereby ensuring that the existing UK housing stock is better utilised and goes further. Where second and subsequent homes persist society can at least be sure that they offer some benefits to society as a whole.
Tax to build social housing
The proceeds from property taxation should, therefore, first and foremost be earmarked for the building and refurbishment of sufficient numbers of council houses to provide all people who need one – young people and the non-affluent elderly in particular – with the opportunity to rent reasonably priced accommodation. To avoid unnecessary environmental damage local authorities would be encouraged to buy and refurbish available private housing to reduce, whenever possible, the need for new housing developments on green field sites.
Local authorities across the UK would once again have a large stock of council houses at their disposal. This time around the new and refurbished social housing needs to be more often integrated into communities to avoid becoming isolated ghettos; they must have good access to both public and private transport services and be in areas offering good job and business opportunities. In time, these measures will once again reduce house price inflation and put downward pressure on the cost of both social and private renting, as indeed was the case when we Baby Boomers and our Silent Generation parents first needed a home in the 1950s, 60s, 70s, and 80s.
Taken together the measures proposed in this article would substantially improve intergenerational fairness in the tax system and would also provide much needed funds to deal with other aspects of intergenerational unfairness, as illustrated by the example of council house building. If the playing field is levelled it will bring the generations closer together and provide true independence for young adults, as indeed it did for us Baby Boomers when we were young, but most of all it will release our human potential as a nation giving us our best chance for a long period of sustained economic growth.
In case you were wondering, these measures would significantly and adversely affect the 65-year-old author of this article, but at least I could look the younger generations in the eye!
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