Friday, 7 October 2016

Ring-fencing extra taxes

Recently, Eluned Morgan, one of Labour’s new AMs, put forward an argument for a new Welsh tax to pay for care costs of the elderly.  The problem she highlights is a very real one; the population is ageing, and as people live longer they will need more care which will add to costs.  She also, entirely correctly, identified the additional problem that we face in Wales of people retiring here, usually from England.  And although such people may well have paid taxes to central government for many years, care costs fall on local authorities, so effectively Wales gets the costs without the income to pay for them.  I agree with that analysis of the problem, and the specific budgetary issue of cross-border retirement is something I’ve discussed before.
However, I’m not convinced about the argument for a specific Welsh tax to pay for care.  The first reason for saying that is that I’m not a fan of hypothecated taxation in any event.  Whilst telling people that tax A is a tax to pay for something that they agree we need is superficially an attractive way of selling that tax, it implicitly assumes that there is no scope for altering the priorities within current tax revenues and therefore diverts attention away from that question of priorities.  It also assumes that governments cannot be trusted to spend the money raised in the right way unless their hands are tied.  That might be a fair assumption, actually, but ring-fencing won’t necessarily stop them.  National Insurance was supposed to be a hypothecated tax, but the money simply goes into the same account as everything else.
The second question, though, is about what sort of tax this would be.  I assume that it can’t be an addition to income tax, given the categorical promise by Carwyn Jones that a Welsh Labour Government would not increase that tax.  So what does that leave?  The proposal of a special tax is not new nor is it unique to Wales; back in July last year, Andy Burnham suggested taxing the monies left when people die to cover the costs of care, and I wondered whether that might be what Eluned Morgan is hinting at here.
It’s an idea not without merit, although it’s unlikely to be popular.  Having said that, unpopularity is hardly a sound reason in itself to reject any specific tax; we’d have no taxes at all if that were the main criterion.  But the basic problem such an idea faces is that most people believe that the costs of looking after them in later years are part of what they’re already paying for through National Insurance contributions.  And that’s where the failure of successive governments to establish a proper system of insurance based on the ‘premiums’ that people thought they were paying comes back to bite them.
We do indeed need a sensible conversation about how we pay for care, sickness, unemployment and all the other things that NI was supposed to cover; but the core of that needs to be about how we move to a proper system of insurance rather than simply adding a new tax.


Penderyn said...

Germany recognised this issue in the 80s and 90s, so in 1995 introduced the Pflegeversicherung - effectively a "care insurance".The current rate is 2.35% of the income, to be covered 50% by the employee and 50% by the employer. Childless couples pay a higher premium, as it is assumed that the children of people in care will also contribute. See . I'm afraid it's in German, and too much for me to translate....

What is interesting in Germany is that the alternative to military service was a voluntary scheme of the same duration, whereby the majority of the people doing it worked in care homes. As military service has now been scrapped, there is a voluntary year for all young people, who also opt to help in care homes. If it were not for these volunteers, the costs for care and hence also the insurance would rocket.

Would it not be thinkable to introduce such a system in Wales?

J. Jones said...

"she also, entirely correctly, identified the additional problem that we face in Wales of people retiring here, usually from England."

British people are free to retire anywhere they want to but the impression that you create, that somehow Wales carries an unfair extra burden is a false one.

Those people in Wales who are over 65 number 562,544 according to the census.
Those people over 65 who are living in Wales but were born in England number 149,133.
Those people over 65 who are living in England but who were born in Wales number 143,518.

The additional onerous burden suffered (but not in silence) by Wales is the support of 5,615 people.
I would however point out that in England or Wales, Scotland or Northern Ireland these are retired people living in Britain and only the rather nasty Nationalist parties seem to want to begrudge them their care.

Leigh Richards said...

Why not just use the income tax varying powers wales is getting to pay for the increasing costs of social care in wales? We all say we want better social care for people in wales - well if we do we are going to have to pay for it. And when all is said decades of social policy across europe shows us that most effective and fairest means of doing this is through general taxation.

It does puzzle me that when we get powers over income tax in the devolved government's across the UK parties are so hesitant to use them (they've had them in scotland for nearly 20 years and they've still never been used by either labour or snp governments). I appreciate one reason is that they are afraid of a political backlash from voters - but surely it's time those of us on the left side of the street robustly challenged the neo liberal economic holy grail that low taxation is a good thing. If a society wants any kind of meaningful social welfare system then low taxation is certainly not a good thing.

And i very much hope plaid will say that it would use these newly aquired fiscal powers to introduce a marginal increase in the rate of income tax in wales to help pay for our rising social care costs. I think people would understand the need for it and it would be popular.

In point of fact such a major economic initiative could prove to be a very significant step towards greater self government for wales. It would mean that for the first time in wales modern history we'd be generating a significant level of resources in our own country. Wales would have a degree of economic control it hasnt enjoyed in its modern history - maybe that is the real reason why people like carwyn jones are apparently so unwilling to use such powers?

John Dixon said...

J Jones,

I don't know what the source of your figures is, but I'll accept that they may well be true. However, they don't really deal with the point being made here, for three reasons. The first is that the question here isn't just about absolute numbers; it's also about percentages. Wales has an older population than England; that isn't just about retirees coming here, it's also about the fact that so many of our young people leave Wales to work (often for England). The second is that the point which I made wasn't about where people were born, it's about where they pay taxes and where they receive services, and how those services are paid for. It applies as much to people returning here to retire as it does to people who've never lived here before. And the third is that where they were born tells us nothing about where they spent their working life or when they moved to Wales.

Because of the way taxes are paid and services are provided, income taxes are paid where people work, but services for the elderly are paid out of the resources available in the area to which they retire. So there's a mismatch. As long as there is a single unitary state and a willingess to redistribute according to need, that really doesn't matter too much in fiscal terms. But the context in which the comment was made is a context where more and more attention is being given to the question of whether Wales is raising enough income through taxes to pay for the services being provided. In that context, it is important to note that the 'subsidy' is a two-way one, not just a one-way one as often presented. Wales pays for education and other services for its young people, and again for the cost of care and other services for its old. But the fiscal 'benefit' of that, through income tax during the working life of individuals, is often paid in England and counted as English revenue.

I agree with your comment that these are retired people living in Britain, and in previous posts have argued that people should have freedom of movement (although I extend that beyond these shores as well as within these islands). I don't know why you think that I would begrudge them their care; nothing I've said suggests that. The point is one about taxation systems, not about whether the care should be provided or not.