The wrong tax
Comment Piece: The prose and cons of Johnson’s reforms
Between 2012 and 2018 I watched my mother decline and suffer from dementia. Over the same years a succession of Prime Ministers did precisely nothing to solve the problem of social care. If I’m honest, my mother was lucky in that for all of her final months she was cared for at home. Many others in this country have not been so lucky. The burden of good social care, which can cost anything from £1,000 to £2,000 a week, is enormous. You are looking at a minimum of £50,000 a year. Even with house prices as they are, it only takes a few years in care to wipe out a families lifetime of accumulation. And you do not need to have ended up being asset rich.
So enacting a system today which will address that is welcome. The Prime Minister has announced that social care will be free for those with assets of less than £20,000. For those with assets totalling £20,000 to £100,000 social care will be means tested. For those with assets over £100,000 the cost of social care will be capped at £86,000.
This will be welcome for families who have dreaded the possibility of an elderly relative getting dementia or needing permanent care for other reasons.
However once again we have seen a system introduced which will leave the best deal for the richest part of our society. Why is means testing stopped at £100,000? The principle of means testing is fair. It allows everyone to pay according to their means.
It is not clear to me why a person with an estate worth over £1m should have social care costs capped at £86,000. It seems perfectly clear that a system that does not wipe out a families assets completely is desirable. But the cap that is to be instituted under these reforms simply benefits the richest in society the most.
The same flawed ideal permeates the way Johnson intends to pay for the NHS and Social Care. Using National Insurance (NI) is a bizarre choice. It is a regressive tax. Yet Johnson proposes to increase NI by 1.25% on everyone. Certainly aspects of it have been improved. Pensioners will now pay NI so that all people of all ages are contributing.
But let us look at how NI worked before the changes.
- Salaries up to £9,564 pay no NI
- Salaries between £9,564 and £50,268 pay 12%
- And here’s the kicker. Salaries over £50,268 pay just 2%
In other words it is a tax regime where the richer you are, the less you pay as a % of your wealth. In sharp contrast Income Tax works in the other direction.
- Earnings up to £12,750 pay no tax
- Between £12,571 and £50,270 you pay 20% tax
- From £50,270 to £150,000 you pay 40% tax
- And over £150,000 you pay 45%
In short, unlike NI income tax works in such a way that the richest in society pay more. So the solution that Johnson has come up with, is regressive. It is true that the differences are not great numerically, but there are two important practical differences. Under income tax you pay no tax until you have £12750 earnings. So more of the lower paid will escape the new tax altogether (under NI it is only up to £9,564). And secondly pensioners already pay income tax, so there is no need for any complicated systems changes. Government and big IT changes. I mean what could possibly go wrong?
And Johnson has said the big reason he didn’t use income tax is “income tax isn’t paid by businesses”. It isn’t. But Corporation Tax is. And there is no explanation as to why Income Tax and Corporation Tax could not both be increased by 1.25%
The plus side of what he proposes is that the money raised will “hypothecated in law to health and social care”. But this too is bizarre. After all that was pretty much what National Insurance was meant to be from the start. So why is only 1.25% to be hypothecated. It makes no sense. If all NI is once again to be hypothecated in law to health and social care, that would be a positive move. NI has become a tax that just contributes to the general running of government. But to have part of NI hypothecated and part of it not is frankly bonkers. And a major missed opportunity. The Government should and could have restored NI as an hypothecated tax for health and social care.
But for now, at least we have a starting point. A system that over the past 9 years government has avoided creating. Now it is in place others can come along in the future and tweak and remould it to make it work better.