No one knows if they might need social care at some time in their life. I would make no exclusions. It is one of those risks that we all face. There are three ways, in essence, to face this risk.
The first is we ignore it and accept the consequence when it happens. Many would like to do that: they'll live in denial whilst not needing the care. They may not be too happy when their need becomes both real and chronic. Because society at large has decided it cannot face the prospect of those who were negligent to provide for themselves or were unable to do so it has sought to provide social care for all. Ignore the cost for a moment: this is a decision to not see people in need left to suffer. It is an ethical decision and its implication is that society must pay and we cannot rely on individuals to do so.
It can be argued that if society has decided that this is an issue where collective responsibility in the face of an unknown incidence of risk is required then collected resources, collected through the tax system, should be required to pay for social care. This is a collective insurance scheme in effect, with (as in so many other cases) the premium being paid through taxation. This is the second option. The provision is universal. The cost is spread through whatever tax base and at whatever rate the government (and eventually, the electorate) think appropriate. I will return to this below.
The third option is to mix the two, requiring that private resources be used to fund a certain part of social care but with a back stop that limits the contribution any person may make, at which point tax picks up the bill. This is what has been happening in the UK. The Tories plan to do more of it, and involve the private sector financial services sector a great deal more in it as well. The result in their case looks to be pretty spectacularly unjust as far as taxation goes.
I am not a total fan of Adam Smith's four maxims for taxation: I think like some other ideas from 1776 they have needed updating since then, but the Tories are big fans of them. That is good enough reason to use them now. He said tax should be:
- Equitable, or in other words, each person should pay in accordance with their personal capacity to do so;
- Certain, or in other words the charge should not be arbitrary;
- Convenient, meaning the tax should be levied at an appropriate time, and;
- Efficient, meaning only as much tax as is needed is collected to achieve a goal.
The Tory plan for social care does impose what is, in effect, a personally prescribed tax on those who need social care, which is agreed to be a common good or provision for it would not be needed, and this plan fails all of these tests that Adam Smith laid down. First of all the amount required to be paid is not equitable: the definition is a 100% rate until £100,000 is left. This is a random charge in that case that does not come close to being related to any equitable assessment of capacity to pay, progressivity or other social priority of the sort I described in The Joy of Tax.
Second, the charge is obviously uncertain. You only pay if you are in need, which need cannot be predicted.
Third, The tax is levied when you are in need. That is very obviously the wrong time to pay.
And fourth, if as expected, the tax is going to involve rolled up liabilities, private sector interim funding and many other complexities the chance that this tax will be efficient is remote in the extreme.
In other words, the founding father of economics would say this is a bad tax, and he would be right to do so.
What can be done instead? First, the tax must be national and not local. That is obvious: people is less well off areas cannot be expected to bear a disproportionate burden for the cost of social care.
Second, the charge must meet Smith's criteria, and be progressive and match social priorities inherent in other policies. There are are a number of ways to do this.
Charging capital gains tax on a house on death would be a way to do this. An allowance for inflation might be made, and of course surviving partners and long term resident carers must be provided for, but the charge is otherwise obvious and just. The rise in house prices is not otherwise taxed and has massive social implications for the young.
A reform of inheritance tax could also be of benefit, but candidly this tax is already too arbitrary and so I doubt the merit of this. I suggest an annual wealth tax instead. This is now possible, largely because automatic information exchange from tax havens now massively reduces the risk of money running away from such a tax.
Or there could be a whole new tax base, meeting this cost and more. Land value tax, to fund local authorities and social care, could work so long as the social care element was apportioned and set nationally.
Of these three, capital gains on private houses on death is by far the most logical. It is certain, equitable, convenient and efficient. It balances the inter-generational contract. It helps tackle the housing problem.
What is not to like? I can see issues with those who moved may times in life: maybe the charge might be restricted in that case to the last 25 years in life (I am thinking out loud here). And of course, sales in the period before death would have to be charged: the seven year rule now in inheritance tax might be considered. But that apart I am struggling to see the problem.
And it would raise revenue. Of that you can be sure.
Thoughts?
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Richard,
I also imagine the wealthy will have a percentage of their assts in off shore trusts, making them “off limit” for taxation. That would need to be considered in any overall strategy?
Michael C
These are now becoming increasingly traceable
Tax justice campaigning will be del;I earring this benefit
Agreed, but you have to tackle trusts and off shore or many will inherit and charge rent and avoid paying anything which is unfair.
But there is no particular reason to hypothecate any tax change to a particular spending area. As you said, only overall spending and tax matter – the details can be decoupled. Tax should just be fair and encourage productivity and prosperity.
All accepted
I would certainly not formally hypothecate the two
I speak with over forty years of social work experience and social care planning, with special reference to mental health and elderly care.
Successive governments have avoided the issue – have commissioned reports and deferred a decision. It’s been put in the “too difficult” tray. By law, local authorities are obliged to administer means tests even if (exceptionally) they waive some charges (now a very big ask, because of cuts to HMG funding).
It’s no fun breaking the news to the frail and their caring relatives that services are chargeable for most people.
Ideally, all social care would be free and paid for out of taxation. New and fairer ways of taxation need to be sought, eg raised council tax bands (also put in the “too difficult” tray).
Failing that, I would cautiously suggest providing free social care to all over-85s (or from whatever age threshold is deemed acceptable). This, I believe, would make it easier for people to insure themselves against under-85 costs, and for insurers to devise policies. This takes account of the unpredictability of longevity and also a common pattern whereby people have x number of health years in old age and y number of unhealthy.
People in need of services other than the elderly – people impaired or disabled from childhood, youth or middle age – will tend to be poor because of a lack of earning capacity or opportunity for modest earnings only, and they should have little to fear from a means test.
Interesting interim idea
This sounds sensible to me.
And keeping the private sector out of it is absolutely essential as it works now.
This is a big and growing issue, and a major cause of “bed blocking” in the NHS.
Social care should be a universal benefit, paid for by taxes on inheritance / wealth, whichever.
Popular resistance to inheritance tax amongst folks with no obvious family wealth is a ubiquitous mystery to me. A driver of a bin lorry told me recently that inheritance tax was unfair as that money has already been taxed once. Really? In most cases the wealth will be in the form of a house or bungalow, in which case not only has it not been taxed,it has not even been earned for the most part.
The new funding proposals – you are ahead of me. Last I heard was family payments were to be limited to £75k. X2 that is enough to wipe out the “wealth” of the vast majority of families whilst letting the properly rich out lightly.
That’s why I suggest a tax more closely linked to wealth, and unrelated to the cost of care
If the Tory plan is to involve the private sector in an equity release scheme then the person might be wiser to sell their home and go into a care home (if they could find one). As far as I can see most of these equity release schemes are a bit of a scam.
I thought that Social services can currently put a charge against your home (i.e. if you move into a care home and should be self funding from the sale of your home, but until the sale goes through SS pays). I would have thought this would be a much less costly way to get the home care funded than via an equity release scheme. The latter sounds more like giving the Tory friends a bung.
I mightily distrust equity release
People can only enter a care home once their needs have been assessed, as many people, including those with dementia, can be and are cared for at home. It is scarcely a lifestyle choice but forced upon people by circumstances.
As regards the costs, some (a few) are wealthy enough to pay for their care until their resources go down. Trying to avoid care charges, eg by selling property, is illegal.
Sorry, I didn’t mean sell the home to avoid paying. My concern is that once you agree an equity release scheme you, or rather your inheritors , can find that a much greater share of the value of your home goes to the equity release scheme than you had planned. If you sell your house and then use the cash at least you are in control and not subject to administration cost etc of a scheme.
I’m not sure you’ve thought this through.
Are you talking about CGT on the house as well as IHT?
What base cost are you looking at? If I bought a house 30 years ago for £100k I might have a gain of £300k, but if I sold that house last year and bought a new one, my taxable gain on the latter would almost nil. The incidence of the charge would be almost entirely arbitrary.
How exactly do you protect my spouse and children (and aged parents living with me) if they have to sell the house to pay the CGT? Tax-free transfer to my wife – who then immediately gives the house to the children (PPR, and no SDLT) to avoid the same fate?
The proposal is uncertain in amount, inequitable for that very reason, inconvenient in that it breaks up households at a stressful and distressing time, and so riddled with avoidance opportunities and arbitrary results that it can’t be efficient.
Andrew
Go and read what I wrote
I did indeed think all these issues through
As ever you miss the point my reading what you want
Heaven knows how you advise clients
Richard
You’re blustering, Richard.
What you wrote was:
“Charging capital gains tax on a house on death would be a way to do this. An allowance for inflation might be made, and of course surviving partners and long term resident carers must be provided for, but the charge is otherwise obvious and just. ”
There is no reference at all the the issues I raised.
Now you may have thought the issues through, but if so you have not disclosed those thoughts.
Readers can only read what you write, not what you think but fail to write.
So: what would you do to ensure equity between a person who bought their house 30 years ago and one who bought it last year? Allowing for inflation doesn’t cut it: with house prices rising steadily above inflation, then if you index to normal inflation then the problem of inequality persists, and if you index to house price inflation then no-one pays any tax.
I’m always willing to admit I am wrong if that is the case. I also do my research
So I went back to the article and found this:
I can see issues with those who moved may times in life: maybe the charge might be restricted in that case to the last 25 years in life (I am thinking out loud here). And of course, sales in the period before death would have to be charged: the seven year rule now in inheritance tax might be considered.
Wrong again Andrew
Firstly, that paragraph makes no sense. People who have moved many times are by definition, not the ones who will have held a property for 25 years or more.
Secondly, even if one reverses the sense of that paragraph to refer to those who have *not* moved, limiting the charge to 25 years of gain is still a massive inequality of treatment.
Thirdly, bringing in sales in the last 7 years of life means that the CGT charge explicitly duplicates the IHT charge.
Fourthly, by suggesting retrospective charging you are making the administration of the tax significantly more complex, as well as unfairly disadvantaging those who die suddenly. If I get hit by a bus, my family get hit by CGT on the house I sold 6 years ago, and on the one I sold last year, as well as IHT on the one I own now. Massive complexity to impose unfair levels of tax.
Candidly, I stand by my assessment: you haven’t thought this through.
Candidly, I think you’re wrong
Have I covered all the detail: I said not
Would it work. You bet it would.
How do I know? Because you’re upset by it
I’m not upset by it, I just think it’s one of those ideas that seems good after a few pints down the pub (like “just charge 20% VAT on everything”), but doesn’t hold up to any form of scrutiny.
It would *work* in that it would raise a load of tax; but it wouldn’t work *well*, because it would raise that tax in an unfair, uneven, and arbitrary fashion.
Bluntly: as a rule, two people should pay the same tax if they are in the same position; any difference in tax should be proportionate to the difference in situation. If Mr A bought a semi-detached house 20 years ago, and Mr B bought the one next door 10 years ago, Mr A would probably pay around twice as much tax on death as Mr B, simply because he’s lived there longer. That’s disproportionate, arbitrary, and unfair – not a good tax.
So we consider all gains over 25 years, as I noted, assuming they roll over
Oh I see – you’ve now moved to essentially getting rid of PPR in favour of a holdover that crystallises on death, persists even if you dispose of the assed rolled over into, evaporates after 25 years, and has some other tweaks to take account of the needs of family members. And is still on top of IHT.
No, I can’t see any complications there…
Incidentally, I believe you consider the growth in renting and decline in home ownership to be a bad thing. What impact do you think a 28% tax on owning your own house would have on that dynamic?
I would be proposing the equalisation of cgt and income tax rates, of course
And if you think tax on death changes the dynamic on home ownership you really do live in a bubble far removed from reality
The proposal does appear to be a mandatory equity release arrangement with the charge against the asset being taken at the point that social care is required.
This being so why would one not enter into a voluntary equity relase scheme before care is required so that the released equity could be enjoyed; and so that the equity base could be reduced by the time that care is required.
Will be interesting to see if the asset deprivation rules are amended.
On this latter point I cant see how the transfer of assets under trust does not fall into the asset deprivation category for general taxation. There appears to be a penalty clawback if assets are transferred prior to social care arrangements but not for those who wish to deprive society of taxation through historical trusts.
This is going to be massively complicated
Why not just keep it simple and put housing into the standard Capital Gains Tax regime by scrapping principle private residence relief, probably adding in some kind of rollover relief.
I was taking steps in that direction
This an eminently sensible proposal. I have never understood why capital gains tax on the sale of prime residences is so rarely discussed by politicians.
Because LVT is a much better tax than any other property tax.
Dementia and Alzheimer’s are not just a part if growing old.
They are medical conditions. Why are they not recognised as such by the system?
My partner and I are in our 50s, and live with our adult autistic son. We are all fit and healthy and would hope to be for many decades. As things currently stand, we would assume that on our deaths, our son would remain in our house which would form the basis of his long term security. Having to pay CGT would force him out at a highly vulnerable time. Any thoughts on how this would be managed?
Would your son need the house three of you had lived in?
Or would the funds left over buy him a wholly suitable property?
On the basis that all children should have the same opportunity to benefit from education and employment or self-employment, the acquisition of assets by some parents will tend to benefit the quality of life of their children, when assets are distributed on a second death in most cases. Even if the second death distribution suffers IHT at approaching 40%, the enrichment of this group will tend to perpetuate inequality based on inherited wealth?
It is interesting that a Tory party should now be promoting a scheme that would mortgage the wealth of middle England families by creating a charge over their homes to cover elderly care social costs. In a bizarre twist, it looks as if the Conservatives are now in favour of the redistribution of wealth.
A further corollary to this policy, is that families that look after their aging parents and provide effective care in old age, without making demands on local authority funding, will avoid any reduction in the after tax equity in their family home inheritance.
Of the suggestions made above, I am drawn to David’s suggestion that the State could underwrite care cost for say the over 85’s, and that families could organise to insure or carry the risks of care provision up to 85. The difficulty with this approach is that old folks with no close family and no cash reserves (and no spare income during their working lives to insure against later life care) will be stranded in a bleak, Victorian workhouse situation.
If we accept a communal responsibility for the care of the elderly, does this not suggest that the cost should be spread in accordance with our ability to pay? If we try and recover all the cost from those who have benefitted from the remorseless rise in property values, or year on year increases in net wealth, by an increase in IHT or CGT, why can we not also consider an increase in income tax, corporation tax or National Insurance?
My only other contribution to funding is to offer estates a long dated National Care Treasury Bond in place of CGT or IHT on a second death disposal of the family home. In this way the government would still get it’s pound of flesh, but instead of paying tax, families would be investing in national care. If these bonds were marketable, surely they would be safe investment for pension funds? Perhaps these NCTBs could attract interest and as long as held for a required period would be tax free on subsequent disposal; if sold during the “required period” then CGT would apply…
Richard i dont understand how on the one hand you say that mmt is correct that government doesn’t need taxation to fund its activities but on the other hand you keep posting that so and so tax will fund so and so program. Can you please help square this rather irritating circle?
Three reasons
a) How to recover a spend has to be identified if we want control of the macroeconomy
b) The world does not understand MMT
c) This means I have to play their game for the time being
The government can spend as much as it wants but once the money is out there it is competing for the same goods and services that existed before, so if overall activity does not grow, e.g. employing people previously underemployed then there will be inflation. As Richard or MMTers will say the role of tax is partly to mop up excess money and prevent inflation. So whether we need to increase taxes to match increasing spend depends on where we are in terms of full employment, inflation etc.
Spot on
Tax is part of macroeconomic policy in reality
Hi Richard.
A question to aid my understanding of this issue.
You have stated in the past that QE is a solution to some if not all of our revenue raising options. Could the social care issue be solved by using some amount of QE to help both the UKs care and NHS unerfunding?
QE is a way to boost investment in a downturn
It is not a current funding option
But, I stress, if there is underemployment or unemployment then raising tax is not a constraint: the spending pays for the tax
Isn’t this misunderstanding one of the major reasons for our economic malaise? And considering how well known you are, i think its simply reinforcing this belief amongst the wider public. This belief that we need the money of the super rich and super corrupt to finance our society keeps putting the ball in their court.
I accept the risk
I also know the whole paradigm has not changed yet
But I do work on it when I can
MMTer’s tend to be sticklers for getting the language framing right but I can see why you adopt the ‘mainstream language’ consciously in order to function in the circles you work in without unnecessarily ruffling feathers and getting involved in theory when there are practical policy issues you want to get through.
I remember reading a short biography of Abba Lerner, the founder of ‘Functional Finance’ a forerunner of MMT. Keynes knew him and thought that Lerner’s view of the system was right and clearly articulated but he thought the public wouldn’t accept the simple truths of how monetary systems work, so he didn’t adopt Lerner’s language.
But the fact that more and more people on this site are asking the question is a sign something is very slowly shifting.
I have a lot in common with MMT ers
But I see little point in pushing the issue and going backwards in the process
Social care is an area in which I have some expertise, and I found this post of yours and the previous one thought-provoking and nuanced. I hope you’ll return to this important topic.
Thanks
I can see no logical relationship between homes and Care. I also believe that a Care service should be one that everyone knows they have contributed to so feel they can use it when needed.
I have never understood why those over state pension age should not be paying the equivalent to NI to help cover this with a (small?) tax rise for all to cover the rest.
Earnings from a house is a capital gain and should be taxed as such.
Hard to disagree with this.
We clearly need to substantially boost funding for both health and social care.
(i) Roll responsibility for social care into the NHS so that it can better plan and manage integrated care strategies from hospital to home (though the National Health and Care Service doesn’t roll off the tongue quite so nicely!)
(ii) Implement a CGG tax due on death for everyone with an estate worth above whatever threshold is needed to generate the additional funding this service would need to do its job and provide decent care for everyone.
As stated by others, this needs to be combined with a genuine attempt to properly deal with tax avoidance and evasion (I recognise this is no easy task). If the 99% are going to pay their extra dues, it’s would be grossly unfair to allow the 1% to decide it doesn’t apply to them.
I picked this up in the Guardian it takes an “interesting” (& credible) angle on funding social care – I’m not sure I would want to be on the recieving end of it:
“The Conservatives will attempt to soften the blow by promising that pensioners will not have to sell their homes to pay for their care costs while they or a surviving partner are alive. Instead, ‘products will be available’ allowing the elderly to pay by extracting equity from their homes, which will be recovered at a later date when they die or sell their residence.
“I have just seen this post online:“‘People need to read the small print associated with this because its a lot nastier than it looks.
“I work in the City. The insurance industry was approached by the Government several months ago with the aim of creating a new market for a new product.
“This arrangement is a culmination of those discussions. You wont have to sell your house PROVIDED that you purchase an insurance product to cover your social care. The “premiums” would be recovered from the equity after the house has been sold and the Insurance company will have a lien on the house and can force a sale if it wants to. So your offspring cant keep it on the market for long in order to get the best price.
“The real kicker in this is that in order to encourage the industry to market these products the government guaranteed that there would be no cap on the premiums.“This was in some ways “atonement” for Osborne’s destruction of the highly lucrative annuities market. This means that the premiums could be up to (and including) the entire remaining equity in the property after the government has taken its cut. Companies will be falling over themselves to get their snouts in this trough.
“In short your offspring and relatives could get absolutely nothing from your estate.“If you buy one of these products you need to read the small print very very carefully indeed because there will be some real dogs on the market.
“I suspect that this is another financial scandal waiting to happen, but by the time it does May will be long gone.’”
I am sure all of that is true