The UK has announced a new health and social care tax that will increase national insurance contributions by 1.25% for employees and employers. Bernard H Casey is based on the experiences of Germany and Japan, where the contributions dedicated to the payment of care are increased. It also assesses whether a better approach is possible.
Boris Johnson not only broke his party’s election promises when he announced its solution to solve the problem of long-term care – no tax increase – he also made an innovation – tax mortgage. He increased the national insurance premium by 1.25% for employers and employees, and he imposed a tax of 1.25% on dividends.
Equally important, he rounded off his announcement by saying that the fee would be named a new “levy for health and social care” – which would be devoted exclusively to clearing the backlog of health services and then paying the cost of care. by limiting the amount everyone should come together with their own resources.
The increase in national insurance has been widely criticized as regressive. It hits the lowest paid workers before income tax (the Conservatives promised to raise the national insurance cap to the same level as the income tax cap, but they did not do it until now). Income assessed for national insurance is capped, while income tax is not.
Those who work pay the premium, but retirees, who could be the main users of social assistance, do not. The levy constitutes a tax on employment. There is no guarantee that the money raised will go to long-term care rather than staying with the NHS, as embezzling the money later could prove to be very difficult politically. Finally, the levy is a tax on the lowest paid workers to allow the rich to leave their homes to their children.
Some have supported the levy imposed on the lowest paid employees by suggesting that the latter would find it just because they were invest for a service they might need it later in life. It fundamentally ignores what is planned. There is no “fund” that people will contribute to – in the same way that there is no national insurance fund either. The latter entity, despite its name, and whatever opposing beliefs persist, is just an account held to ensure that money is available to pay for expenses during a given period.
Mortgage has traditionally been rejected by UK governments. It has also had a turbulent history. In addition, and despite widely held public perceptions to the contrary, the NHS is not funded by National Insurance. It is financed by general taxation. National insurance was originally designed to finance certain contributory rights – pensions, unemployment benefits, sickness benefits and maternity benefits. The shortfalls were filled by transfers from general taxation. The excess income went the other way – in the form of cheap loans to the Treasury.
Some of the funding for national insurance actually goes to the NHS, although the amount has varied over the years (it is currently around 19%). It is true that, in the past, some increases in national insurance have been billed as helping to pay for increased NHS spending – most notably by Gordon Brown in 2002, when national insurance rates for employers and employees went from 10% to 11%. However, money is fungible. This is undoubtedly what worries those who fear that resources raised by the health and social care tax will remain with the NHS, easing the need for otherwise necessary increases in income tax, VAT or something else.
The only exception, little mentioned in the debate on the levy, was the mortgaged tax known as the “precept of social protection of adults”. Since the mid-2010s, local authorities have been able to raise an additional 3% in addition to the usual charges to finance social assistance for adults. However, the housing tax – the base on which the precept is levied – is widely criticized as regressive. In addition, the localities where the need is greatest are also areas where the proportion of higher value properties, on which the tax is higher, is also lower.
What are the others doing
The levy is very different from the systems adopted in other countries which have sought to create special schemes to finance long-term care. In the case of Germany, contributions are deducted from income. All pay a percentage – both employees and retirees (but not employers, who pay into health insurance). The premium is currently 3.05% for those with children and 3.30% for those without. There is an income limit beyond which contributions are not paid, but it is around £ 1,200 per week (€ 62,550 per year), while national insurance for employees is not paid. only on earnings between £ 184 per week and £ 967 per week.
In Japan, all people aged 40 and over pay a premium for long-term care, although only people aged 65 and over can use the system. Bonuses are a proportion of income and generally around one percent. Retirees also pay a membership fee. Tax revenues cover half of the costs, contributions for those under 65 around 20% and those over 65 around 30%.
And how it could be done
The intention of successive plans to pay for social assistance has been primarily to prevent people in need of care from depleting their assets. The intention here is to allow those who have built up a fortune to make bequests. The popular press is full of stories about houses (the main form of wealth) to be sold to cover child care costs. Indeed, if a spouse lives in the same house, the latter is not taxable property. Even though moving to residential care makes an asset liable, it can be kept on the lien of the local authority funding the care, and costs incurred are only reimbursed after death when an estate is disbursed.
Those who inherit wealth from their parents tend to do so relatively late in life. Many are already retired or close to retirement. Most, if they have had any, will have already paid off their mortgages. Most will no longer have dependent children. Yet they suffer a sudden and unexpected windfall payment. Moreover, the value of the inheritance will not have been the product of savings, it will have been the result of the inflation of patrimonial values. There are plenty of good reasons to consider taxing this inheritance as a way to pay for long-term care, which the author has been advocating for over 20 years.
This idea was also launched by the professor of social policy of the LSE Howard Glennerster – still a long time ago. It is as valid today as it was then. In addition, economists have always criticized intergenerational transfers. Even the OECD has come out in favor of increasing their taxation. Businesses passed down from parents to their children have tended to fare worse than those that were passed on when the owner died.
Intergenerational transfers are, in general, economically inefficient and could be as daunting for effort and as encouraging for dependency as “well-being” has always been. Despite this, successive governments have sought to raise the thresholds for inheritance taxes rather than lower them. Those in the United States have sought to abolish inheritance taxes altogether.
Successful financiers, such as Warren Buffett, and successful lawyers, such as Bill Gates Snr (father of the Microsoft co-founder), have argued exactly the opposite. Maybe it’s time to take a few sheets from their books.
Note: This article gives the author’s point of view, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured Image Credit: Simon Dawson / No 10 Downing Street (CC BY-NC-ND 2.0)