In case you missed it, the Resolution Foundation has published A New Generational Contract, the final report of the Intergenerational Commission.
It's a serious piece of work and deserves to be taken seriously. Predictably, tax features high as the preferred instrument for implementing many of the financial and social changes which the authors advocate. Here's a quick summary of the main tax proposals:
- introduce a £2.3 billion “NHS Levy” by charging National Insurance (presumably at 12 per cent) on the earnings of those above state pension age, and at a lower rate (presumably), on the occupational pension income.
- fund a ''Better Jobs Deal” and improve the funding of technical education by cancelling 1p of the forthcoming corporation tax cut.
- replace council tax with a progressive property tax, featuring surcharges on second and empty properties.
- halve stamp duty rates to encourage moving, and offer a time-limited capital gains tax cut to incentivise owners of additional properties to sell to first-time buyers.
- abolish inheritance tax and replace it with a lifetime receipts tax. This would be levied on recipients and would have fewer exemptions, a lower tax-free allowance and lower tax rates. The extra tax raised would be used to introduce a £10,000 “citizen's inheritance” – a restricted-use asset endowment to all young adults to support skills, entrepreneurship, housing and pension-saving.
The report is underpinned by the concept that, just like our families, society rests on an intergenerational contract. In a nutshell, “the intergenerational contract works because everyone puts in and everyone takes out”. Recognising that most families are already doing whatever they can to care for their older people while supporting the younger ones, the report states categorically that “so far the state has failed to adapt”. Sadly, those families which have done most to adapt are the ones which are most likely to suffer under the new proposals.
The changes proposed by the report are, at face value, a fascinating and well-researched toolbox full of novel approaches to addressing the problems of intergenerational inequality.
Some are blindingly simple and likely to be very attractive. For example, many recommendations in the report focus on housing development and the provision of corporate-owned rental property. This continues existing trends of marginalising private landlords. Under current rules, those private landlords may suffer a negative return on the properties, as well as facing a hefty capital gains tax charge if they try to sell. The idea of time-limited capital gains tax cut offers the prospect of significant property redistribution.
However, notwithstanding the time and effort put into the report, we are concerned that some of the Commission's proposals will produce dangerous side-effects.
For example, imposing National Insurance on pensioner earnings and on occupational pension income could at a stroke change the careful long-term financial planning of responsible individuals who have sought to be a burden neither to their families nor to the state. Those financial plans could also be devastated by the proposed cap on tax-free lump sums. It is simply not acceptable to compensate for a generation of state mismanagement, as identified in the report, by drastic changes which undermine a generation of prudent and responsible conduct by individuals. Careful transitional arrangements will be required.
The proposal to replace council tax with a progressive property tax has the potential, according to the report, to raise £2.3 billion over and above current council tax levels. With the suggestion of tax exemptions for many and ten or twenty fold increases for others, many of these proposals will not be welcome but are not unexpected. However, important implications are glossed over. Recognising that a new property tax based on real values would be very difficult to administer, the report suggests that the new tax should be paid by property owners. Will councils have to pay tax on their own council houses? Where do social landlords fit into all of this? And for private landlords generally, rent increases will have to be imposed on tenants to meet the new tax bills.
Other concerns remain. For example, with such a long list of proposals, there is a high risk that a future government will make selective choices from the list thus achieving only selective benefits and perpetuating many of the current problems. Second, if political priorities change, what guarantee is there that the NHS levy would continue to be paid to the NHS, for example?
Notwithstanding its shortcomings, the report deserves serious consideration. We hope that it will receive exactly that.
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