Social Care Levy in Wales is a taxing issue that needs to be thought through

17 Jun 2019

Should the state pay more for social care? CIOT's Tax Policy Director John Cullinane examines the issue for the Western Mail newspaper.

Should the State pay more for social care? Most people accept the idea of personal responsibility in principle, but in life‚ s lottery they have little idea how much they will end up needing, so it is hard to plan effectively. The State is well placed to spread the risk.

But no-one has been able to push through a new UK approach to social care. With devolved tax powers, can Wales show the way forward?

Most people say they would support putting up tax to pay for social care, but mistrust whether that is how it really will be spent.

We‚ ve been here before. UK National Insurance and ‚ surtax‚ financed old age pensions and other benefits in the early 20th century, and uncapped contributions from better-off employees helped increase NHS funding in the early 21st century. The public supported these changes. But does an increasingly sceptical public demand some stronger link between the new tax and social care as the price of support today? Does the tax have to be handed over to an ‚ independent‚ body, perhaps operating a real fund? This would need more revenues in the early years to invest for the not too distant future when (with an ageing population ) more people are living on retirement incomes, generally paying less income tax, and more of them needing social care?‚

Maybe, maybe not. Yes, it is a challenge to persuade the public to support more tax now. But whatever people say at the outset, how will they actually feel about paying more tax now for a public body to build up a pile of cash? Given the uncertainties of investment returns, population changes and economic performance, how much tax will be enough? Will the fund need topping up or bailing out? Or, if it has spare cash, will it come under pressure to invest risk capital in Wales, which might make broad economic sense but might not be the safest way of securing future funded social care? Will the UK Government agree to exempt the fund‚ s investment return from UK tax? Will these future arguments around the technicalities of accounting and investment policies distract the public from the core issues of how much actual care the public needs and who can realistically pay?

Whatever the answer, more tax will be needed. And it will have to be the Welsh income tax paid by the generality of Welsh taxpayers, or some levy that is pretty much like it. This is the only tax base big enough over which Wales has devolved powers.

Tax has to be collected, and this has costs ‚ to HMRC, employers and individuals. Making access to social care support dependent on contributions would require new software systems - whether operated by HMRC or the Welsh Revenue Authority or anyone else. (But if there is no contributions requirement, it could be quite expensive - people could take jobs and pay tax outside Wales in their prime earning years and return on their retirement.) The more complex the rules, the greater the costs. Just putting up an existing tax is less complicated than inventing a new tax or levy.

On the other hand, creating a new levy gives an opportunity to address limitations in the existing tax base. Maybe there could be some relief against a social care levy for student loan repayments. This might be a simpler approach to intergenerational equity than, say varying contributions rates by age. Nothing like this could be done with Welsh income tax, which is constrained by UK rules.

A big problem with the UK tax system is that owners of incorporated businesses can end up paying less tax (corporation tax on profits and dividend tax on paying it out to the owners) than unincorporated businesses (business income tax and NICs). Incorporating your business is not just about tax, but if growing businesses make that decision earlier than they might have done, the government loses revenue. This could become a bigger problem for Wales if Welsh income tax goes up - that tax is partially devolved, whereas corporation tax and dividend tax aren‚ t. Could a social care levy be designed to get round that problem?

In any case, the Welsh Government will need to work through the whole context of taxes and benefits which each section of the population pay, and make sure they know, and can defend, the overall net impact the new tax will have on each. What is the impact on universal credit claimants? Or people still repaying student loans? Or non-contributors retiring to Wales. And so on. If the impact is not seen as fair, it will be seen as a problem with the new tax, even if the other tax and benefit rules that it interacts with are not themselves devolved.

A devolved administration does allow the interactions between different policy areas to be considered more systematically than in a bigger jurisdiction where, inevitably, policy is more compartmentalised. But this does mean that there is a lot for the Welsh Government to think through.

This article by John Cullinane, Tax Policy Director at the Chartered Institute of Taxation, first appeared in the Western Mail on Tuesday 11 June 2019.