Tax system slated for its intergenerational unfairness

The Committee on Intergenerational Fairness and Provision is an ad hoc committee set up by the House of Lords specifically to look into this area.

Among the suggestions is that the Treasury should publish a breakdown of the effects of each Budget by generation and government should create Intergenerational Impact Assessments for all draft legislation. Investment in generational modelling of its policies would allow the Government to better differentiate where it is investing in the future and where it is unjustly passing on debt to future generations who will not benefit from its spending.

The Chair of the Committee, Lord True, said: “We found that intergenerational bonds are still strong, and the evidence suggested both young and older people recognise the contribution the other makes and the challenges they face. However, there is a risk that those connections could be undermined if the Government does not get a grip on key issues such as access to housing, secure employment and fairness in tax and benefits.”

Conclusions and recommendations on tax

• Inheritance Tax is capricious and not currently fit for purpose. Consideration needs to be given to whether and how assets should be taxed on death or transfer in a way that ensures fairness between generations.
• The National Insurance system functions poorly. NICs do not pay for the State Pension even though they are used as a way to determine eligibility for it. They are not linked to any actual rules on the size of State Pension and the Government does not treat it as a future liability in the Whole of Government Accounts. There are strong arguments for the Government to consider greater alignment and the eventual merger of the NICs and income tax systems.  It is not fair that only individuals under the State Pension age pay this tax. Individuals over the State Pension age should contribute. Older people with lower incomes could be protected from this change by aligning the NICs threshold for this group with the income tax personal allowance.
• Stamp duty has seriously distorted the housing market. The Government should review the effect of stamp duty on the liquidity of the housing market and consider how stamp duty could be reformed to improve the housing choices and availability for young families.
• Council Tax is an incoherent combination of a property tax and a service charge. If the Government decides it would like to continue to fund local authorities through a tax partly based on property value, then it might reform Council Tax so that it adheres to the following principles: (a) a reformed tax should more closely mirror the value of the property than the existing Council Tax system; (b) It should include a method for allowing individuals with low incomes but high asset values to delay payment until the property is next sold or transferred; and (c) second homes should pay the full rate of local tax.

Other relevant recommendations

• The triple lock for the State Pension should be removed. The State Pension should be uprated in line with average earnings to ensure parity with working people. However, there should be protection against any unusually high periods of inflation in the future.
• Free television licences for all over a certain age should be phased out. Those who can afford to pay for a television licence should do so. The poorest may be subsidised directly by the Government, if it so chooses
• Free bus passes and Winter Fuel Payment should only be available five years after a person becomes eligible for the State Pension.

Assessing intergenerational impact of policies

• The Government should introduce a new fiscal rule that addresses the whole government balance sheet as well as the current deficit.
• The Office of National Statistics should introduce a generational breakdown of the Effects of Tax and Benefits on Household Income dataset.
• The Treasury must do more to generate and publish data on intergenerational fairness. It can immediately begin by producing a distributional breakdown of the effects of each Budget by age group using the static models it already has. It should invest in developing its capacity to model the generational effects of tax and benefits policies.

Other recommendations in the report:

Housing

• Grant local authorities a presumption to develop unused land owned by public sector bodies and give them greater freedom to borrow to build.
• Ensure local authorities have specific planning policies to meet the housing needs of younger and older people.
• Government reforms to the rented sector do not do enough to provide tenants with long term secure tenancies. They should be backed up by a new regulatory framework.

Training and employment

• Substantially increase funding for Further Education and vocational training to tackle unfairness between those to go onto Higher Education and those who do not.
• There should be an assumption of the employment status of ‘worker’ by default to protect young people from exploitation or insecurity in the gig economy, while allowing those who wish to stay as self-employed to do so.
• Increase lifelong learning and training. In the context of a 100-year life, continuous training and retraining will become more important. Older people need to be equipped and supported to respond to a changing labour market.

Communities

• Policies should promote all age communities as drivers of intergenerational fairness. Local authorities should share intergenerational best practice and local and central government should focus on facilitating community activity and ensure long term sources of funding are available.

The full report can be found here.

By Hamant Verma.