It’s time we delivered tax reforms that benefit the young
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We put much more effort into arguing about the overall burden of tax than in thinking about the best way to actually raise any given amount of tax.
There are important issues about who pays, given the impact on different generations. Here are four practical proposals – evenly balanced between tax increases and cuts – which would offer a better deal to younger people.
It is good news that about 1.5 million pensioners are now working. Many other countries only pay the state pension to people after they retire but here you can work and collect a state pension at the same time. These working pensioners don’t pay employee national insurance contributions. So, if a young employee and an older one are on the same pay, the 70-year-old will take home more than the 30-year-old. When the government got rid of the retirement condition for getting a state pension back in the 1980s, it should have got something in return for this very favourable arrangement – pensioners should pay national insurance on their earnings.
Whatever the total burden of tax should be, we also need to get the balance right between the generations
Young people need to build up a funded pension. The good news is that the cross-party policy of auto-enrolment means that many more people are now paying in. But the bad news is that it isn’t much – contributions are far lower than in the old defined benefit schemes which many older people enjoy. At the moment, employee pension contributions are usually exempt from income tax but they aren’t exempt from national insurance. We should change that rule so that there is no employee national insurance paid on earnings being put into pension contributions. This would boost incentives to save.
Young people are not just finding it harder to build up a decent pension but also to acquire the other great asset which most older people enjoy – a home of their own. We should do more to help younger people get started on the housing ladder. Stamp duty is a barrier because it penalises property transactions. Ideally the overall rate would be cut, but in the meantime the discount for first-time buyers due to expire in 2025 should be made permanent.
The main tax on housing is council tax. Indeed it counts as our main property tax. However, it is paid at a much higher effective rate on low-value properties, which is where younger people tend to live. The high-value properties, which tend to be owned by older people, pay council tax at a much lower rate. That could be changed. One option would be to update the bandings which have not kept up with the surge in house prices and mean that very high-value properties don’t pay more council tax than properties which now, in many places, are considered mid-value. Another option would be to remove or reduce the single person discount which also tends to help older people.
One of the biggest changes in the British political economy over the past 40 years has been the rise in the value of our assets – properties and pensions – compared with our income. This has particularly benefitted the older generation who own most of the property. But the tax system has not kept up with this change. It is much lighter on older people with assets than it is on younger people with earnings.
Whatever the total burden of tax should be, we also need to get the balance right between the generations. These four modest proposals would help.
Lord Willetts is a Conservative peer, president of the Resolution Foundation and author of The Pinch.
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