Paying for social care, regressively
Boris has finally made a start on putting more money into the social care system. Of course, there is a lot more to do to ‘fix’ social care, as I pointed out in my other post. So, who has he decided should pay for this extra funding? Let’s have a look…
The reform will be paid from a 1.25% rise in National Insurance contributions in the UK (plus a similar rise for tax on dividends for those who own shares in stocks), a tax paid by employees and employers to count towards various state benefits and pensions, i.e. welfare. So, this is an additional tax on earned income, which acts alongside our standard Income Tax. How do these taxes work together to affect an individual’s overall take-home pay?
The figure below shows the percentage of total income taxed (grey line, % on the vertical axis) for different annual incomes (horizontal axis), and the contribution of Income Tax (blue) and National Insurance (NI, orange) to this total.
As you can see, except for the lowest income levels where it drives all of the tax paid, National Insurance makes up a smaller contribution to the total taxed income than the conventional Income Tax does. Also noteworthy, whereas Income Tax has a relatively progressive shape, the more you earn the higher proportion you pay (well, up to a ceiling towards the right of the figure where it flattens out for the richest, of course), National Insurance has a U-shape with income-level. This means it is progressive up to a point (up to around an annual income of only £50,000 – over 13% of tax payers earn more than this according to the latest Government figures), then it becomes regressive, i.e. the more you earn the smaller proportion you actually pay…
How does this happen? Well, Income Tax has thresholds, the top being a 45% marginal tax for any income over £150,000 (the top 2% or so of taxpayers). This means very high earners can end up paying close to (but, never actually the full rate since some of their income is taxed at lower rates) the full 45% rate on their take-home pay. On the other hand, National Insurance has both a lower and an upper threshold. Between the lower and upper thresholds, everyone pays 12%, above the upper (£967 per week, or around £50,000 a year), you pay only 2%! So, income payments start to approach this 12% limit up to £50,000 (but again never reach it since some of that income is always tax free), then begin to fall towards 2% thereafter. When the 1.25% social care tax increase comes in, it won’t change this shape drastically. It will simply lift the whole U-shape up by a small amount. This is a regressive tax, at least for the richest.
The Conservatives, of course, when they do decide to increase taxes choose carefully who to hit. It is not Boris and his Eton mates who will be paying for social care, it is you and I. In particular, since the tax applies to employees and employers, it is the working population, mostly younger generations who have already sacrificed (being at far lower individual health risk than older generations) their freedoms for months to accumulate the debt that Boris now wants to pay down.
I’m not disputing that we need to pay for social care, of course we do. But, there are other ways to raise taxes, not only through income (although, there is probably also room for more, higher thresholds above £150,000 a year – the top 1% of tax payers earn more than £175,000), but wealth – savings, property, and other financial/non-financial assets. It is in wealth where the greatest inequalities lie, inequalities that have gotten far worse since the pandemic when the richest have added substantially to theirs. This is also where the biggest inter-generational inequalities lie, the oldest who are closest in time to using these social care services have far more wealth.
Perhaps it is time to start considering a wealth tax in the UK, and there are good arguments for doing so? Or, perhaps this will be one step too far for a Conservative government, especially in a country that fully legitimises sitting on endless wealth with an archaic Royal family? If only we had a Labour leadership who could propose any sort of alternative vision…