Tag Archives: intergenerational-equity

Neo-Feudalism: back with a vengeance

Polly Toynbee mourned the death of social democracy in the Guardian yesterday which, based on her definition, is not something I will be shedding many tears over. He kneejerk reaction that what Brown should have done instead of raising the IHT threshold was to increase income tax on people with incomes above £100,000 was akin to arguing that instead of shooting himself in the foot he should have simply shot himself in the head. Not only would such a move have been massively unpopular, but it wouldn’t have made much economic sense either.

Fortunately, calmer voices were also to be found in the Grauniad, with Shelter’s Chief Executive Adam Sampson giving a much more lucid account about why wealth taxes are a good thing and the government so wholly wrong this week. In doing so, he breaks a major taboo, suggesting that our home owning economy might not be the unambiguous good that the cross-party consensus asserts.

The problem, which Sampson readily acknowledges, is that when you live in a society where 70% of the electorate are home-owners, making the national interest case for wealth taxes is a thankless task. Quite what a mountain we have to climb is summed up by Andy Beckett’s article on IHT which explores quite how unpopular the tax is and why. Beckett or more precisely Professor Stuart White, for that is who he is quoting, manages to both sum up the conundrum and miss the point with this sentence:

“What seems to have come through in Britain, post-Thatcher, is not so much a meritocracy as a feeling that what you get is what you’re entitled to.”

Michael Young, the man who coined the term meritocracy in 1958, became exasperated towards the end of his life at the way in which politicians came to adopt the term uncritically. His 2001 essay on this is even more relevant now than it was back then. The point is that exhorting meritocracy leads precisely to the view that people get what they deserve. The political establishment’s failure to challenge the idea that it is okay for the rich to get ever richer so long as you piously acknowledge the importance of “equality of opportunity” is precisely why the general public seem so resistant to wealth taxes. The fact that it could lead to, among other things, lower income taxes, increased social mobility and a more entrepreneurial culture falls on deaf ears.

The vested interests which ultimately defeated the 1909 People’s Budget sat in the House of Lords. Sadly, those same vested interests now dominate the electorate (although I suspect that over the longer term these mini-property empires will begin to aggregate as some manage to press home their inbuilt advantage better than others). For a substantial minority of the population that represents the death of hope: a life of no accumulation of assets, high income taxes and high user charges on services.

I see this as a profoundly depressing future; the very antithesis of progress whether you are coming at it from a liberal or a socialist perspective. Yet the Lib Dems can’t really give Gordon Brown too hard a time over it. While the rhetoric of our taxation policies is quite sound, almost everything we are committed to doing in our hypothetical first term of government is to compound the problem. In the long term, we’re committed to land value taxation; in the short term we’re committed to scrapping municipal property tax (making the eventual implementation of LVT much harder). In the long term, we’re committed to reforming IHT into an acquisitions tax, thus closing off a major loophole; in the short term we’re committed to raising the IHT threshold as well. Ming was careful at is conference speech to talk of transferring the burden of taxation from incomes and onto pollution – not resources. At a time when he desperately needs a USP, and the cause of progressive taxation needs a champion, he’s being advised to back away slowly from the sound of gunfire.

But perhaps I’m being too harsh on political parties. They are, after all, prisoners of an electoral system that gives enormous power to a handful of swing voters. All the time the parties are forced to chase the same small part of the electorate around like Pepe le Peu, the scope for making the case for broader policies will always be limited. Somehow we need to capture the public’s imagination outside the party political sphere. Anyone got any ideas?

Gideon’s daylight robbery

There are two ways you can indulge in a bit of fantasy at Blackpool this week. One is to see Hot Ice, the iceskating spectacular. The other is to listen to Gideon Osborne for an hour. If you are under 50, the former would probably be more worth your while.

To be fair, his idea of a flat rate charge on all non-doms (I thought someone who is not dom was called a submissive, but clearly I frequent with the wrong sort of people) is worth considering. It is very easy to threaten to crack down on people who live here yet evade taxation, yet Gordon Brown has demonstrated that the reality rarely matches the rhetoric. We should not dismiss a proposal out of hand that would at least do something. I have an open mind, and I’d be interested in hearing what others thing of this.

This tax rise is to be balanced out with two tax cuts: one on stamp duty for first time homebuyers, the other on inheritance tax. Sadly, both of these cuts are wholly irresponsible.

Firstly, the cut in stamp duty for first time homebuyers for property values up to £250,000. Sounds fair enough, although it means chuff all to anyone buying a first home worth more than £250,000. Is a one-off payment of £2,500 really that significant to a first time homeowner? We might see a few houses just below the £250,000 threshold drop their prices in the very short term, but it is also likely to increase inflationary pressure on properties worth significantly less than that. Overall, it will do nothing whatsoever to make houses more affordable or to discourage speculative property investment.

The proposed inheritance tax cut is even worse. It will lock up even more property that would otherwise be available to first time home owners. It will benefit those families who have benefited from the massive increase in property values over the past decade while punishing everyone else. Far from rewarding hard work, as Osborne suggests, it will severely curtail the purchasing power of anyone struggling to get onto the housing ladder.

I’m not denying that Stamp Duty Land Tax and IHT are bad taxes, although I suspect my definition of bad differs from Osborne’s. I would replace them, along with all other existing wealth taxes with a single land value tax. Simple, fairer and a dampener on property speculation.

Let’s be clear about this: these tax proposals will result in higher, less affordable house prices for first time buyers, while offering the already wealthy a significant tax cut. They are about entrenching privilege not expanding opportunity. Faced with a choice of cutting income taxes on low wage earners and rich homeowners, they’ve opted for the latter. True to form, but the fact they are pretending otherwise really sticks in my craw.

Those Redwood tax cuts – a question of priorities

I’ve been going down the list of tax cuts that John Redwood is proposing. Scrapping inheritance tax, lowering corporation tax, raising the super tax threshold, restricting capital gains… to be brutally honest, I regard all of these as good things in principle, but even leaving aside the affordability issue, how can they be said to be priorities?

Inheritance tax, for example, certainly does hit a lot of middle-income families these days. But what would you prefer? A tax cut on your estate when you die, or a tax cut on your income now? I know that I for one would prefer the latter. Happily, I’d also argue it is better for both the economy and society more generally.

As I’ve argued before, the accretion of wealth within an ever declining number of families is not a particularly healthy thing for our society. It creates a situation whereby, because of historical accident, some individuals end up higher up on the ladder than others. If that wealth is bound up in property, it is a finite resource and our existing financial system creates a situation whereby the more property you own, the easier it is to acquire more. As it is a finite resource, that means that, over time, private ownership becomes nothing more than a dream for more and more people and an underclass emerges.

To a certain extent you might argue that is inevitable, but if anything ought to be a candidate for taxation, it is this. Indeed, the creation of IHT and other fiscal tools in the last century have done much to create a more egalitarian society which we now seem to be slowly slipping away from.

IHT’s biggest problem is that it doesn’t do this terribly well. Nothing a half-competent financial adviser can’t wriggle around any way. There are better ways of taxing wealth such as a land value tax. Needless to say, this isn’t top of Redwood’s wish list.

For me, the “Competitive Challenge” is to ensure that the fruits of people’s labours and entrepreneurship are kept by the individual to as great an extent as possible. IHT doesn’t make our economy uncompetitive; income tax does. The point at which the 40p rate for income tax kicks in isn’t the main issue: the 20p rate and the level of personal allowance are. And then, of course, there’s VAT (which Tories historically seem to love).

But if I don’t understand the economic case for Redwood’s priorities, I understand the political case even less.

It’s a gift to the Lib Dems: not only are our policies better targeted at people at the lower end of the scale (I’d go further, but that’s another issue), we explain how we will pay for it. Redwood’s case, by contrast, is tax cuts for the relatively well off, paid for by vague, amorphous cuts in ‘red tape’. I for one would relish that particular fight.

The demographics of Um?

I meant to blog about the Centre for Um discussion paper on demographic change by Alasdair Murray a couple of months ago, but I ended up getting distracted. As part of my general post-holiday catch-up, I thought I’d get my comments off my chest now, but as it was a while since I read the paper, I’m a little rusty.

On specifics, I don’t quibble with a lot of what the paper is saying. It is surely correct to point out the problems of simplistically emphasising how the aging population will lead to more elderly dependents on the economy without looking at how other dependents (the young, the economically inactive) effect the economy at the same time. I don’t think any liberals question the need to scrap the fixed retirement age of 65 (socialists are another matter – I seem to recall Labour activists queuing up to denounce this at their last autumn conference). I agree also with the need to bring more young people into the labour market – a stark contrast with Labour’s obsession with giving 50% of the population a (potentially worthless) university degree and raising the school leaving age to 18. There certainly should be an emphasis on skilling young people, but that should be done in the workplace, not in pseudo-universities (on which point, can I recommend Geoffrey Wheatcroft‘s article on the subject last week: “Those who insist that expanding higher education is virtuous in itself never stop to say why this should be so. And they never explain why it should be better to be a third-rate media studies graduate than a first-rate carpenter.”).

It is the wider arguments of the paper that trouble me. First of all, the bland claim that “pessimistic predictions about Europe’s demographic future overstate the problem in most countries and ignore the potential to adapt.” That is half true, but how are we to adapt if we ignore the pessimistic predictions? Alasdair Murray points out that a number of countries have already dealt with the “pensions time bomb” in their policies, but this has to be at least partially because of the scare reports that have been dribbling out over the past 20 years and more. This doesn’t prove them wrong: it proves their worth.

More irritatingly, I can’t go along with his bald assertion that inter-generational conflict isn’t worth bothering with. He bases this on two lines of argument: that there is little evidence of an emerging conflict, and that young people are better educated, richer and have higher rates of employment than their parents.

The first argument is just plain daft; it’s the Nelson defence (“I see no ships”). To start with, it depends where you look and what you’re looking at. What’s more, the fact that there is little tension now is not to say that there won’t be tension in the future.

The second argument misses the point that it isn’t incomes that we are quibbling about, but assets. Those subsidised right-to-buy homes people bought in the 80s simply do not exist. Greater earning potential is one thing, but if the economy drives people into habitual debt – thousands just to get “credit rating”, tens of thousands on graduation, hundreds of thousands of mortgage debt – that leaves very little at the end to build a nest egg. I’ll come onto the underlying assumption in the paper that population growth is an unalloyed good in a moment, but assuming that is the case for a moment, it is surprising that he appears to have missed the growing evidence that one of the main reasons that people are starting families later in life now is because they struggle to afford the housing; indeed housing is barely mentioned either in the paper as a whole, or in the section on inter-generational conflict.

Worst of all, he parrots that old canard about wealth cascading down the generations. I’ve lost count of the number of times I’ve said this: that’s the problem. Because people don’t, as a general rule, spread their wealth evenly to the younger generation: unsurprisingly they favour their children. This entrenches privilege, deepens the divide between rich and poor and, by putting wealth in the hands of ever fewer families and individuals, is a potentially catastrophic cause of social immobility. No-one is questioning that the millionaire couple who profited from the buy-to-let boom will eventually hand their assets over to their children; what we’re questioning is whether they should be the beneficiaries and what economic impact it will have further down the line.

The biggest single omission however is that this paper does not mention the environment, climate change and the management of natural resources. At all. I’m amazed that you can even write a paper on demographics without mentioning these things. A dry debate about immigration is one thing, but what do we do if Bangladesh goes underwater and Africa becomes an arid dustbowl? Where do the people go? What if they decide to come here? Cheery forecasts about pensions is one thing, but what about peak oil? Europe’s stagnating population is one thing, but global population is expected to reach 9 billion by 2050 (it seems like only yesterday when we reached the 6 bn mark – now we’re at 6.6 bn).

You may argue that all these big questions go beyond a simple paper on the economics of European demographics; I accept that they would have lead to a substantially different paper. What I do seriously question however is how the paper can assume that population growth is a good thing that policy makers should aim for. The paper does not oppose pro-natal policies, just the practicalities of the more crude of these (such as Germany’s tax system). Instead, it recommends policies that “best create the conditions where fertility rates might rise by removing structural obstacles to female labour market participation”.

I’m not in favour of radical anti-natal policies such as China’s one child policy, let alone anything more draconian. Nor do I believe in putting obstacles in the way of “female labour market participation” with a view to reducing fertility rates. I do however feel that population growth and environmental sustainability are heading for a full on collision, that one will have to give way to the other and that if the species is to survive in the long term, it had better be the latter. How do we develop genuinely liberal anti-natal policies? And if those policies are successful, won’t they exacerbate the problems associated with an aging population (if fertility rates dropped significantly, the average age would increase quite rapidly)?

In short, while he has some good points, Alasdair Murray’s pamphlet is exactly the wrong paper at the wrong time. It sets out to deal with a problem which, from the outset, it asserts has already been solved, and fails to answer the important questions relating to demographics that we need to be answering in the 21st century.

Jon Cruddas: the real winner?

Lest I be accused of denigrating Jon Cruddas, it has to be said that he has emerged as one of the true victors of the Labour deputy leadership contest. To come third, even if not within the membership college, was a real achievement for a candidate who has never had ministerial experience.

Reading Brown’s speech, he has won at least two other victories: firstly, he has got the Labour Party – and everyone else – talking about housing again. For me this is one of the most important issues that must be tackled over the next few years, and a crucial tool in the battle for intergenerational equity and against the extreme right. Of course, the fact that the Housing Minister since before the stone age happens to be married to Gordon Brown’s representative on Earth does suggest that she is not about to be sacked for failing to make progress on this issue, but we can at least hope she will be moved sideways.

Secondly, his pledge to not accept a ministerial post if elected has resulted in Brown pledging that the new deputy leader will do precisely that, making it analagous to the Lib Dems’ Federal President.

I don’t agree with Cruddas on everything, and certainly some of his statements such as his support for raising the basic rate of income tax were too much in Labour’s comfort zone, but the fact that he has done so well in pushing the party’s internal debate forward is to be congratulated by all of us who believe that politics ought to be more about ideas and less about personality.

“Pity the poor rich old ladies!” Oh dear, here we go again…

In recent months, I’ve noticed a marked increase in media stories about intergenerational equity, pointing out that young people today are up to their eyeballs in debt and struggling to get onto the housing ladder. I suspected there would be a backlash against this, and it would appear that the Observer has started a rearguard action. Apparently we are to believe that Baby Boomers are “broke, ailing and anxious” while Mary Riddell wants us to know that “not everyone can grow old gracefully“. The implication of both these stories is clear: older people need big cash payouts from their kids, and fast.

Some of this stuff stretches credulity. The first story is based around a book called “The Maturing Marketplace: Buying Habits of Baby Boomers and their Parents” by Professor George Moschis. He claims that “boomers are not as financially well-off as their parents; boomers are in worse health than previous generations were at the same age.” This is appears to go against almost everything we know about demographic trends, which indicate that people are increasingly living longer. If Moschis is correct, surely we should have amassed evidence by now to indicate a reversal of this effect, or at least a dramatic levelling off? Or has some new phenomenon emerged that I was previously unaware of, in which poor people in poor health live into their hundreds en masse? Clearly we will have to read the book to find out; the Observer is only interested in the scare story.

Reading between the lines, the pattern that appears to be emerging is that the issue is less that Baby Boomers are deprived compared to their parents, but that they have squandered the opportunities that many of their parents literally died to bring them. They aren’t financially insecure because they lacked opportunities, but because “they have enjoyed spending their money more than saving it” (I still don’t see how this squares with the amount of property owned by Boomers). They eat poorly due to over-indulgence, not malnutrition. They live stressed, vain existences and are terrified about the prospect of old age.

The problem with this story, and Mary Riddell’s piece, is that it doesn’t seem to be telling us anything particularly new, but is nudging us to draw startlingly bad conclusions. We’re supposed to have thought that there is no such thing as geriatric poverty. Has anyone ever said that? The conclusion we are invited to draw is that the young must bail out the young. Mary Riddell smugly points out that “more than 40 per cent of the electorate is over 50,” clearly implying that if the young don’t give it away, the old will simply vote in a government that will take it from us. But the fact of the matter is that while geriatric poverty exists, so, undeniably, does geriatric wealth. Yet Mary Riddell is also quick to point out the so-called scandal that anyone with more than £21,000 in assets is forced to pay for their own social care. Presumably she would prefer it if their wealth could just sit there growing, untouched, while their every whim is cared for by the state.

Dig a little deeper and you often find that the people who shout loudest about pensioner poverty (including, sadly, the Lib Dems in the last General Election), are in fact set on tax breaks and handouts which disproportionately benefit pensioners in a much more stable position. Free nursing care? Of no benefit whatsoever to poor pensioners. Local Income Tax? Ditto. Citizen’s pension? Limited. Yet the cost of such proposals have the effect of making it harder for the next generation to save or to acquire assets, leading to more dependent, asset-poor pensioners in the longer run. Meanwhile the untaxed assets of pensioners that we dare not touch eventually passes down to their children, creating an entrenched them-and-us society of social immobility and an elite able to lord it over an emerging serfdom. We are sliding back into feudalism.

It is precisely this sort of monstrous short-termism that Prof Moschis appears to associate with the Baby Boomers, so don’t expect any great change any time soon. The challenge is for the next generation to develop a wider consciousness. Linked to that is an awareness that our parents appear to lack of the fact that we will get old at some point, and that we need to be prepared – both financially and spiritually.

That spirituality is the key factor. You don’t have to be religious to recognise the limits of materialism (indeed you only have to look around yourself to see that organised religion is riddled with materialism itself). If we are going to survive the 21st century, we are going to need to replace the cult of the individual with a renewed emphasis on co-dependency. It’s anyone’s guess how we do it though.

The first nail in the coffin of Local Income Tax?

I’ve been very good this past month and have managed to keep schtum about the Liberal Democrat Youth and Students’ decision to reject local income tax in preference to land value taxation until after the elections were out of the way. Now I see that the entire motion is up on the ALTER website, I suppose my self denying ordnance can come to an end.

LDYS has a proud history of leading where the party subsequently follows, and I’m hopeful that this will prove to be another example of this. And it is timely, with the National Institute for Economic and Social Research comparing the rise in property prices to the national debt. Aida Edemariam wrote a good summary of how the problem is affecting the whole of the UK in the Guardian on Friday. We have to do something, and a tax on land values is a lot more economically respectable than a crude property tax.

One of the problems the party faced in the latest round of elections was a failure to stand out from amid the crowd. Taking on intergenerational equity would give us a USP. It isn’t simply an old-versus-young issue as older people who were simply in the wrong place at the wrong time have lost out just as much as the younger generation who are now left with the consequences. The introduction of any new tax could be matched by a cut in other taxes, ranging from existing property taxes such as stamp duty through to income tax. Such a tax shift need not be unpopular.

Fundamentally, we have to tackle this situation whereby people have more incentive to invest in bricks and mortar than in stocks and shares. That is bad for the economy whichever way you look at it. I don’t want to sound all Marxist, but if the political system doesn’t solve this problem, the economic system will do it for us in a way that will be much more painful. I’m amazed that the political class isn’t looking at the emerging picture and isn’t worried. To be fair, some individuals such as Vince Cable and David Willets, have been warning about this for some time, but their views have been falling on deaf ears.

But there is no prospect of Local Income Tax on the horizon. With the combined SNP/Lib Dem seats in the Scottish Parliament 2 short of a majority, it won’t be introduced there. Labour and the Tories have resisted the simple populism of LIT with good reason: they appreciate the danger of scrapping property taxation altogether even if they lack the courage to introduce a proper system that doesn’t have the flaws of council tax. Rather than dismissing this as stupidity, the Lib Dems ought to consider why this is one popular policy our rivals (except for the SNP, which in itself should tell you something) have declined to steal.

I still have high hopes that sooner or later the Lib Dems will realise that this is one issue that we could really make our own. Gordon Brown’s announcement to cut income tax by 2p in the pound has forced us to revisit our taxation policy (it’s amazing how much of the paper we passed last year has been borrowed by the Tories in Labour in such a short space of time). Hopefully, more radical minds will prevail.

House price boom should be treated like national debt

Not much time for blogging at the moment, but I thought I should flag this up now:

The National Institute for Economic and Social Research says in its latest journal that the surge in house prices is one “of the major adverse developments affecting the UK economy over the past 20 years”. The thinktank’s director, Martin Weale, says the rise has a similar effect to rising government debt because it transfers a burden to future generations.