This is a question I have often asked myself, wouldn’t it be simpler just to tear up the current system and start again? I have been thinking about this over the past couple of weeks as we learned of the introduction of the new National Insurance levy or ‘Social Care Tax’. We will all have own views on whether a rise in NI contributions is the fairest way to tackle the Social Care problem and I don’t intend to get into that here but on the central point of how messy our tax system is, I read the following article in the Times on Monday with great interest.
The article was written by Paul Johnson, Director of the Institute for Fiscal Studies.
The mess of our present health and tax systems is a product of history
“History casts a longer shadow than we might suppose. The modern A1 largely follows the route of the old Roman road, which itself followed ancient trackways, in use for perhaps thousands of years before. I’m sitting writing this in London because ancient peoples recognised the advantages of its defensible position on the Thames convenient for trading routes between England and the Continent. So ran my thoughts as the prime minister spoke on Tuesday last week, announcing a reform to the funding of social care.
It is not merely our roads and our cities that are where they are as a result of decisions made long ago. The same is true of the structure of our taxes and of the welfare state. Why are we in the mess that we are in on social care? Because of decisions made back in 1946, which themselves harked back to a previous era. As Nick Timmins, the country’s foremost authority on the history of the welfare state, has written: “Why is it all so hard? Partly thanks to history. The modern origins of what we now call social care lie in the National Assistance Act of 1946. Its opening sentence — passed in the same years as the legislation that established the NHS — boldly claimed to ‘abolish the poor law.’ But it didn’t quite.
The NHS remains largely free at the point of use and open to all, with entitlement to treatment still essentially dependent only on a clinician’s judgment that you need it. Social care, by contrast, remains first needs-tested and then means-tested — the shadow of the infamously stringent poor law relief lingers on.”
The NHS, meanwhile, exists in its present form because of how it was originally conceived and legislated back in the 1940s: paid for by general taxation not, as in much of continental Europe, through a system of social insurance; GPs never fully part of it, self-employed contractors to the NHS, the original privatisation, consultants, powerful and largely self-regulating. It is as it is because it is, and it seems impossible to challenge or unpick despite ample evidence that other systems work just as well, if not better.
Our university system is still in thrall to Oxbridge because the Stamford Oath of 1333 effectively made it impossible to establish other universities until its abolition in 1827. Other countries, including Scotland, have more ancient seats of learning and hence a less hierarchical higher education system, because they imposed no such duopoly. Our largely pointless and disruptive national exams at age 16 exist because that’s when most young people used to finish education. A-levels replaced the broader Higher School Certificate in 1951 and have remained much the same ever since.
The same principle applies on the other side of the ledger — how we raise taxes. National insurance contributions were first introduced in 1911 and were, in the 1940s, central to Beveridge’s idea of a contributory pension and benefit system. I still recall NICs being referred to as “the stamp” (perhaps they still are) after the stamp cards that recorded flat-rate contributions on the basis of which entitlement to flat-rate benefits were earned.
The remnants of that flat-rate system remain today in the form of the upper earnings limit. The historical relationship between contributions and entitlements is now just that: historical. No such relationship now exists, yet the folk memory lingers on, one of the reasons that national insurance is, supposedly at least, still a relatively popular tax. Which, in large part, is why it was effectively NICs that were raised to pay for last week’s announcements.
No doubt the newly minted “health and social care levy” will take on a life of its own over the next decades and perhaps centuries. Commentators will be stroking their chins in a hundred years wondering why the chancellor decided to raise this rather cumbersome and inequitable levy rather than raise the basic rate of income tax to 10p in the pound.
William Beveridge’s 1942 report served as the basis for the welfare state
Tax years run from the start of April because William Pitt followed the precedent set by the window tax when he introduced the first income tax in 1799. The date itself derives from the old quarter days. Many curiosities in the tax system date back to the 19th century. Other parts exist for quite different reasons than you’d think from economics textbooks. We economists are taught that there is a high tax on petrol because of the environmental costs that driving creates. That was not in the mind of David Lloyd George when he introduced petrol duty in 1909 — it was there to pay for the road network. Many of the bizarre rules about exactly what is and is not subject to VAT date from well before VAT was introduced in 1973 to replace the old purchase tax, itself introduced in wartime with the aim of reducing wastage of raw materials.
Things change, of course. William Beveridge must have spent decades turning in his grave as his vision of a welfare system based on contributions has been completely unpicked. Who, 50 years ago, would have predicted the virtual end of public sector housebuilding or the creation of a whole new leg of the welfare state through rights to free childcare? All services and taxes adapt as the country grows richer and as priorities change.
Yet, as the past week has demonstrated, you can’t understand present policy unless you understand history. Our social care system is the unfinished business of 1946 and the direct descendant of the poor law of 1834; the decision to fund it through a levy is a throwback to a time when we had a social insurance system. And that’s the trouble. If you want a rational system for tax, welfare and public spending, best not to start from here.”
I completely agree with Paul’s final point, we need a radical overhaul of the entire tax system to ensure fairness to all and to reduce complexity, the endless tinkering with a system that was designed for another time, helps no one. I think most people, including politicians from all parties would agree BUT, who is going to have the courage to take up this challenge?
I hope you found the above of interest but please do not hesitate to contact me if you have any concerns or questions relating to anything in this e-mail or indeed any other finance related matter.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
