Social care funding, inheritance tax and hypothecation

Social care funding is as pressing now as when the issue blew up Theresa May’s 2017 attempt to decimate the Labour Party and assert control over the Brexit process.  A consensus of sorts seemed to emerge from that discussion that it was right to expect those who would otherwise pass on large estates to pay for their social care either partly or wholly through taxes on those estates, levied after death or not.

I blogged at the time that I didn’t think this was ‘fair’.  My reasoning was that you can view unexpected longevity combined with ill-health – which requires a lot of money spending on social care – as getting a bad draw in the lottery of life.  It wasn’t fair that one’s financial resources, and what one could pass on to the next generation, should be dependent on what draw one gets in the longevity and ill health lottery.  As a result, social care funding should be offered out of general taxation.

The debates about the appropriate level of inheritance tax and social care funding are separate, conceptually, although because social care funding – or its shortfall – constitutes such a large line item in public finances there is bound to be a practical link between the two:  finding so much more money is likely to mean looking across the whole range of taxes.  But the issues are no more linked than are the debates about the level and progressivity of income tax and the level of funding for state education.

The appropriate level and schedule of inheritance tax depends on weighing political desires to eradicate/perpetuate inequality on inheritance, economic evidence about the ability to collect and enforce without taxes being avoided or evaded, and economic evidence on the harmful effects of that inequality, or the harmful effects on incentives of taxing accumulated wealth away.  The economic evidence is uncertain on all accounts [as always], and different people will have different ethical positions on equality.

To illustrate the conceptual separateness of social care and inheritance, two thought experiments.

First, imagine an economy in which there was an overriding social norm that old people commit suicide at the first sign of irreversible dependency, so that there was no social care expenditure, private or public.  [For clarity, I’m not advocating this:  it’s a thought experiment to make a point].  In such an economy, there would still be a legitimate and important debate to be had about the appropriate level and schedule of inheritance tax.  The euthanasia of otherwise-about-to-be-dependent old people would leave open the question of what to do about those bequests, which could create harm through next generation inequality, or, if taxed away, reduce incentives in the future too.  In this extreme case, social care funding levels and inheritance taxes are seen to be entirely separate because there is no social care funding, and yet inheritance is a live possibility, there to do its harm [or not, depending on your perspective].

Now consider the opposite case.  An economy with no bequests.  Imagine that there was an overriding social or religious norm such that on death there was a ceremonial bonfire of all the recently deceased assets.  Who knows why:   perhaps there is a belief that they will be transmitted to the old person in the afterlife, or a belief in self-sufficiency of the next generation.  [Again, for clarity, I’m not advocating such a norm:  this is a thought experiment to continue making a point].  In such an economy, despite the fact that there were no bequests, there would still be a legitimate question as to how to fund social care, and an argument for using taxation [note here there is no inheritance to tax] to avoid that life satisfaction through extended end of life dependency does not depend on the lottery of life [ie how much end of life ill-health has to be endured].  The absence of a potential inheritance tax base would not negate the case for public funding when there are other – eg income, spending and profit – taxes to dip into.

The conflation of social care and inheritance is part of an increasingly popular idea that taxes should be hypothecated to fund particular items of public spending.

Hypothecation might have a basis in terms of offering a way to sustain public support for spending taxes on public services.   But it is conceptually flawed.  The examples described here are extreme case illustrations of why.  If hypothecation between inheritance tax and social care spending were the rule, in one of our economies we would have no inheritance tax [because there was no social care funding] even though it could do good;  and in another there would be no social care spending [because there were no inheritances to tax] even though it could do good.

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