Newspaper Articles

How can we level the playing field between young and old?

Date: 13 November 2017
Authors:
Publisher: News International
Published in: Times

"Bliss was it in that dawn to be alive, but to be young was very heaven”. Not in 21st century Britain. To be young is to be left behind economically. Those in their 20s today earn less than did those in their 20s a decade and more ago. Home ownership rates are collapsing. Those in their early 30s are only about half as likely to be homeowners as a generation ago. Young people have no access to the generous occupational pensions that many of their parents enjoyed. And, of course, today’s university students are building up far more debt than students from any previous generation.

It is not surprising, then, that the chancellor is coming under pressure to address this. There are good ways to do that. As ever, there are also bad ways.

The two propositions that seem to have had most airtime recently are the suggestion that income tax rates for those under the age of, say, 30 should be cut and the abolition, or substantial reduction, of student fees. Each, clearly, would benefit some younger people. Each would benefit the better-off most. Cutting tax rates for the young would introduce new inequities. A 25-year-old earning £25,000, for example, is likely to be much better off over their life than a 45-year-old on the same salary, so cutting the tax of the former and not the latter might not look like such a great policy.

As far as student fees are concerned, now that the income level at which repayments begin is set to rise, pretty much any way you can think of to reduce fees or reduce repayments will help the highest-earning graduates the most. They are the only ones who fully pay back their loans, in any case. And any such change is obviously of no help to the 60 per cent who still don’t go to university. Reducing tuition fees may create some equity between this generation of graduates and previous ones, but it does not help the young people most in need of help, at all.

If he wants to rebalance the playing field, Mr Hammond should look elsewhere. If he wants to raise some money to redistribute to the young, his first port of call should be those bits of the tax system that explicitly favour the old, and the wealthy. In recent decades the stock of wealth held by households in housing, equities and so on has risen dramatically relative to the flow of income. The tax paid on that wealth has barely risen as a fraction of tax paid in total.

One problem is our dysfunctional system for taxing housing. Occupiers of low-value property pay a much higher proportion of the value of the property in council tax than do occupiers of high-value property. And, of course, in England relativities are still fixed at their 1991 levels. Alongside penal rates of stamp duty, this gives older owner-occupiers a strong incentive to stay put, gumming up the housing market at the expense of the young. It is not just more houses that we need, it is a more sensible system for taxing housing. Direct support for younger people, like the various incarnations of “help to buy”, have their flaws, but they can increase the power of first-time buyers in the market relative to those who already have housing wealth.

It’s not only housing, though. There are other elements of the taxation of wealth that Mr Hammond should be looking at. Capital gains tax, extraordinarily, is completely forgiven at death, creating big incentives to lock up wealth until the end of life. There are also overly generous tax breaks for the owners of agricultural land and for people wanting to pass on accumulated pension pots, as well as more esoteric loopholes. All these elements of the system are ripe for reform. All could be reformed to level the playing field between old and young, rich and poor, whilst also improving the efficiency of the tax system.

Then there are national insurance contributions. While the rest of us pay these on our earnings, those over the state pension age do not. And those lucky enough to be in receipt of a final-salary pension will be getting a flow of income on which national insurance contributions were never paid. People complain about the income tax treatment of private pensions, but, other than the tax-free lump sum, income tax is paid when the pension is withdrawn. If an employer contributes to a pension — and most occupational schemes are largely funded by employer contributions — then national insurance is never paid. A brave chancellor might consider a levy on occupational pensions in payment.

And if he wanted to spend any of the additional revenue that he managed to raise in these ways, then there are better ways to help the young than cutting rates of income tax or reducing tuition fees. Simply providing every 25-year-old with a present of a few thousand pounds would benefit all the same (at a cost of about £700 million per £1,000). Less radically, reversing some of the planned cuts to working age benefits would help poorer younger people.

In the end, though, the best bet for the young is a growing and dynamic economy; only then would their earnings start to grow and only then would they have a really good shot at matching or surpassing the living standards enjoyed by their elders. In broad terms, the policy agenda is obvious: sensible tax reforms, an effective education system for all, minimal barriers to trade with the European Union, encouragement of the inward investment from multinationals that drives our productivity. Evidently, the bleedin’ obvious is beyond too many of our politicians, both in government and in opposition.

This article was first published by The Times and is reproduced here in full with permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist.