Tag Archives: social care

How not to reject a proposal

In last night’s Sky News “debate”, Theresa May was asked about social care. It was clear she had been given some new lines to try to convince the public that she hasn’t U-turned since the Conservative manifesto was published, but this is a difficult act to pull off.

The problem for the Tories is that their manifesto said that they were rejecting Andrew Dilnot’s 2011 proposals to put a cap on care costs, the Health Secretary went on Radio 4 and said that there wouldn’t be a cap on care costs, but now Theresa May is saying that there will after all be a cap on care costs. It looks on the face of it like the PM has changed her mind, but changing one’s mind is dangerously close to flip-flopping and has a whiff of weakness. So a decision has been made to try to convince us that no minds have been changed, that the current policy is what the manifesto always meant to propose and that to say otherwise is simply scare-mongering.

Here’s the most problematic passage of the manifesto for someone wishing to make this argument.

We believe this powerful combination maximises protection for pensioner households with modest assets, often invested in the family home, while remaining affordable for taxpayers. We consider it more equitable, within and across the generations, than the proposals following the Dilnot Report, which mostly benefited a small number of wealthier people.

It sounds an awful lot like the Tories are explicitly rejecting Dilnot’s proposals, which it is claimed “mostly benefited a small number of wealthier people” – a common (but inaccurate) criticism of the proposed cap on care costs.

But wait – this paragraph doesn’t explicitly say that they are rejecting the idea of a cap, just that they don’t like “the proposals following the Dilnot Report”. It is this chink of light that some bright spark in the Tory election campaign has tried to prise open with a new set of lines that hit our airwaves last night. In this version of events, it is not the idea of capping costs that has been rejected, but the version of a cap proposed by Andrew Dilnot. This has been fleshed out with two quite specific objections to the Dilnot proposals – so let’s see how they stack up.

1. It was going to be paid for out of general taxation

In some other countries, working age people pay into social insurance schemes so that they are protected against social care costs in their old age. In others, this transfer from our working life to our old age is made using general taxation. However, in both cases, the money is not really saved up. The current working age population pays in and the current population of older people takes out. If at some point coverage is significantly increased then there is a generation of people who are already retired and will take out more without paying in more. There is a widespread view in the UK that the current generation of retired people already have it too good and that it simply wouldn’t be fair to ask the working population to pay more to fund their social care. Whether you subscribe to this view or not, where the money comes from is an important issue to consider. So does the new Tory position on this represent a rejection of Dilnot’s proposals?

Here’s what the Dilnot Report said on how the reforms could be paid for.

The Commission believes that there are three possible ways for our recommendations to be paid for:

  • The Government may decide it wishes to raise additional revenue through general taxation. This is the way in which the current system is funded.
  • It may choose to reprioritise existing expenditure, because it places greater value on this than other spending.
  • It may decide to introduce a specific tax increase and, if it did so, it would make sense for this to be paid at least in part by those who are benefitting directly from the reforms. In particular, it would seem sensible for at least a part of the burden to fall on those over state pension age. If the Government decides to raise additional revenue, we believe it would be sensible to do so through an existing tax, rather than creating a new tax.

In making its decision on how to pay for reform, we believe the Government needs to consider the impact of any funding mechanisms on different income and generational groups.

This is, to say the least, quite vague. This was presumably tactical, since the previous attempt at reform was scuppered by the political fallout from proposals to fund it through inheritance tax, but some people have criticised the Dilnot Report for not making a clear proposal. What is clear, however, is that it is not accurate to say that the Dilnot reforms were going to be funded through general taxation. The decision was left to government.

When the Coalition accepted Dilnot’s proposals, they did in fact tackle this issue – and they did not choose to fund them through general taxation. Instead they stated that the reforms would be funded by changes to the state pension and inheritance tax, so that intergenerational unfairness would be minimised.

So how are the Tories now planning to fund their proposals? It’s not possible to answer this question definitively, since unlike the Dilnot and Coalition proposals, the Tories have refused to say at what level they would set the cap, let alone what the proposals would cost. But a significant proportion of the cost will be met by changing the means-testing rules so that people have to use the value of their house to pay for care even if they are still living in it. Is this the change that sets the Tory proposals apart from the Dilnot reforms?

Alas, no. It was in fact Andrew Dilnot himself that proposed this policy.

At present, housing assets are treated differently across the social care means tests (domiciliary and residential) – the result is that different care settings are not on a level playing field. Individuals who may have a preference to receive care in their own homes have a financial incentive to do so; however, local authorities have an incentive to encourage movements into residential care to increase charge revenue. In the longer term, the Government may wish to rationalise these arrangements.

We know that making such a change would be difficult. Our public research reveals that using housing assets to pay for care is a very emotive issue. However, once a cap is in place, it may be easier for people to think about such a change. Our deliberative research indicates that people may be more willing to use some of their housing assets to pay for care if they know that will not have to spend the whole amount. To support changes of this kind a universal deferred payment scheme would need to be in place.

So where does that leave us on the PM’s first claim? The Dilnot Report did not specify that the change should be paid for out of general taxation, the Coalition policy was explicitly to fund the changes in a way that targeted the older population, and the new Tory proposal to fund the changes is lifted straight from the Dilnot Report. The claim made by Theresa May last night is untrue.

2. It protected wealthier pensioners but did nothing to protect pensioners on modest incomes

The first thing to say about this claim is that it demonstrates that Theresa May doesn’t really understand Dilnot’s proposals or her own. The main focus of the debate has been the treatment of assets, not incomes. The manifesto proposal to raise the means test floor means that people who have assets of £100k or less won’t have to pay for care from their assets – but they will still have to use their incomes.

But let’s gloss over that and charitably assume that she meant people with modest assets. Did Dilnot’s proposals do anything to help them? The answer is of course yes. Dilnot recommended that the means test threshold should be extended to £100k, but that it should be tapered so that the less wealth you have the more support you get. This system is actually pretty effective at protecting people with modest assets. Here’s Dilnot’s assessment of the protection that people get from the combination of a cap on care costs and his means-test changes.

The Conservative manifesto did propose something slightly different to this. The means test would be extended to £100k – borrowed straight from Dilnot – but it would no longer be tapered, so that everyone with less than £100k in assets gets the same level of support. This is more generous that what Dilnot proposed and gives more protection to people with low levels of assets, but it is a modification rather than a rejection of the original proposals. The claim made by Theresa May last night is clearly untrue.

Despite all the lying, the U-turn policy is not bad

So we can see that, rather than rejecting Dilnot’s proposals, the Conservatives are now adopting them whole-heartedly, while going even further than Dilnot recommended on extending the means test. But they have clearly calculated that the worst possible thing would be to admit that they have changed their minds and that it is better to try to trick us into thinking that they meant this all along. In doing this they are taking the public for fools, but it may be a line they can hold until the election. However, while all the lying is not a good look, the actual policy they have ended up with is not bad – even if there is a suspicion that they ended up here by accident.

The chart below compares the impact of the policy with the previous Coalition position, which was to implement a version of the core Dilnot proposals with a £75k cap. (This chart is a little different to the one from the Dilnot Report, since I have assumed that the person has £50k in savings.)

As the chart shows the U-turn policy (with a £75k cap) is better than the Coalition policy for people with housing wealth less than £100k or so. It is worse for people with more than this (including someone who owns a median-value property) because they will pay more if they need home care, but even in the worst case scenario they will only use just over 40% of their assets paying for care. It addresses the uneven incentives between home and residential care identified by Dilnot and the additional charges paid by home care users mean that it will probably be cheap or even cost-neutral. This is a perfectly reasonable policy proposal.

But as ever, the devil is in the detail, and we have precious little of that so far. Theresa May refuses to give us any indication of where the cap will be set, preferring instead to consult on it after the election. (Presumably she is not aware that the Coalition has already consulted on this funding model.) The level at which the cap is set is important: if it is set at £75k then the maximum amount of assets that someone will use to pay for social care is around 40%, but if the cap is £150k then this goes up to 60%.

The mechanism for allowing people to use their housing wealth while they are still living in their house is also going to be crucial to the success of the policy. If, as suggested by the Tory manifesto and the Dilnot Report, local authorities are going to pay up-front costs and claim the money back from people’s estates, this means a huge expansion of their role as debt collectors. When people inevitably try to hide their assets and get away without paying, are local authorities willing and able to chase their heirs through the courts? If, on the other hand, the intention is to work with the private sector to finance care through an expansion of expensive equity release products, the political fall-out a decade down the line when financial services companies start gobbling up people’s estates could be severe.

These are difficult policy issues, but they should be surmountable. Unfortunately, the Conservative approach to social care reform to date does not inspire confidence that they have the competence and commitment to do the surmounting.

Advertisements

When is a cap not a cap?

Following my recent post on social care reform, I’ve had some interesting discussions about the ins and outs of different options. In this short follow-up, I want to pick up on one argument that is a bit too complicated to go through properly on Twitter: whether the proposed “cap” can really be considered a cap.

James Lloyd makes the point that in the current system, local authorities have used their market power to push down the price they pay for care. This has meant that care providers charge people who pay privately a higher price to make up for the low profit margins (or perhaps even losses) that they make in their dealings with local authorities. Some people argue that this is a stealth tax levied by local authorities to keep their social care costs down, others characterise it more innocently as “price discrimination”. Either way, if a capped cost system were to be based on the local authority price then it could underestimate what people have actually spent, leaving them spending more than £75k before reaching a £75k cap.

Others have made related points. Sonia Sodha argues that the cap isn’t a cap, because people will still have to pay for their food and accommodation if they go into a care home.

Both James and Sonia are in a sense right: there are limits to what the Dilnot proposals will cover and some people may pay more than the theoretical cap. In fact, such limits apply to any system of social protection, for social care or anything else, and what people actually get in practice is never as simple as a one-line explanation of the offer. If there is too much distance between what a system sounds like to the public and what it means in practice then it risks being unpopular, so this is something worth considering before ploughing ahead with reform.

Given that all systems suffer from this problem to some extent, we want to know whether it is significantly worse under the Dilnot proposals than under other options – and as it happens, we have quite a few options to play with. A number of different reforms to social care have been recommended over the last two decades, most of which were serious and sensible and all of which have foundered due to a lack of political will. The table below takes each of these systems and tries to articulate what it sounds like to the public and what it would mean in reality (assuming local authorities continue to pretend social care costs less than it does).

  What it sounds like to the public What it would mean in reality
Raise the means-test floor
(Tory manifesto, 2017)
You will not be left with less than £x of assets
  • You have to pay top-ups after you hit the floor so you might be left with less than £x
Capped cost model
(recommended by the Dilnot Commission, 2011)
You will not have to spend more than £x on social care
  • You pay the first £(x+ε) of your social care costs
  • After that you have to pay a small top-up
  • You will pay the part of your care home cost that is for food and accommodation
Shared cost model
(recommended by the Wanless Review, 2006)
The government will pay x% of your social care costs
  • The government will pay (x-ε)% of your social care costs
  • You will pay the part of your care home cost that is for food and accommodation
National Care Service
(recommended by the Royal Commission, 1999)
Social care is free
  • Social care is mostly free but you have to pay a small top-up
  • You will pay the part of your care home cost that is for food and accommodation
Current social care system
(since 1948)
The state will pay if you can’t afford to from your income and assets
  • The state will pay most of it, but your family might have to pay a small top-up
National Health Service
(since 1948)
Health care is free
  • An approved set of health care interventions are free
  • You have to pay the full cost if you want things outside of this set

I really struggle to see how the Dilnot proposals are very different in this regard to the other plausible options. The cap tells people they will only spend £x, but in reality they have to spend more than £x; a National Care Service tells people social care will be free, but in reality it’s not free. Under a cap people still have to pay for their food and accommodation if they go into a care home; but they will also have to do this under a shared cost model, leaving them paying much more than the stated percentage of the care home fee.

I don’t mean to argue that a disjoint between how a system is described and reality is harmless. Take the NHS: people think that it means that all health care is free and are scandalised when they are told that the NHS won’t cover the expensive new cancer treatment they have heard about. This causes upset and eats away at trust in the institution, but it is to some degree unavoidable: the NHS can’t pay for high-cost, low-value treatments unless we raise lots more in taxes, but it’s never going to be possible to explain to everyone how NICE technology appraisals work.

It is reasonable to look for a system that minimises this issue, as one of a number of criteria for assessing policy options. It is reasonable to call for local authorities to pay a realistic price for social care, or to demand that government does more to explain the limits of the policies that it proposes. However, in this case, the gap between what a policy sounds like and what it is likely to be in reality does not seem to be a significant factor in deciding between social care funding systems. While debate about the merits of different options is to be welcomed, I do think there is an obligation on those who say “the cap is not a cap” to explain how this can be addressed or how the issue would be less significant under other options for reform. Otherwise it is hard to see this issue as anything but a distraction.

The Conservative manifesto, social care and taxing inheritance

UPDATE: Some of this post is a little bit out of date, since in the time between writing and publishing, the PM appears to have done a U-turn and re-committed to the coalition policy of a cap on care costs. I’m not going to update the whole post to reflect this, since I think it’s still worth understanding the impact of the manifesto policy, but I’ve added a section at the end discussing the implications of the U-turn.

The dementia tax as an inheritance tax

The Conservatives’ new social care proposals have caused a stir. Their manifesto promises changes to the way in which state support is means-tested. People with assets less than £100,000 will now be entitled to state support – up from £23,250 – but the definition of assets has changed, so that your house is now included even if you are still living in it. Previously the house was only included if you went into a care home (and you didn’t have any family still in the house). To get around the fact that it’s difficult to sell something you are living in, people won’t have to pay up-front but the money will be claimed from their estate when they die.

The backlash has been fairly predictable, although one must wonder if the Tories underestimated it when they put this in their manifesto. The changes have been labelled a “dementia tax”, referring to the fact that people who get dementia and need support in their own home now incur much higher costs while those with other illnesses continue to get free treatment on the NHS. There are echoes of the Tory cries of “death tax” that sounded the death knell of the last-but-one attempt to reform social care: Labour’s National Care Service.

But there has been support for the policy and some of it has come from a surprising angle, given that this is a Conservative reform relating to the inheritance of wealth. Some commentators have praised the reforms as progressive because they take away some wealth that would otherwise be passed on to children, while additional protection is only provided to those with lower levels of assets. This is set in contrast to Andrew Dilnot’s proposals to cap lifetime social care costs, which offered risk-pooling to everyone, including the wealthy.

Broadly speaking these arguments are correct. The Tory proposals are progressive, in that they make small inheritances (passed on by people who need social care) a bit bigger and medium to large inheritances (passed on by people who need social care) a bit smaller. But if we want to see the dementia tax as a sort of inheritance tax then we don’t need to discuss it in the abstract. We can do some analysis to see exactly what sort of inheritance tax it would be.

Estimating the total rate of “taxation” on inheritance

If we are going to think about social care costs as a tax on inheritance then we need to consider them alongside the other major tax on inheritance: inheritance tax. As well as the changes to social care, the Tories are also cutting inheritance tax by raising the threshold at which it kicks in from £325k to £500k per person. This allowance can be passed on to a spouse, meaning that mum and dad’s estate won’t incur any tax unless it’s worth more than £1m. So what is the combined effect of these two “taxes”?

It’s easy to calculate the effective tax rate on an estate in any given scenario. For example, under Tory policy, someone starting with a £200k estate who needs expensive social care would have £100k of their estate protected and have to spend the other £100k on social care. The “dementia tax” on this person would be levied at a rate of 50%, but they wouldn’t pay any inheritance tax. Meanwhile, someone with an estate of £1.5m who never needs any social care would pay 40% inheritance tax on all assets over £1m, working out as an effective tax rate of 13%, but they wouldn’t be hit by the dementia tax.

The chart below shows how the combined tax rate relates to the value of someone’s house (assuming they also have £50k in savings) under the current system and the Tories’ proposals for social care and inheritance tax. The “dementia tax” rate also depends on how much social care someone needs, so two scenarios are shown: people who don’t need any social care; and those who have very high costs of £250k over their lifetime, which they can’t afford from their income.

There’s quite a lot going on in this chart, so I’ve marked on four changes that will see different groups passing on more or less to their children.

People who will pass on more to their children as a result of these changes

1. Non-homeowners who need social care

There is one group of people that absolutely benefits from the manifesto policy, and that is people who don’t own their own home. The increase in the means-test rules mean they won’t have to use their assets for social care unless they have more than £100k in the bank. People with very low value houses will also benefit: if someone has a house worth £50k and another £50k in the bank, they won’t have to use their assets either. In the current system they do.

2. Most homeowners who go into a care home

People who go into a care home already have to use their housing wealth to pay for care – that is, they already pay a “dementia tax”. If their costs are high enough, they will only be left with £14,250. The Tory proposals raise this to £100k, so many homeowners will be better off. Of course, this only affects people who are going to reach this limit. With £250k of lifetime care costs, you would benefit from the new limit if your total estate is less than £350k. Given that the median house price in England is £220k, this is most homeowners. Fewer people benefit in London, where the median house price in London is £435k.

But while most homeowners who go into a care home are better off under Tory proposals, it’s still not great for their chances of passing on money to their children. Someone with a median-value house who has expensive residential care is still going to see about 60% of their estate going into social care costs.

3. Rich people, unless they need social care at home

Only rich people pay inheritance tax. Assuming that the person in question has a partner who dies before them, the first £650k of their estate will not be taxed. In 2016-17, only 8% of the population paid any inheritance tax – and that was a record high. By raising the threshold to £500k for individuals and £1m for couples, the Tories are giving a tax cut of up to £140k to the heirs of wealthy people.

However, the proposed social care changes take this money back – but only for some rich people. Those who are lucky enough to not need social care are fine – they can still pass on the additional £140k. Those that go into care homes are also unaffected by the rule changes. But those who need care at home are going to find themselves paying more towards it. If they need a lot of home care, they may find that this completely cancels out the inheritance tax cut.

(In reality, people with £1m plus estates are likely to have high incomes, so may be paying most or all of the cost of home care under the current system. In this case they would be unaffected by the social care proposals and their inheritance tax cuts would be safe.)

People who will pass on less to their children as a result of these changes

4. Most homeowners who need care at home

Most people who own a home have most of their wealth tied up in it. Under the current system, this wealth is not considered as part of the means test as long as they are still living in the house. The Tories propose to change that, meaning that anyone who owns a house worth more than about £75k (assuming they also have £50k of savings) will have to pay more out of their assets for home care. This is the vast majority of homeowners.

For people with homes worth around £75-300k, there is a trade-off between coverage for different risks: they pay more for home care, but if they go into residential care they are better protected. However, for those with homes worth £300-600k it is all downside. Even with £250k of care costs they won’t hit the proposed £100k floor, so won’t benefit from that change, but if they need home care they will pay more – sometimes a lot more. Meanwhile they aren’t rich enough to pay inheritance tax in the first place, so won’t benefit from the tax cuts.

Many London homeowners fall into this category. The median house price in London is £435k. Someone with a house worth that much won’t benefit from the £100k floor even if they have £250k of care costs. If they go into a care home they will pay the same as under the current system. But if they have care at home, they will pay much more: more than 50% of their estate will go towards social care costs, compared to around 7% in the current system. Their children will need to sell their house to pay the debt.

Another group that will lose out is people who go into residential care and leave a spouse at home. The value of the house isn’t considered as part of the current means test in this scenario, but under Tory proposals it would be included, leaving people paying a lot more in care home fees.

Summarising the effect on people with different levels of assets

The chart below shows another way of looking at this. It segments the population by house value (again assuming they also have £50k of savings) and identifies which groups win from the changes (shaded green), which lose (red) and which get a mixed bag (orange).

The effect of the changes can be summarised as follows.

  • Non-homeowners (or those with very low-value homes) do better thanks to the rise in the means-test floor.
  • People who own low-middle value homes (£75-300k) get a mixed bag and see an equalisation of their risks between home and institutional care. Home care will be much more expensive for them, but their residential care costs will be limited. This group includes the median homeowner in England.
  • People who own middle-high value homes (£300-600k) lose out. They already faced a risk of losing more than half of their estate paying for residential care. Now they face the same fate if they need home care. Meanwhile, even if they spend the majority of their assets on social care, they are very unlikely to benefit from the increased means test. This group includes the median London homeowner.
  • People who own high value homes (£600k-£1.2m) get a mixed bag. If they need a lot of social care in their own home, they are going to have to use up more of their assets paying for it. If they are lucky enough not to need social care (or if they have to go into a care home) then they benefit from the inheritance tax cut.
  • Very rich people get to pass on more of their money thanks to inheritance tax cuts. Although people who are asset rich and income poor might see this gain cancelled out if they need home care, they are unlikely to be worse off than in the current system.

In short, the changes to the treatment of assets and inheritance in the Conservative manifesto help the poor and the very rich while hurting the people in the middle.

Comparing Tory policy with the Dilnot proposals

In setting out a new approach to social care funding, the Conservative manifesto also rejects the approach recommended by Andrew Dilnot and adopted by the Coalition: a cap on lifetime care costs. Dilnot recommended that the cap should be set between £35k and £50k, but the Coalition thought this was too expensive and set it at £75k.

It’s not quite fair to compare a cap on care costs with the Tory proposals since the cost isn’t going to be the same. The new proposals help some people and hurt others. It’s not clear what the net effect on government spending would be, but it is plausible that the proposals are cost-neutral. The Coalition’s version of Dilnot’s proposals costs around £1bn a year, so if we are to make a fair comparison we need to consider where this money would come from. As it happens, this is about what the inheritance tax cuts were reported to cost, so capping social care costs and cancelling these tax cuts could be roughly cost-neutral.

The chart below compares these two options: the Tory proposal versus a cap on care costs funded by cancelling the planned inheritance tax cuts.

Some people do better from the Tory proposals.

  • Non-homeowners (and those with very low value homes) pay little or nothing towards social care under the Tory proposals. Under the Dilnot proposals these people do much better than in the current system, but they still might use up to half of their assets on social care costs.
  • Rich people who don’t get sick are the big winners under Tory policy. There is a tax cut for all estates over £650k which is worth as much as £140k for estates worth more than £1m – although people who need a lot of home care might see it cancelled out.

Other people do better if we cap social care costs instead of cutting inheritance tax.

  • Almost all homeowners who need social care (with the exception of those with houses worth in excess of £1m) would be better off with a cap on care costs. People with houses worth the median house price or just above benefit most. Under Tory proposals, someone with a median-value house and £50k of savings would lose over 60% of their estate to social care costs, compared with less than 30% under Coalition policy.

Conclusions

Tory policies in relation to inheritances seem designed to benefit those with the least and those with the most. Those with low levels of assets (mostly non-homeowners) are better protected from social care costs and very rich people get a big tax cut – provided they don’t need social care. But the proposals leave the vast majority of homeowners either worse off full stop or just facing a different distribution of risk between home and residential care.

Reverting to the Coalition policy of a £75k cap and cancelling inheritance tax cuts could be roughly cost-neutral – meaning that the total amount of money coming out of the assets of older people would be the same – but the impact would be different. Non-homeowners would pay less than in the current system, but more than under Tory proposals, while the very rich would pay more inheritance tax. The beneficiaries would be the vast majority of homeowners. Under Tory proposals, the median homeowner could have up to 60% of their estate claimed after their death to pay for their social care, while the Coalition policy would limit this to less than 30%.

Update

Just before hitting publish, word has reached me that the Prime Minister may be in the process of a U-turn on this policy. Despite the Conservative manifesto explicitly rejecting the Dilnot recommendations, the PM appears to now be insisting that we must all be mistaken and that the policy was always going to include a cap on care costs. This puts Tory policy squarely in line with the Dilnot Report, which suggested that the means-test changes for home care could be a good idea if coupled with a cap.

So what would it look like if the manifesto changes to the means were combined with the Coalition’s £75k cap? In short, it looks much better for homeowners.

But if everyone is now going to pay less from their estates, where will the money come from? If the PM is indeed performing a U-turn here, she has just made a spending commitment in the billions. There is one blindingly obvious way to finance at least some of the cost – cancel the inheritance tax cuts. The chart above shows that even with the U-turn, the effective tax rate on estates from social care and inheritance tax combined is regressive: people with assets of £175k (in the chart, a home worth £125k plus £50k of savings) pay the highest rate. Funding the U-turn by cancelling inheritance tax cuts would be both progressive and intergenerationally fair. But it may be too much to ask from a Conservative Prime Minister.

Three golden rules for discussing progressivity

What does it mean for a policy to be progressive? The way this question is addressed by the media (and often by government) can be infuriating. It’s got to the point where I am tempted to say the term should be banned, but instead I am going to make one last attempt to clarify it by proposing three golden rules.

I was reminded of this issue when reading Jo Maugham’s analysis* of the impact of the new “social care precept”. This is essentially a £2bn rise in council tax, a significant proportion of which will be paid by poorer households. Here are the figures that Jo gives:

Who pays what in council tax

So is this tax progressive or not? Well, rich people pay more, and for some that’s good enough. Fraser Nelson, for example, likes to point out that “the top 3,000 taxpayers in Britain stump up more income tax than the lowest-paid 9 million”. It is more common to look at how paying tax affects the living standards of different groups by comparing tax paid as a proportion of income. By this measure, council tax is regressive.

This is as far as the discussion usually goes. But both of these comparisons have no basis in reality – unless that reality involves collecting these taxes and throwing the money in the sea. The fact is that this money will show up somewhere else, either as increased spending or lower taxes. Which brings me to my first golden rule: the distributional effect of a policy change can’t be assessed without looking at both sides of the equation.

Since this is called the “social care precept”, we might think that it will lead to increased spending on social care. It’s not easy to find numbers on how social care spending is split between income groups, but modelling done in 2011 for the Dilnot Commission (see figure 11 here) made some estimates. Reading the numbers off the chart, I get something like this.

Council tax and social care by income group

Social care spending is more heavily weighted towards poor people than council tax collection, so lower income groups make a net gain from this policy. That is, the introduction of this policy increases the total amount of redistribution that the government does, which is the only sensible definition I can think of for the word “progressive”, with reference to a change in policy.

Gain from spending council tax on social care

But is higher spending on social care really the effect of this policy? That is, if it weren’t for the social care precept, would we see lower social care spending? You could argue that social care spending is going to rise either way, since we’ve got more old people than ever. If it’s not paid for by council tax rises it will be paid for by higher taxes elsewhere, higher borrowing, or cuts to other services.

So this is my second golden rule: identify a realistic counterfactual. We need to know whether the policy leads to more redistribution than what would otherwise have happened. That “what” can have a huge impact on how we view the distributional consequences.

Let’s say we believe that without the social care precept higher social care spending would have to be funded through an increase in income tax – or perhaps higher borrowing now, funded by future increases in council tax. As Jo points out, income tax is much more targeted on rich people than council tax. Here’s the net effect of raising £2bn through council tax instead of income tax.

Gain from raising council tax vs income tax

This policy change would give money to the richest 20% at the expense of everyone else. I think we can all agree that’s regressive. So depending on the counterfactual, the social care precept is either highly progressive or highly regressive. Take your pick. We need to decide which counterfactual is more realistic. In this case, the first one is probably closer to the truth (raising income tax and borrowing more are not top of this government’s agenda) so I’d argue that the policy is probably progressive.

But there’s another more fundamental question here: how much redistribution do we want? Requiring all policy changes to be “progressive” implies that we think we don’t currently have enough. But at some point, if we were to go on increasing redistribution, we’d have too much. Views will differ wildly as to what the optimal level is, but in principle there must be one. I imagine few people think that there should be no redistribution and few think that redistribution should fully equalise living standards.

And even if we want more redistribution, we might not care if a policy is regressive if its effect on the overall level of redistribution is small and it achieves some other aims. The state does not exist solely for the purpose of moving money from the rich to the poor. My third golden rule is therefore this: the overall level of government redistribution is what matters. We need to know whether we want to increase or decrease it, and how much we care about small changes relative to other policy aims.

These rules really are essential. It is impossible to say anything about whether a policy change is progressive without considering both sides of the equation and being clear about what you think the alternative scenario is. It is impossible to know whether you actually want the policy to be progressive, or whether you care, without considering the overall level of redistribution.

These are not new insights and many organisations (the IFS, the OBR, sometimes even the Treasury) are quite diligent about doing distributional analysis properly. But much of the public discussion of “progressivity” fails to follow a single one of these rules, giving us a rather poor standard of debate on the state’s role in reducing inequalities.


* I’m not picking on Jo’s analysis because it is a particularly egregious example. On the contrary, I am picking on it because is one of the better examples of someone tackling this question, so Jo has done most of my work for me.