The Logical Error In The IFS Report On Taxation


The Institute for Fiscal Studies is making a rather strange logical error in its latest report or discussion of taxes. It’s also managing to ignore pretty much everything we know about how tax systems should be built but that’s another matter.

The error is here:

Public spending on the average 80-year-old is about four times that spent on the average 40-year-old. It is a similar story for tax payments, but in reverse. The average 40-year-old pays nearly four times as much tax as the average 80-year-old.

In our pay-as-you-go system, you would expect the economically active young to support the economically inactive old. The extent to which they do that, though, should depend on relative incomes and wealth. The current system does not reflect those relativities at all well. In large part that is because our tax system often under-taxes capital income and capital gains, relative to earnings.

OK, fair enough, not to agree you understand, just to say that it’s a reasonable statement to start with:

The most obvious issue relates to the taxation of housing. A generation that has had the good fortune to make huge capital gains on their primary residence will face no tax on those gains.

So, it seems that we’ve solved that problem then, doesn’t it? The oldsters have all that untaxed capital to pay for their own care. Job done.

Yes, I know, it doesn’t entirely work that way. But that has been the general thrust of policy for some decades now. That people save for themselves for their old age. The IFS claim is to entirely ignore that in its entirety.

There’s a great deal of point in having a social insurance system. Some people don’t save, some people cannot save and some people save entirely rationally and then live longer than their savings. But the existence of social insurance is not the same as a system of prepayment for government services which are then doled out to all. The first is perhaps a right wing idea. A classically liberal one even. That second is a distinctly statist one, even a left wing one. On this the IFS certainly appears to be lefty. For they are indeed tending toward the idea that the state should take care of all, not just those who need it, and all must pay in to gain what the state dispenses.

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There are two assets in the UK which have benefited tremendously from lower real interest rates (check the BOE data to see how far things have moved). Housing and defined benefit pension schemes – the largest of which is obviously the civil services. We are told that housing wealth is unearned and that gain must be taxed – even though the same house is providing one unit of shelter just as before. Obviously the civil service defined benefit schemes (which have also seen a huge increase in value) should not be touched – as they are providing the same inflation… Read more »