Most of the tax recommendations in the Resolution Foundation’s epic Intergenerational Commission report published this week will bring a smile to the face of public finance experts.
Scrap council tax and replace it with a progressive property value levy? Get rid of inheritance tax and replace it with a lifetime gift tax? Eliminate the loophole which means over-65s don’t pay national insurance on their wages?
The politics of these policy proposals are, of course, a head-exploding nightmare. Property taxes are the third rail of British politics – touch it and it’s liable to kill you. Levies on pensioners are scarcely any less dangerous. And given inheritance tax is already the most reviled of all taxes imagine trying to sell the public a beefed up version
But the public finance economics is uncontroversial. The community of credible researchers in this area have been urging such moves for a long time now. Yet the most eye-catching of the foundation’s recommendations, the proposal to give everyone access to a lump sum of £10,000 on their 25th birthday, will divide opinion among experts.
The theory of asset-based egalitarianism goes back to Thomas Paine. In his 1797 pamphlet Agrarian Justice Paine proposed that everyone should receive a sum of £15 at the age of 21 (equivalent to around 65 per cent of a labourer’s annual income at that time) funded by a tax on the estates of the wealthy.
“To the numerous class dispossessed of their natural inheritance by the system of landed property it will be an act of national justice,” he wrote.
The idea of tackling wealth inequality directly bubbled around in the following centuries, but it was given new impetus in 1991 by the US economist Michael Sherraden, who argued in favour of establishing statefunded savings accounts for the less well-off as an alternative to traditional income redistribution and public spending.
And in 2005 the UK got a policy motivated by the theory of asset-based welfare. This was when Gordon Brown rolled out his “Child Trust Funds” – £250 paid into a fund for every child at birth (more for those from poorer families), which they could access at age 18. CTFs were scrapped by the coalition in 2011. But Resolution thinks the concept should be resurrected.
Should it? Resolution proposes that the uses to which the £10,000 “citizen’s inheritance” could be put should be limited to funding additional education and training, paying off tuition fees, putting down a deposit for a home, investing in a business or saving in a pension. So no Caribbean holidays or smashed avocado binges.
But if the government wants to help out hard-pressed millennials, why is it better to give them a lump sum rather than simply a higher income through the tax and benefits system, or specific support? The case for favouring asset-based welfare over more traditional redistribution will depend in large part on the counterfactual – what good things will the policy facilitate that could not have been facilitated more efficiently in other ways?
There might be other advantages though. Advocates cite indirect benefits, such as helping people cope with risk better, encouraging the habit of saving, and reducing wealth inequality. More broadly, the theory is that it will give people a greater degree of power over their lives than traditional redistribution.
“Income only maintains consumption, but assets change the way people interact with the world,” said Sherraden. “With assets, people begin to think for the long term and pursue long-term goals. In other words, while income feeds peoples’ stomachs, assets change their minds.”
The evidence on this has been inconclusive. But, to be fair, this is because asset-based welfare hasn’t been widely implemented. And, where it has, it has not been sustained for long enough to give clear results.
Perhaps, after suffering the introduction of tuition fees, this is one UK public policy experiment in which millennials deserve to be the guinea pigs.