A senior Conservative is to urge Theresa May to target the wealth of baby boomers to prevent their children’s generation being forced to stomach a 15p rise in income tax to cover the spiralling cost of healthcare, education and welfare.
Former minister David Willetts will argue that public spending on the three areas is due to rise by £60bn a year by 2040, which could be funded by either taxing the homes of wealthy pensioners or by squeezing younger people’s take-home pay.
“As we baby boomers sit on so much wealth – which has continued to grow even as incomes have stagnated – one obvious source is for us to make a contribution through capital or property taxes,” Lord Willetts will say in a speech on intergenerational fairness.
Willetts, who was in David Cameron’s cabinet and now chairs the Resolution Foundation thinktank, will admit that he is addressing “difficult and unpalatable options”, particularly for his Conservative party, but will say the debate can no longer be delayed.
“By the end of the next decade, the fiscal gap is set to grow to the equivalent today of £20bn a year and then to £60bn after another decade. That translates to an income tax hike of 15p in the basic rate by 2040, the burden of which will overwhelmingly fall on the generations following baby boomers,” he will say.
“Is that kind of tax rise really the legacy we – a generation that owns half the nation’s wealth – £13tn of wealth – want to bequeath to our children and grandchildren?”
The Tory peer will hit out at “clumsy” attempts to address the issue, such as the mansion tax proposal by Labour and the Liberal Democrats and the so-called Tory “dementia tax” at the last election, which he feels triggered “hysterical” responses.
“But neither party can avoid this issue,” he will say, claiming the Tory party’s stark 2017 manifesto was a “taste of things to come” with little room for tax cuts in the future. The Labour party, he will add, cannot raise all the money from the very rich as “taxing bankers cannot pay for everything”.
Willetts will call for an overhaul of council tax, which he will describe as the “most regressive property tax you could have”. According to the Resolution Foundation, which has been gathering evidence through its Intergenerational Commission, a family living in a £100,000 house faces a tax rate five times higher than the occupant of a £1m house.
“That is why council tax is crying out for reform. We will shortly be publishing a paper looking at the options for making it fairer and raising more money from it,” Willetts will say. One idea is a 1% tax on the value of properties above £100,000, adding £9bn to revenues.
The idea of controversial new bands for council tax has never been attempted, however, because of the numbers of people living in homes that have risen dramatically in value while their incomes have not. However, Willetts points out there could be ways to help “asset-rich, low income older families”, for example through deferred payments.
The Resolution Foundation is also examining inheritance tax, which it says is “poorly designed, widely abused and under-utilised”.
“Inheritance is now a classic bad tax with a very high rate and very high exemptions. We could lower the rate but with a broader tax base, which would be fairer for all,” according to Willetts, although he admits that would also be unpopular.
He will argue that he has come round to the idea of such tax measures reluctantly: “Today’s young people are earning less than people of the same age 10 or 15 years ago. Recent shifts in the welfare state have been increasingly tilted against their generation and towards older people.
“The younger generation are spending a record share of their income on housing – and getting smaller, insecure rented accommodation in return, rather than the homes they want to own and settle down in. The norm of major living standards gains made by each successive postwar generation is under threat.”