Why Combine Income Tax and NI?

At the beginning of last week the Office for Tax Simplification (another new body, with an un-sexy name, but an important job), released its interim report into how to simplify the tax system. The coverage at the time was minimal (what with Libya imploding and Japan’s nuclear reactor’s exploding it’s hardly surprising), but since then and with the budget looming the media has suddenly started to pick-up on their most radical proposal, Scrapping National insurance in favour of a tax which combines National Insurance and income tax into one.

Why is this a good idea? Well firstly national insurance is quite complicated and calculating income tax deductions and national insurance deductions and completing the correct returns for the PAYE system is a time consuming process for business (especially smaller ones). In fact I am almost certain that there is research out there somewhere which shows that being responsible for the tax affairs of employees is one of the things that stops sole traders and one man band businesses from expanding into employers.

Secondly National Insurance is a tax that has had its day. It’s designed to act as an insurance payment, you pay in and get access to benefits and the NHS if you need them, if you don’t then your payments are paying for someone else to get them. Except you also get access to benefits and the NHS if you’ve never paid any National Insurance, because as a society we also look after the poorest and those that can’t work.

At present National Insurance raises £98.5bn a year against an annual welfare bill of £180bn and an annual bill for the NHS of £xxbn. In reality taxation from NI isn’t ring-fenced to pay for benefits and the NHS and if it was it wouldn’t be anywhere near enough anyway. It’s all just money for government coffers, and is just another form of tax on income with complicated rules and rates.

Removing National Insurance actually goes hand in hand with the benefit reforms which Ian Duncan Smith is currently pushing through. His suggestion that everyone will be entitled to a flat rate £140 a week pension removes not just the link to NI contributions over time, but also the complicated mechanism for NI top-ups, that make sure that someone isn’t left in poverty in their old age. So combining NI and income tax not only simplifies things on the employee side, but could also help reduce the huge bureaucracy which is required to administer our benefits system.

Finally of course if we do this then it’s more difficult for a future Labour government to put up taxes by stealth by increasing NI, because it’s all in one single payment. In reality at present the 20% tax rate, including NI is actually 32%, and the 40% rate is actually 52%. So not only would it be more difficult to put up taxes when we’re in opposition, but it’s also easier to convince people that they should be reduced when we’re in government.

So really it’s a win-win all round and something of a no brainer. My prediction is that the Chancellor will announce some kind of commitment to set-up a commission or inquiry into how this can be done in the budget, although who knows he may go further.

Bootnote: This was originally written last week and I've only just got around to looking up the tax income figures.

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The jobs tax is back

One of the most successful attacks against Labour during the campaign was the branding of Labour’s budgeted National Insurance rise as a tax on jobs. The term stuck, looked great on posters and in headlines, talked to the growth agenda and was a definite policy redline between the two parties.

Fast forward 8 months and unbelievably it’s back. In case you missed it, today saw VAT increase from 17.5% to 20%, and Alan Johnson took to the airwaves to say it was the wrong choice and that instead we should be raising National Insurance (which would mean about a 4% jobs tax rise).

And knowing how catchy the phrase “tax on jobs” was Labour have also been out and about trying to brand VAT as a tax on jobs (because people will buy less, even though a 2.5% decrease didn’t really make people buy more) and therefore companies won’t make as much money so jobs will be lost. Do you follow the odd leftie logic there which avoids the growth / disincentive to employ arguement completely.

To back them up they have the CIPD saying that the VAT rise will mean 250,000 jobs lost by 2015-16 three times the jobs official figures say will be lost as a result of the NI increase (not forgetting other measures predict 2.5m new jobs created). Except it turns out that the CIPD got those figures by their head, who happens to be a Labour party member, ringing up a few friends and asking how many jobs they thought they’d lose, multiply it up and there’s your quarter of a million you were looking for.

So the tax on jobs is back and here to stay, you can have either the Labour or Conservative flavour depending on your political persuassion.

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Darling admits NI hike will cost jobs

Whilst appearing in front of the Treasury Select Committee yesterday, Alastair Darling admitted that the 1p hike in National Insurance will cost jobs, an about face from his previous position on the subject.

His admission came after a Paxmanesque performance from the committee's deputy chairman Micahel Fallon, who asked eight times how many job losses it would cause. Finally a defeated Darling admitted "We think that the impact is manageable"

George Osborne, who announced Conservative Conservative plans to scrap the planned increase for 70% of people responded to the news by saying 

"Alistair Darling admitted his National Insurance tax rise would cost jobs.

"How many? There must be an internal Treasury estimate - so what is it? Either he knows and is not telling us, or he doesn't care."

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