Chancellor George Osborne. Photo: Oli Scarff
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Merging income tax and NIC: the Chancellor's calculations

The proposed plan could increase pressure for tax cuts and undermine the contributory principle.

George Osborne is planning to merge income tax and national insurance, according to a report in today’s Times.

The move would increase transparency of the tax system and likely raise pressure for tax cuts, because rolling the two together would help workers to see the scale of how much they contribute to the state.

The total sum paid by workers on the basic rate of income tax, for example, would rise from 20 per cent to 32 per cent. The amount paid by those in the higher bracket would rise from 40 per cent to about 52 per cent, with 2 per cent added to earnings above £42,000.

National insurance is the exchequer’s second-largest income source, raking in £104.5bn in 2012-13. Income tax contributed £152bn.

The political calculations made by No 11 and No 10 (said to be actively considering the proposal) are interesting. The Tories are willing, assuming they make it back into government next year, to risk accusations that they have raised the overall tax rate.

Some allegations would be incorrect and based merely on perception. Incidentally, that risk hints at the work the government would have cut out for itself in creating a public-awareness campaign which explains the amalgamation.

Other accusations would be true, reflecting the closure of quirks and loopholes in the national insurance system if it were merged with income tax. The self-employed, for example, would pay more in the new system because generally speaking they pay less national insurance than employees.

So why would Osborne risk the fallout? The gamble is offset by the Conservatives’ hope that greater transparency of the scale of individuals’ contributions to the state will incline voters towards tax cuts, which are on the cards given that public finances look set improve in the next parliament.

Another hidden benefit is that rolling national insurance contributions and income tax together will undermine the contributory principle, making it easier to slash welfare.

Because national insurance is, of course, a social insurance scheme, which entitles people to specific social security benefits – known as “contributory benefits” – through a history of contributions to the scheme made by themselves and by their employers.

First proposed by David Lloyd George in the People’s Budget of 1908, it was introduced in 1912 to create a national system of insurance for working people against illness and unemployment.

While a portion of the national insurance fund is set aside for the NHS, the rest funds contributory benefits. So to do away with national insurance will further harm the contributory principle that is a key defence of welfare.

On the other hand, to give due weight to the downsides national insurance, it is true to say that its rates have become opaque and difficult to calculate. It is because of this opacity, and therefore the ability for govenments to raise it quietly, that the Chancellor is said to be suspicious of national insurance as a “stealth tax”.

But its contributory principle means that accusations from the TaxPayers’ Alliance, among others, that national insurance has become indistinguishable from income tax, with any division merely “academic”, is wrong.

Overall the plan looks likely to be popular with Conservative MPs and voters. The biggest obstacle, however, is likely to be practical rather than ideological: namely, the risks associated with the ambitious IT system that would be needed to implement the merge.

The prospect is a daunting one following the chain of problems, and attendant bad press, that have occurred in the technology developed for the Department for Work and Pensions’ flagship Universal Credit policy, which has suffered delays and multi-million pound write-offs.

According to the Times, it was only such fears of a Whitehall IT disaster that restrained the Chancellor from announcing the move in this year’s budget in April.

The public-awareness campaign needed to explain the merge would present another challenge, as public misunderstanding would lead to the perception that the government was simply hiking tax rates overall.

Other questions remain too. Will pensioners, for example, whose pension incomes are exempt from national insurance contributions, still enjoy the lower tax rate if they continue to work?

And the million-dollar question: how will the shortfall from employers’ contributions to national insurance be made up? It remains to be seen whether corporation tax would be raised, for example, or whether income tax on employees would have to cover it.

Lucy Fisher writes about politics and is the winner of the Anthony Howard Award 2013. She tweets @LOS_Fisher.

 

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Our union backed Brexit, but that doesn't mean scrapping freedom of movement

We can only improve the lives of our members, like those planning stike action at McDonalds, through solidarity.

The campaign to defend and extend free movement – highlighted by the launch of the Labour Campaign for Free Movement this month – is being seen in some circles as a back door strategy to re-run the EU referendum. If that was truly the case, then I don't think Unions like mine (the BFAWU) would be involved, especially as we campaigned to leave the EU ourselves.

In stark contrast to the rhetoric used by many sections of the Leave campaign, our argument wasn’t driven by fear and paranoia about migrant workers. A good number of the BFAWU’s membership is made up of workers not just from the EU, but from all corners of the world. They make a positive contribution to the industry that we represent. These people make a far larger and important contribution to our society and our communities than the wealthy Brexiteers, who sought to do nothing other than de-humanise them, cheered along by a rabid, right-wing press. 

Those who are calling for end to freedom of movement fail to realise that it’s people, rather than land and borders that makes the world we live in. Division works only in the interest of those that want to hold power, control, influence and wealth. Unfortunately, despite a rich history in terms of where division leads us, a good chunk of the UK population still falls for it. We believe that those who live and work here or in other countries should have their skills recognised and enjoy the same rights as those born in that country, including the democratic right to vote. 

Workers born outside of the UK contribute more than £328 million to the UK economy every day. Our NHS depends on their labour in order to keep it running; the leisure and hospitality industries depend on them in order to function; the food industry (including farming to a degree) is often propped up by their work.

The real architects of our misery and hardship reside in Westminster. It is they who introduced legislation designed to allow bosses to act with impunity and pay poverty wages. The only way we can really improve our lives is not as some would have you believe, by blaming other poor workers from other countries, it is through standing together in solidarity. By organising and combining that we become stronger as our fabulous members are showing through their decision to ballot for strike action in McDonalds.

Our members in McDonalds are both born in the UK and outside the UK, and where the bosses have separated groups of workers by pitting certain nationalities against each other, the workers organised have stood together and fought to win change for all, even organising themed social events to welcome each other in the face of the bosses ‘attempts to create divisions in the workplace.

Our union has held the long term view that we should have a planned economy with an ability to own and control the means of production. Our members saw the EU as a gravy train, working in the interests of wealthy elites and industrial scale tax avoidance. They felt that leaving the EU would give the UK the best opportunity to renationalise our key industries and begin a programme of manufacturing on a scale that would allow us to be self-sufficient and independent while enjoying solid trading relationships with other countries. Obviously, a key component in terms of facilitating this is continued freedom of movement.

Many of our members come from communities that voted to leave the EU. They are a reflection of real life that the movers and shakers in both the Leave and Remain campaigns took for granted. We weren’t surprised by the outcome of the EU referendum; after decades of politicians heaping blame on the EU for everything from the shape of fruit to personal hardship, what else could we possibly expect? However, we cannot allow migrant labour to remain as a political football to give succour to the prejudices of the uninformed. Given the same rights and freedoms as UK citizens, foreign workers have the ability to ensure that the UK actually makes a success of Brexit, one that benefits the many, rather than the few.

Ian Hodon is President of the Bakers and Allied Food Workers Union and founding signatory of the Labour Campaign for Free Movement.