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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Tackling tuition fees may not be the vote-winner the government is hoping for

In theory, Theresa May is right to try to match Labour’s policy. But could it work?

Part of the art of politics is to increase the importance of the issues you win on and to decrease or neutralise the importance of the issues your opponent wins on. That's part of why Labour will continue to major on police cuts, as a device to make the usually Labour-unfriendly territory of security more perilous for the Tories.

One of the advantages the Conservatives have is that they are in government – I know it doesn't always look like it – and so they can do a lot more to decrease the importance of Labour's issues than the Opposition can do to theirs.

So the theory of Theresa May's big speech today on higher education funding and her announcement of a government review into the future of the university system is sound. Tuition fees are an area that Labour win on, so it makes sense to find a way to neutralise the issue.

Except there are a couple of problems with May's approach. The first is that she has managed to find a way to make a simple political question incredibly difficult for herself. The Labour offer is “no tuition fees”, so the Conservatives essentially either need to match that or move on. But the one option that has been left off the table is abolition, the only policy lever that could match Labour electorally.

The second, even bigger problem is that it it turns out that tuition fees might not have been the big election-moving event that we initially thought they were. The British Electoral Survey caused an earthquake of their own by finding that the “youthquake” – the increase in turn-out among 18-24-year-olds – never happened. Younger voters were decisive, both in how they switched to Labour and in the overall increase in turnout among younger voters, but it was in that slightly older 25-35 bracket (and indeed the 35-45 one as well) that the big action occurred.

There is an astonishingly powerful belief among the Conservative grassroots, such as it is, that Jeremy Corbyn's NME interview in which the he said that existing tuition fee debt would be “dealt with” was decisive. That belief, I'm told, extends all the way up to May's press chief, Robbie Gibb. Gibb is the subject of increasing concern among Tory MPs and ministers, who regularly ask journalists what they make of Robbie, if Robbie is doing alright, before revealing that they find his preoccupations – Venezuela, Corbyn's supposed pledge to abolish tuition fee debt – troublingly marginal.

Because the third problem is that any policy action on tuition fees comes at a huge cost to the Treasury, a cost that could be spent easing the pressures on the NHS, which could neutralise a Labour strength, or the financial strains on schools, another area of Labour strength. Both of which are of far greater concern to the average thirtysomething than what anyone says or does about tuition fees.

Small wonder that Team Corbyn are in an ebullient mood as Parliament returns from recess.

Stephen Bush is special correspondent at the New Statesman and the PSA's Journalist of the Year. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.