The contributory principle is dying. And yet we keep National Insurance Contributions (NICs) propped up in the corner, as if Britain is one of those slightly odd families who stuff Fido and keep him next to the hearth where they can still talk to him.
Beveridge’s conception of a social insurance scheme, in which contributions led clearly to entitlements, was undermined from the outset by the perceived need to offer protection to those with incomplete contribution records. Since then, the government’s contributory Ponzi scheme has been built upon like an ancient farmhouse. Instead of Georgian facades, higgledy piggledy extra categories have been tacked on, and the codes governing each group of contributors have multiplied like seventies conservatory extensions. Each category of contributor is treated differently – and the rules pertaining to some sets are enforced more than others.
The complexity of the various rule books (and the apparent variability in policing) adds a huge burden to business as well as driving inequity. And boy is it unfair! Not only are NICs a pretty regressive form of taxation to begin with but they also have a more insidious effect: NICs act as a general tax on employment, adding to payroll costs and suppressing numbers of job opportunities, especially for those on low incomes. Even if there are jobs available then the incentives to take such roles are diluted by the realisation that often contributory benefits pay out less than the means-tested equivalent. This is madness.
So perhaps it is just as well that NICs as an incentive structure are rendered almost entirely moot by their opacity. Do you have any idea how your NICs are calculated? Do you know what they, in turn, entitle you to? For most of us the answers are no and no. And this makes the NI fund vulnerable: it is far too tempting for government.
For years the Treasury has seen the NI fund as merely another receipt, barely differentiating this source of income from standard taxation. How convenient, when budgets are tight, to be able to increase revenue by upping NICs without facing the ire of the country for increasing income tax. If you were a minister, mightn’t you be tempted to get a little more money from the NI fund for the NHS? Or to use that money to fund green initiatives? The myriad uses of the fund have become so muddied and muddled over the years that all things seem possible.
To top it all, returning to my initial point, the contributory principle is dying a long slow death – corroded by a proliferation of means-tested benefits. If the trailed government plans for a universal state pension of £140 per week come to fruition, then only 6% of benefits would be contributory.
So let’s just be honest and get rid of NI. In a CPS report published today, David Martin argues that the time has come to merge the whole thing with income tax.
This would simplify government accounting – ratifying a de facto approach to income that already treats NI contributions like any other tax receipts – and reduce administration and enforcement costs. The HMRC currently charges us £300 million a year for collecting NICs and it costs DWP about a billion to distribute the benefits. These costs could doubtless be reduced or even eliminated if we merged tax and NI.
A merger would also reduce the burden on business and simplify our gargantuan, creaking tax code. This in turn will remove one of the barriers to entrepreneurship and make incentives to work clearer – this plan is a natural partner to IDS’s grand benefit simplification.
And this reform would give us a tax system that is far more transparent and less enticing for politicians. There will one be fewer stealth tax for ministers to tinker with, one headline rate of income tax that we could all understand.
So, apart from a sharp intake of breath when someone tells us, up front, how much tax we are already really paying, what’s not to like? As an added bonus David Martin argues that, if this wholesale reform coincides with a return to growth, it could be accompanied by a slight tax cut that would lessen the shock slightly. But he admits that the figures will be scary enough to require ‘a combination of political will and extremely effective communication skills’. If this government truly believes its own rhetoric on tax simplification, democratic accountability and transparency, and restoring incentives to work, then this reform will be well worth the political capital.