Boris Johnson and Rishi Sunak have reportedly agreed to fund long-term social service reform by raising national insurance by a dime for employers and employees.
The move would raise around £ 10 billion a year.
The government is bracing for unease among its backbenchers because the Conservatives pledged not to raise income taxes or national insurance in their 2019 election manifesto.
Maybe he shouldn’t be too worried about it. The Prime Minister can always point to the social assistance crisis and the need, more broadly, to consolidate public finances after the COVID-19[female[feminine pandemic.
The Chancellor, meanwhile, may point out that one of his predecessors, Gordon Brown, did something similar in his April 2002 budget. After pledging not to raise income taxes in the manifesto from the 2001 election-winning Labor Party, Mr Brown shattered the spirit of that promise, slapping more than 4 million workers with a 1% increase in national insurance.
The risk of breaking an election promise is the least of the problems with this offer.
For starters, this move will perpetuate the myth that national insurance is a kind of special safety net, mortgaged to pay pensions, unemployment benefits and other elements of the welfare state such as the NHS.
It is remarkable how many people still believe this when, for many years, National Insurance was just an income tax by another name.
Yes, there is what is called the National Insurance Fund, but it is essentially a government accounting whistle.
The money collected in national insurance contributions is insufficient to pay for the public benefits and services that many people think they do. It just disappears, effectively, into government coffers and is spent the same way income tax, VAT, and corporate tax revenues are spent.
Because the UK state pension system is a ‘pay as you go’ system, the national insurance paid by workers today pays for the pensions of today’s retirees, not theirs. .
This misunderstanding of national insurance is perhaps precisely the reason why the government is proposing to take this path.
Polls suggest that people are happier paying national insurance rather than income tax because they really seem to believe they are getting something, a benefit, for doing it.
This is why chancellors over the years have opted for national insurance as their favorite stealth tax. In 1979, national insurance revenue was equal to half of income tax revenue. This year, according to the Treasury, they will equal about three-quarters of income tax revenue.
This proposal also poses other problems.
The first is that it exacerbates intergenerational injustice. Unlike income tax, workers who have reached state retirement age do not pay national insurance on their income, so the hike will fall entirely on younger workers.
Moreover, since national insurance – unlike income tax – is levied only on income, rather than on other sources of income, such as interest on savings, the cost of this measure will fall disproportionately on young people rather than older ones.
In other words, after making sacrifices throughout the pandemic to protect older people, younger people will once again pay with their income a benefit that will benefit older people rather than themselves.
This decision could therefore worsen the problems the Conservatives have with young voters.
An explicit goal of welfare reform is to prevent people from having to sell their homes to pay for such care. Younger people, unable to buy a house in the first place, may wonder why they are being asked to pay higher national insurance premiums so that others can keep theirs.
Others will criticize the lack of progressiveness of this proposal.
All workers (other than those earning more than £ 100,000 a year and not receiving personal allowance) can earn up to £ 12,570 before they have to start paying income tax. In contrast, national insurance kicks in as soon as a worker earns £ 9,568.
As a result, a wealthy retiree living on a generous end-of-salary pension or income from his savings and dividends will not pay this proposed increase, but a low-paid worker earning just £ 184 per week will.
Another major problem with this proposal is the unwanted consequences it will have. Taxes, by their nature, reduce the activity on which they are levied. This is why the chancellors heavily tax smoking.
Because this proposed national insurance will fall on employers, as well as employees, it will make the cost of hiring someone more expensive.
Higher payroll taxes mean fewer people working and, potentially, lower growth. That’s why, in response to Mr. Brown’s hike in national insurance in 2002, then-Conservative leader Iain Duncan-Smith called the move a “tax on jobs.”
The same goes for David Cameron and George Osborne when Mr Brown ordered his chancellor, Alistair Darling, to announce a 1% increase in national insurance in March 2010 to pay for the financial crisis. Mr Darling had preferred to increase VAT. Mr Brown’s decision ensured Labor had virtually no corporate support in that year’s general election.
So in conclusion, what the Prime Minister is proposing is a tax increase that will disproportionately affect young people and low-paid workers while making it harder for employers to hire people.
Or, as Nick Macpherson, the former permanent secretary of the Treasury, put it on Twitter: “Annuitants and trustafarians won’t have to pay a dime. And the poorly paid young people will subsidize the rich old. Higher spending requires higher taxes. But national insurance is a regressive tax on jobs. “