Wednesday, 23 March 2011

Merging Income Tax and National Insurance?

In my previous piece on National Insurance, I wrote:
NI contributions are expected to bring in £97 billion for 2010/11 — almost twice the £50 billion held in reserve in the National Insurance Fund.

In this same period, £117.2 billion will be paid out in pensions alone. Pensions are paid not from previous savings, or returns on investments, but by current contributors. Most people would recognise this as a Ponzi scheme.
I was delighted to read a few weeks ago that the OTS recommended integration in their "Small business tax review interim report" (March 2011).

Melanie Phillips recently wrote about the impact this could have
Almost from the very beginning of the Welfare State in 1948, the claim that tax and National Insurance — first introduced in 1911 — are quite different and separate arrangements has been a deeply misleading fiction.

There is a widespread belief that, all their working lives, people pay into a National Insurance fund from which they then draw a pension and other social security benefits.

This in turn has created the impression that National Insurance is a principled bargain between the individual and the state based on reciprocal responsibility.

And this means that National Insurance is therefore regarded as a Good Thing; whereas income tax, which involves rapacious governments making off with people’s hard-earned cash in order to pour huge volumes of it down a series of deeply incompetent or objectionable drains, is very much a Bad Thing.

The fact is, however, that none of this is now remotely true about National Insurance — if indeed it ever was.
National Insurance is simply taxation by another name. The purposes for which the two imposts are used are now pretty well interchangeable. So the true basic rate of tax should be acknowledged not as 20p but 31p.
She notes that previous suggestions for harmonization have been dismissed a politically infeasible, but speculates that
remarkably, according to the advance briefings from George Osborne’s camp, it is precisely in this jump in the basic rate that lies the political attraction.

If people realise how much they really are paying in taxes, it is argued, they will be more inclined to vote for the political party that promises to lower them.

So in addition to the savings to be made from merging two alternative tax-raising bureaucracies, electoral support would be swung behind the idea of a smaller state.

We'll find out later today. Anthony Evans of the Cobden Centre will be live blogging the event. His recent Spectator article, Three principles that should underpin the Budget, is well worth reading.

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