Political Promise

Merging NI and Income Tax Could Work

In Jonny Roberts on March 22, 2011 at 10:32 am

Mr Balls is wrong, merging NI and income tax could be a winner that Labour doesn’t want to miss out on, says Jonny Roberts.

George Osborne, in his budget tomorrow, is set to announce a full-scale review on whether or not to merge National Insurance and income tax and how it could be done. Every newspaper article written on the subject in the past week has noted that politicians have muted the idea for decades only to be told it was too complicated by Treasury officials or nervous party pollsters (who fear the electorate knowing how much tax they pay), unfortunately Ed Balls seems to have spent too long in the Treasury as he has scoffed at the idea in The Guardian this weekend.

Where I think Mr Balls is wrong is that frankly the winds of change have been blowing this way for years as more and more elements of the tax or NI systems were fiddled with by Chancellors, red and blue, making the differences between the two systems more and more minimal. Osborne is clearly interested in this radical reform in the name of simplicity, Labour shouldn’t write it off, it should jump on the bandwagon and make sure it uses the merge to further its aim of fairness.

Osborne is certainly right on one thing, the UK tax system is a convoluted jungle of jargon. The argument goes that the Tories think merging the two income-based taxes will let voters know how much tax they are really paying on their income and stun them into voting for the tax-cutting Liberals and Tories, never again allowing Labour to pull it’s party trick of ‘no income tax rises’ whilst slapping an extra 1% on NI contributions. Whilst its correct that Labour did use this ‘trick’ its strikes me as an overwhelming elitist view of the British populace to assume that most of them can’t add 20+12 and work out they are paying 32% tax. It’s the differing thresholds which cause the calculation problems, merging the taxes would resolve this (though may mean the Lib Dems have to give up on a £10,000 threshold and settle for around £8,000’£9,000 unless they want to slash even more public services). Labour should embrace the merger on the principle of simplicity, because it is more democratic that people know how much they are paying towards the state, it’s both Stalinist and cowardly to try and cloud this in the name of more investment. A strong political argument can be made for public investment and the taxation required to fund it, a case for Labour to make.

Businesses will benefit from the changes as it will make payroll far easier, levying one tax rather than two on income – that’s pro-growth and the main reason Osborne is pursuing this. Of course how the benefits of growth are shared is a whole other debate but Labour should and are a pro-growth party too. The real reason Labour should embrace the merge (and the area upon which they must scrutinise the merge most closely) is that it will mean income from non-payroll sources is taxed at the combined rate of 32%, 52% etc. rather than minus the NI element as is currently the case. In other words the more well-off and rich who receive income from dividends or interest on large cash savings will have such income taxed the same rate as the income the shelf-stacker who slogs his guts out for 39 hours a week. This is how Osborne will justify his scrapping of the 50p tax rate – on the basis that the very rich are charged a 50p rate, in part, to deal with the lack of NI contributions paid on such income and thus merging will reduce the need for the 50p rate. Labour should oppose this; not scrapping the higher rate under a merged system would bring in additional tax from those who can afford it most – this is why merging the systems could be (much as I now loathe the word) ‘progressive’, it’s why Labour should support the merge and this is why the merge will be one of the key battlegrounds of the 2015 election.

The scaremongers are already out in force, allow me to debunk.

Pensioners will pay more. Really? You think any Government, let alone the Tories would stick it to the OAP vote. The truth is pensioners get a different tax code at state pension age already, this can be used to raise the personal allowance for pensioners so that 90% of pensioners need pay no tax at all and only the more well-off, those with an income more than enough to cover their needs, contribute.

Savers will suffer. Again Government can easily raise the cap on the amount that can be put into a tax-free ISA to offset the rise in tax on interest for the vast majority of savers so only the most well-off will contribute more.

So this is my plea to Mr Balls. Please don’t get left behind, reappraise your opposition to the merge and begin strategising for how to make the merge work to increase fairness in the UK.


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