Daily Mail, 21 March 2011
George Osborne is about to bite a very large bullet indeed in his Budget on Wednesday, if reports are to be believed.
According to this advance information, the Chancellor will examine recommendations to merge income tax and National Insurance.
Maybe this is merely flying a kite of which, come Wednesday, there will be not a trace in the sky. But if Mr Osborne does consider such a move, it will be an enormously significant and potentially valuable leap in the right direction — but with equally huge question marks.
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.
For virtually from the start, the claimed connection between what individuals paid into National Insurance and the pension and other benefits they received was deeply flawed.
Those in work were always paying for the benefits of the previous generation. And over time, the link between the contributions paid in and the benefits taken out has become ever more tenuous, and National Insurance has become ever more similar to income tax.
But most people still haven’t seen it as a tax, not only because of the contributory principle that it supposedly embodies but because it is deducted uncontroversially on a flat rate.
As result, politicians who flinch at raising income tax because of the political fall-out have regularly sought to fill the holes in the Treasury coffers by increasing National Insurance rates instead — which raises money rather than hackles.
But 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.
Clearly, in the interests of political transparency and honesty the two should be treated as one. What’s that, you cry — since when did the words ‘honesty’ and ‘politics’ have the remotest connection to each other?
Indeed; and there’s the rub. For what politician would dare merge the two and thus in an instant effectively raise the basic rate of taxation — potentially an act of electoral suicide?
Moreover, what should happen to employers’ National Insurance contributions which, if these were also to be incorporated into general taxation, would propel the basic rate of tax upwards again to a dizzying 43 per cent plus?
And how would any government that merged the two imposts deal with the potentially volcanic fall-out from this income tax rise among tax-paying pensioners who at present pay no National Insurance at all?
Yet 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.
Such thinking turns all previous accepted political wisdom on its head. For years, one expert body after another has recommended merging tax and National Insurance in order to reduce bureaucratic overlap, anomalies and fraud. Yet each time, governments have balked at the suggestion because of the political problems.
It also flies in the face of the Cameroons’ ‘modernising’ strategy for the Tories, which has been to leave the total of state spending hardly any lower — indeed, on some measures even higher — than the level they inherited from 13 years of Labour government.
The fact remains that reducing the size of the state is hugely to the nation’s advantage since the state generally makes such a mess of what it does — quite apart from the unhealthy dependency culture it engenders, as well as its mania for intrusive interference in people’s lives.
Nevertheless, decades of such cultural demoralisation and damage cannot be reversed overnight. A change in the very basis of the relationship between the state and the individual requires careful public de-programming and re-education.
For until now, the voters’ clamour for lower taxes has been matched by their clamour for more and better public services funded through the Exchequer.
The brutal, if blindingly obvious, truth that it is impossible to have both has been routinely sidestepped by successive governments, which have instead pledged to deliver both lower taxes and more centrally-funded goodies.
That basic lie has spawned the politics of mendacity and the imposition of ‘stealth’ taxes to conceal the fact that the ever- open maw of the Treasury requires feeding with more and more of the voters’ hard-earned cash.
It must be said, however, that the contributory principle is a very important one in any society that lays claim to a sense of fairness and compassion.
Indeed, a true social insurance scheme on the European model has much to recommend it, requiring individuals to pay into privately-run insurance funds which then deliver benefits and services such as health or social care free of political control.
Such schemes do seem to promote both a spirit of individual responsibility and a collective social conscience. Politicians are kept out of the public services; people really do receive the benefits of what they contribute; while those who truly cannot pay for themselves are taken care of by the funds contributed by the majority.
George Osborne apparently wants to be seen as a radical reformer. But integrating tax and National Insurance would raise many questions that have defeated politicians before him.
Perhaps the biggest of all concerns the nature of the society he would want to help shape through such a possible change.
The contributory principle is based on a moral instinct deeply rooted in British culture. If he finally decides to remove what is now left of it as the admitted sham that it has become, what would he substitute as the governing principle of Britain’s society? And would he tell the public the truth about the inevitable consequences for services such as health, education and the rest?
If he goes ahead with the plan and also shows on such questions that he has both integrity and vision, he will go down in history as a truly radical statesman. If he does not, he will be scorned as more of the same old same old, and out of his depth to boot.
Posts
