Monday, March 21, 2011

On Merging Income Tax and NI

It appears that a good few Tory friendly papers and organisations are being briefed that George Osborne intends to eliminate Employees National Insurance and merge it with income tax. From an entirely practical point of view this strikes me as a good move, politically I think it's a masterstroke.

From a practical point of view there is no real reason why we need to have two separate income taxes operating with different sets of rules. There's no real difference between how the revenues from the different taxes are spent, it all goes into the same pool. What we ultimately get from all this is an easier to administrate taxation system, which is good for both the HMRC and employers more generally. A problem that would need to be worked out is that this kind of change could hurt pensioners who might end up with a higher tax bill (since they don't pay NI), but this would not be a hugely difficult thing to implement.

Politically though it's more interesting, because George Osborne has found Labour's achilles heel. In 13 years Labour steered well clear of income tax, the basic rate only ever went down, the higer rate wasn't changed. When Labour needed to raise the equivelant of a penny on income tax, it did it through raising NI, not income tax. The only time Labour ever increased income tax it went horribly wrong (the 10p tax scandal a few years back). It's an unfortunate truth that Labour is scared to death of being seen as a tax and spend party.

By merging income tax and national insurance Labour no longer have the easy option of raising national insurance, it has to commit to raising income tax. For a Labour party still scarred by it's election loss in 1992, this is a frightening prospect. That said though, from a personal point of view, I'm not quite so worried. If we really needed to pull the wool over the taxpayers eyes to implement our policies, we've already lost the argument. The Labour party will need to get better at making the case for higher taxation, but I don't necessarily see this as a bad thing.

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