Combining income tax and National Insurance – simplification or ideology?

There is much speculation that in his Budget tomorrow, George Osborne will announce plans to merge income tax and National Insurance Contributions (NIC).  I have some real concerns about this.  On the one hand, to the individual in employment, it would appear that income tax and NIC could easily be merged into a single tax, making the process more transparent and possibly reducing the bureaucracy needed for collection.  But there seem to me to be problems both of principle and in practice, and I wonder whether this is about ideology, not efficiency.

As a matter of principle, income tax and NIC are raised, in theory at least, for two different purposes.  One is a general tax; the other is a contribution towards the cost of benefits, including unemployment and sickness benefit and the old age pension.  Of course, both of them go into the consolidated fund – as do excise duties like VAT and duties on petrol and alcohol.

But the point about NI is largely sympbolic.  It’s about entitlement and the right to benefits.  It allows people drawing benefits to do so in the knowledge that benefits are a right that they have earned, not a charity.  This is important when the principle of universal benefits and social provision is under unprecedented attack  – the Big Society seems to me to be an attempt to return collective social action to the voluntary sector, replacing rights with charity doled out by local committees of moral guardians.  The loss of the link to a national insurance payment seems to me to be a step away from the idea of universal provision .

Moreover, this seems to me to be a move towards the right’s dream of a single flat tax.  In many ways NIC is a highly progressive tax – there is a real risk that a combined tax could shift the burden from high to low earners, if not managed properly.

There are technical issues too.  The self-employed currently pay a low level of NI reflecting the fact that their benefits are lower – how would that be reflected in a single tax?  Many pensioners pay tax but no NI – merging the two could be a huge tax whammy for them, without special exceptions that would rather destroy the advantages of a single tax.  Currently NI contributions are paid by employers as well as employees – will those contributions be turned into a payroll tax – after all Osborne’s rhetoric in opposition about “taxes on jobs”? Or will the burden of the employer contributions be passed on to employees?  The problem with a single tax is that to make it fair – indeed to avoid it becoming a way of shifting the tax burden on to indivuduals and away from the corporate sector – it needs a set of exemptions and conditions which will mean no significant simplification.

I have a real fear that Osborne could use such a change for ideological ends – to shift the burden of taxes still further from the rich to middle-income and poor, and from business to individuals.  Many people now are unclear about the structure of the taxes they pay – this could just be the ultimate stealth tax.


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