Economic growth under Elizabeth II is the highest under any monarch at 2.4 per cent, higher than Victoria’s 2 per cent and William IV’s 2.2 per cent. But, as Larry Elliott of the Guardian asks, should it have been better still?
The real story of the past 60 years has been of potential squandered. Britain has grown richer, but other countries have grown richer faster. What’s more, the economy has become more unbalanced and its foundations shakier.
Indeed. Britain’s bloated public sector has unbalanced our economy and the huge budget deficit means the foundations are dangerously shaky, as Greece is discovering. But it could have been better.
If Government spending would have been kept at the 33 per cent share of national income recommended by the 2020 Tax Commission from Elizabeth II’s coronation until 2009, the economy would by then have been 91 per cent bigger than it actually was. Instead of being 3.7 times richer than we were in 1952, we would have 7.1 times richer instead. Adding a per cent or so on growth every year over nearly 60 years makes a big difference.
An actuary, so goes an old joke, is someone who thought the sheer thrill of chartered accountancy seemed like too much excitement. The problems with pensions may be huge in scale and almost universal in their impact, but facing up to them often just seems too dull and uninteresting for all but a select group of doughty actuaries and pensions professionals who have been pointing out the alarming consequences of issues such as a rapidly aging population and permanently sluggish trends for economic growth.
The Single Income Tax, the 2020 Tax Commission’s proposal to radically simplify and reshape direct taxes, tackles these problems head on. But fairness is at the heart of the proposals, and the report warns that without careful planning some groups might be caught in the transition from the current system to the Single Income Tax. The TaxPayers’ Alliance is firmly committed to opposing every tax rise as one of our core principles. Pensioners paying the basic rate of Income Tax are one such group the report cautions governments not to disadvantage in the transition.
“there would need to be a delay before the introduction of some of the recommendations, so that individuals and businesses that have made decisions based on the current tax system do not face too much disruption.” – p.30, The Single Income Tax
Generally, pension funds would enjoy a substantial boost from our proposals. Now, asset values are hit by transaction taxes which gum up markets, hit by corporate taxes when they make a profit, and then hit again by Capital Gains Tax when they are sold. And all that’s before Income Tax on dividends. We propose to abolish all those taxes and reform Income Tax into our Single Income Tax. A recent study indicated that abolishing Stamp Duty alone, which then raised about £4 billion a year, might increase the value of shares by £150 billion, which are largely owned by pension funds. Capital Gains Tax and Corporation Tax currently raise almost £50 billion. Their abolition would be likely to increase share values by a substantially larger margin than Stamp Duty.
But share values are also significantly influenced by expectations of economic growth. The Centre for Economic and Business Research has calculated that our plan would boost trend growth every year by 0.4 per cent. It doesn’t take long for this to make a big difference. They calculate that after just 10 years, the economy would be 5.9 per cent larger than it would otherwise be, and 9.3 per cent larger by 2030. That would mean higher expected profits and dividends which would in turn lead to higher share values now.
So beleaguered defined-benefit pension funds, including many suffering worrying deficits, would receive a major boost from our plan. In addition, our reforms exempting UK companies from tax when they transfer money to other UK companies would free up pension contributions, so employers could pay pensions contributions directly into pension funds tax free, sweeping away complex and unnecessary rules and restrictions.
In addition, pensioners are considerably more likely to directly own property and shares than the population, because they have had the time to build up assets. So not only will pensioners benefit from the gains to asset values owned by pension funds from the abolition of Stamp Duty, Capital Gains Tax and Corporation Tax but they will also gain directly when they sell their own assets.
Despite these huge gains for pensioners in general and the more generous personal allowance under our proposals (the Government plans to freeze the more generous personal allowances for people born before 6 April 1948 so that inflation will make them gradually less valuable), some would still be at risk of losing out from the merger of Income Tax and National Insurance to a Single Income Tax rate of 30 per cent, because pensioners currently enjoy the advantage of being exempt from National Insurance. So instead of the combined rate falling from 40.3 per cent to 30, as it would for basic rate taxpayers under the pension age in work, it would mean a rise from 20 per cent.
Because it would be too late to expect pensioners to adjust their plans accordingly or fully benefit from the wider reforms, it would be unfair if the Government did not account for this. So we would suggest the Government consider two options. Firstly, pension funds could be mandated to increase pension payments to ensure everyone receives at least the same income after the new 30 per cent tax rate. However, once personal allowances are factored in, funds would need to raise their payments by up to 10 per cent to ensure every pensioner would be better off. For example, if all payments were increased by 10 per cent, a 70 year old pensioner paid £15,000 by a fund would have received £13,988 after tax, last year. Under the Single Income Tax, that pensioner would have been £562 better off. Meanwhile, a pensioner paid £40,000 would have been £305 better off.
While ensuring pensioners benefit from the increase in values in their funds, this might not be possible as funds covering annuities tend to hold assets such as Treasury gilts which would be less likely to rise in value as much as shares. It would therefore require detailed study by the Government.
The second option would be to let pensioners whose pensions had already been settled retain the 20 per cent rate for the first £33,000 of taxable pension income. This could be combined with a one-off tax on settled schemes where the other tax reforms have increased their value, to ensure everyone benefits from the reforms. As with the first option, this would require detailed technical study that was beyond the remit of the 2020 Tax Commission.
The British tax system is a complicated mess that requires radical root-and-branch reform to help restore incentives and growth into the economy. The Government must not shy away from this challenge. But it must also protect pensioners and others who have made decisions and arranged their affairs according to the current system. The 2020 Tax Commission’s Single Income Tax can achieve both of these objectives.
City AM has published a superb chart on whether or not you have to pay VAT on your lunch under the recent u-turn on the rules.
The City AM chart, by Lizzie Fournier, shows just how ridiculously complex the rules on VAT are. But while VAT rules are unfair and overly complicated, the Government’s so-called simplification did little more than shift the boundary of unfairness from one area to another. Instead of tinkering around with the rules on VAT that provide no real simplification benefits, the Government should take a look at the 2020 Tax Commission’s final report ‘The Single Income Tax’ and get to work on implementing its serious yet radical measures to truly simplify Britain’s absurdly complicated tax code.
Happy Tax Freedom Day! UK taxpayers have finally stopped working for the taxman and started working for themselves. But as it’s almost June, perhaps we shouldn’t be jumping for joy.
The Adam Smith Institute calculates Tax Freedom Day every year. For 149 days of 2012, every penny earned by the average UK resident will have been taken by the government in tax. And the problem’s got worse too – this year’s Tax Freedom Day falls two days later than it did in 2011.
The ASI says that freedom from the state actually occurs on 23 June, when you add in the cost of borrowing. Our research at the turn of the year factored in the cost of regulations, which means that the Cost of Government Day will extend as far as 26 July this year.
The ASI’S annual calculation is a vital reminder that we are overtaxed in the UK. Last week we released the final report of the 2020 Tax Commission, which recommended that the overall burden of taxation should fall to 33 per cent of GDP. If that happened we’d see better news from the ASI, instead of finding out that Tax Freedom Day is occurring later and later every year.
Small is best. That’s the finding from an economic research paper published today by the Centre for Policy Studies (CPS) which looks at the economic performance of advanced economies with big governments and compares it to the performance of those with small governments. Their conclusions might be nothing new, but it’s certainly helpful to have a new paper to add to the mountains of evidence all pointing in the same way on the question of whether our government is spending too much of our money.
The 2020 Tax Commission published ‘The Single Income Tax’ on Monday, which includes a review of the literature on the effect of the size of government on economic growth. It also recommends reducing to 33 per cent of the nation’s wealth the proportion of national income that the Government spends. Despite all the evidence, Nick Pearce of the IPPR and others still cling to a delusion that “the empirical evidence doesn’t support” the inverse correlation.
Ryan Bourne and Thomas Oechsle have updated the evidence in their CPS paper, incorporating the last 10 years of data and new countries such as Estonia. The numbers in their updated report using robust regression analysis confirms the story from the existing literature: a 10 percentage point cut in the government’s share of GDP per capita adds around 1.1 per cent to per capita economic growth figures every year. Over many years, that adds up to a lot.
The CPS’s estimate of the correlation is on the conservative end of the spectrum. But what if the CPS estimate was applied to the 2020 Tax Commission’s recommendation for government spending at 33 per cent of national income? If you started at 1965, by 2009 GDP would have been 43 per cent higher. That means instead of being £22,190 per person, it would have been £31,817.
But not only would individuals and families have been a lot better off with both much larger earnings and much lower taxes, our proposals would have meant a lot more money for the public sector, too. Even though government spending ballooned to £601 billion or 47.6 per cent of GDP in 2009-10, under 2020 Tax Commission proposals it would have been £604 billion. A smaller fraction of a bigger pie would have meant a bigger slice for the public sector.
The Government is defending new taxes on everything from pensioners’ incomes to Cornish pasties on the grounds that they need to make the tax system fairer and simpler. Unfortunately the Chartered Institute of Taxation has taken a look at the Finance Bill, the legislation that implements the changes announced, and found that it is the longest ever at 670 pages. And Tim Wallace at City AM points out that there are another 508 pages of explanatory notes. Of course, that doesn’t necessarily mean that taxes aren’t being simplified. It probably would take a lot of legislation to fix Britain’s dysfunctional tax code. But the more you look at the detail of this Budget the more the complications look as significant as the simplifications.
Age-related allowances are going, for example. That will simplify taxes, though there would have been much fairer ways to achieve that which didn’t mean taxing some pensioners so much more. But then at the same time the Government has introduced an overall limit on unlimited reliefs – for things like charitable donations and losses – that looks like it will be a disaster in practice.
Major charities are complaining that it will put them in serious trouble and very nasty results could be created for some people. If someone makes a big gain one year, a big loss the next, but the relief on the loss is limited, then they could wind up paying loads of tax on no income. There has to have been a better way of cracking down on exploitation of the rules, or looking at the fundamental problems in the tax system that created the loophole.
Some VAT reliefs are going on things like pasties and static caravans. That will mean higher taxes for people who buy them and just move the goalposts, so that different distinctions between products create new complexities in the tax code. All of a sudden the tax man has to care about the temperature of your pasty, for example, or it might still escape VAT.
Even if that does simplify the tax code. Again it has to be balanced against the way they’ve addressed the very real problem of foreign buyers avoiding Stamp Duty. They have made that tax, which the IFS Mirrlees Review had said should be abolished it is such a mess, even more complicated. And they’ve also introduced a new wealth tax on an extremely small base, altering the basic principles of Britain’s tax system to bring in £65 million, about 0.1 per cent of government revenue. Again they could have found a fairer way of doing it. Just close the Stamp Duty loophole itself, or ideally look at replacing that tax wholesale with new rules.
That is without even getting into the Child Benefit mess.
This was supposed to be a more careful Treasury, which was careful about fiddling with the tax system, to avoid nasty unintended consequences. But instead it has managed to combine unpopular measures to simplify some taxes by making people pay more, with dramatic changes in legislation that make the system a lot more complex without achieving very much. It all makes the good news which will mean most families pay less overall, like the increase in the Personal Allowance, fade into the background.
That’s the problem with revenue neutral tax reform, it often creates lots of losers and new dysfunctions in the tax system no matter how much hard work politicians and officials put in during the run up to the Budget. Tax reform without tax cuts tends to be a political nightmare. But, at the same time, tax cuts without tax reform are a missed opportunity. We need both.
It looks like at the Budget we’ll have the announcement of new property taxes. Reports suggest there will be a higher stamp duty rate for high value properties. That would be a repeat of the same approach taken by Gordon Brown more than once. Some commentators are applauding it as an economically rational move to tax property rather than income, but is that actually what is happening?
No. The revenue from new taxes on very high value properties will likely be underwhelming. Taxes on labour income – Income Tax and National Insurance contributions – raise over £250 billion each year. Capital Economics have estimated the new Stamp Duty rate could raise £400 million a year, just 0.1 per cent of the amount raised by those labour income taxes. Maybe George Osborne will find a way of extracting more than that. But even if he raised ten times as much it would still not be enough to cut a penny off the basic rate of income tax.
This just won’t be the rerun of the switch from taxing income to taxing consumption in the 1980s that helped finance substantial cuts in marginal income tax rates, though those lower rates actually largely financed themselves. There aren’t enough very high value properties for a tax on them to raise a lot of money.
If politicians try to tax property more broadly they will find it is extremely unpopular. It is no accident that our grassroots campaign has always been focused on Council Tax more than any other tax. First time buyers find it incredibly hard to pay Stamp Duty. In the United States, tax revolts have often responded to high property taxes and academic research suggests those taxes are particularly salient. Britain already raises more in property taxes than any other developed country, taking a fiscal windfall from the high prices many families struggle to pay a mortgage on, and if politicians try to raise even more from property they’ll be voted out of office.
Higher taxes on a small number of very high value properties might be a useful political gesture for George Osborne. It is no substitute for the grander vision for the tax system that Allister Heath rightly argues he needs to set out today.
Deputy Prime Minister Nick Clegg has proposed what he calls a new Tycoon Tax. The proposal sounds quite reasonable but in reality it would produce unfair results and, judging by past experience of these kinds of policies, affect plenty of non-”tycoons” over time.
There are four important points to bear in mind: most people on high incomes pay a lot of tax so this won’t affect many of them; sometimes people appear to pay low taxes on their income because they have already paid taxes elsewhere; a similar tax in the United States (the Alternative Minimum Tax – a better description of the proposal) has become a heavy burden on the middle class; and a tax system functioning effectively wouldn’t need this kind of back-up.
There is a constant stream of ideas emerging from Westminster for the next big means to get more money out of high earners. Many of them are premised on the bizarre idea that, for the rich, tax is almost voluntary. Richard Murphy was repeating it over the weekend when we discussed the mansion tax on the BBC Radio 4 Today programme over the weekend. Even the most reasonable plan to increase taxes on high value properties, an increase in the range of bands for council tax, would require a costly revaluation that could easily be used as cover for a more general increase in rates.
In announcing his proposal for an alternative minimum tax, Nick Clegg said that:
If you’re earning millions per year, if you’re able to pay an army of lawyers and accountants to basically pick and choose what tax you are paying, if you are paying as low as 25%, 20% or even less in tax, there should be a minimum fair share that you should pay to society.
In 2007-08, the highest earning 1 per cent of the population earned 13 per cent of total income but paid 24 per cent of total income tax, £39.4 billion. Does the Deputy Prime Minister really think that was all some kind of voluntary donation? That the rich paid all that money – their share of taxes is nearly twice their share of income – for the fun of it?
No. There are some ways that high earners, particularly foreigners, can avoid some taxes like Stamp Duty. It is hard to see how that would be captured by a Tycoon Tax though, as it isn’t related to their annual income. It would be better to either find a way of closing the Stamp Duty loophole or ask whether a tax on moving is a good idea in the first place or if it should be abolished over time for the rest of us too.
There are other loopholes but there are also situations where low tax rates are charged because the income is taxed in other ways. For example entrepreneurs pay a low rate of tax on capital gains when they sell businesses that they have established. But that income is already taxed because expected taxes on future profits depress the value of the shares they are selling. If we add to the double tax on growing businesses that will mean fewer jobs, less innovation and lower wages for workers. Sometimes tax bills are also lower because money has been taxed abroad.
That won’t just be a problem for “tycoons either”. As I mentioned earlier, in the United States they have a tax called the Alternative Minimum Tax, a more accurate description of what Nick Clegg is proposing here. Representative Paul Ryan spoke to the Cato Institute about why that tax should be abolished:
The AMT is a federal income tax that is imposed on top of the existing income tax system. In 1969, AMT was passed to go after 155 rich people who were using deductions and loopholes to avoid paying any taxes. And while subsequent tax reform closed those loopholes, the AMT remained. Most critically, the AMT was never tied to inflation, so that today the AMT is targeting an ever-increasing fraction of the middle class.
About 20 million Americans were subject to AMT in 2006; 23 million in 2007. Their estimated increased tax liability was about $2,000 per person. According to the Congressional Budget Office, by 2010, if nothing is changed, one in five taxpayers will have AMT liability. Nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax.
So the AMT represents an enormous tax hike on the middle class. Going forward, it will represent an even larger tax increase. That is a major reason it must be repealed.
If you think that won’t happen here, then you haven’t been paying attention as tax after tax – starting with Income Tax – has gone from being a tax on the rich to a tax people have to pay on much more modest incomes.
There is a much more effective strategy to get greater revenue from high income taxpayers, one that we have tried in the past with great results. Cut marginal rates of income tax across the board giving everyone a better deal. Then simplify taxes so there are fewer loopholes and everyone pays the same single rate on different streams of income. That can be done, it’s the heart of the 2020 Tax Commission’s plan. It will be much more productive than yet more lazy sticking plasters and won’t be the same kind of threat to our prosperity.
At the end of last week, I discussed tax evasion on the Radio 4 World Tonight programme with the host Ritula Shah and activist Richard Murphy. Everyone should pay their fair share but, as I argued, condemning those who break the law is only part of the equation. We also need lower and simpler taxes which are easier to pay.
At the moment the tax system is so complicated and opaque that the squeezed middle see benefit fraud at the bottom end of the income distribution and the rich hiring expensive lawyers and accountants to avoid taxes at the other end. Some think it is only fair that they cut a few corners. That is one reason why we need a simpler tax and benefit system with fewer loopholes. If everyone is reassured they aren’t the only mugs paying their taxes, then that will undermine a lot of excuses for tax evasion.
But that is also why it is important we don’t overstate the extent of the problem. Exaggerating how many people avoid their taxes only adds to the sense that it is a normal, and to some extent, acceptable thing to do. Unfortunately it does appear that Richard Murphy has seriously overstated the extent of the “tax gap” in his research, which he argues is £120 billion.
In Parliament last year, Treasury Minister David Gauke noted that “estimate does not take into account those reliefs and allowances that Parliament has determined should be available”, including “double taxation relief”. Christie Malry has written about a number of critical problems with Richard Murphy’s work, which suggest the HMRC estimate of around £40 billion is more reliable.
Murphy frequently makes use of flawed reasoning to justify his wild claims. For example,he suggests that the HMRC figure for tax paid late is “just £1.8 billion” while “the Ministerial claim is … £3 billion”. Hence he concludes that the correct figure must be £28 billion.
With respect to personal avoidance, he notes that the HMRC figure is £1.1 billion and that George Osborne has appeared to say that the avoidance figure for capital gains tax alone exceeds £1 billion. He therefore concludes that the Tax Research UK figure (of £13 billion) is “confirmed”.
Yet, when data appear to disprove his estimates,he merely says that “more work is needed to support the Tax Research UK figure”. In fact, the honest response would be to admit that the Tax Research UK estimates are wrong.
That kind of problem might be why, as Tim Worstall reported on his blog, when asked to choose between his estimate and the one produced by HMRC, respondents to a Tax Journal online survey went with the HMRC figure:
Readers were asked whose was the better estimate of the tax gap. While 166 favoured HMRC’s estimate of £42 billion and 83 favoured Murphy’s estimate of £120 billion, a further 151 readers said that both were ‘wrong’.
Tax evasion is illegal and rightly so. We should also try to reduce tax avoidance which often distorts economic decisions and undermines confidence that everyone pays their fair share. But we should do that by closing loopholes and reducing the incentive to dodge taxes with lower and simpler rates. And it won’t help at all if we overstate the scale of the problem.
The Deputy Prime Minister, Nick Clegg, has said he thinks the Coalition should speed up the implementation of its pledge to increase the amount of money people can earn before they have to pay Income Tax (the ‘personal allowance’) to £10,000. The level is currently £7,475 and is scheduled to rise to £8,105 but Mr Clegg argued that poor families being squeezed by the VAT hike and tough economic conditions deserve a break from taxes sooner:
“Today I want to make clear that I want the coalition to go further and faster in delivering the full £10,000 allowance, because bluntly the pressure on family finances is reaching boiling point.”
Quite right. Mr Clegg said much the same thing in January 2011 and we congratulated him then and urged Mr Osborne to take heed. But his other idea, to raise a new tax on houses worth over £2 million, is the wrong way to fund it. As Allister Heath wrote in a blistering editorial in yesterday’s City AM, the Coalition needs to wake up to the urgency of the economic problems Britain faces:
“IT is hard to understand what the coalition is playing at. Britain’s economy is stagnating, GDP appears to have shrunk in the last three months of 2011 and yet the government exudes no sense of emergency, no impression that it realises that we are in a national crisis and that radical, drastic and unpopular action must be taken.”
Raising the personal allowance to take the least well off out of taxes is right on its own merits and the Chancellor should listen to the Deputy Prime Minister. Taxing the poorest on such low incomes and then giving the money back is crazy and kills incentives for people to work and improve their lives.
Despite what some on the left may claim, raising the personal allowance will benefit the poor most, as a graph by TPA Director Matthew Sinclair illustrates. Another way of looking at the policy is to consider how much the move would reduce people’s Income Tax bill by. As you can see from the graph below, it would cut the tax bill of someone earning £26,000 a year by 14 per cent. An earner on £18,000 would enjoy a 24 per cent cut while those on £14,000 would have their tax bill slashed by 39 per cent. Obviously, those on £10,000 or less would have their tax bill completely wiped out. That has to be a good thing and shouldn’t be opposed simply because people below £7,475 already don’t pay any tax and therefore wouldn’t benefit!
But such an obviously popular and ‘progressive’ move should be used to help the Coalition take necessary steps that might otherwise be unpopular. Abolishing the 50p rate of Income Tax, for example. And it should be funded through scrapping wasteful schemes like High Speed Rail 2 and reversing the rises on international aid and the NHS budget, not from even higher taxes on other people.
Yesterday evening I took part in a debate on Radio 4′s PM programme, with the IPPR think tanks’s Nick Pearce, about high marginal taxes rates, particularly on income and capital gains.
You can listen to it here:
Last year Nick wrote that, the “over-reliance of the UK on revenues from financial services, the housing market and wealthy individuals was brutally exposed in the financial crisis”. The kind of argument he was making on Radio 4 yesterday would exacerbate that problem.
The amount people pay in Capital Gains Tax is often quoted and it can often sound low, many politicians have argued that we need to increase the Capital Gains Tax rate to the Income Tax rate as a result. What they miss is that Capital Gains have already been taxed. To understand why look at the Gordon Growth Model:
Where P is the price; D1 is the value of next year’s dividends; r is the cost of capital; and g is the rate at which dividends are expected to grow. Of course, things can get a lot more complicated than that in the world of high finance. But the fundamental picture is the one that simple equation sets out: the value of shares is the earnings they will pay to the current owner or someone else who might own them in the future.
If a company’s profits rise then that currently gets twice. Once by Corporation Tax as profits (and often when it is paid out in dividends too). Then again because the rise in profits increases expected dividends, immediately or in the future, and thereby increases the price of the shares (producing a capital gain).
If we want more good jobs to go around then people who invest in rapidly growing new companies, the ones who get hit by that double tax, are really important. Back in 2009 we set out just how important in a paper on tax and entrepreneurship.
So no, Mitt Romney almost certainly didn’t pay just 13.9 per cent tax and it will be a huge risk to our future prosperity if we started setting new tax rates as if he did.
Some rich Americans probably do find elaborate ways of avoiding paying their fair share in taxes. One of the problems with a tax system that is too complicated and poorly designed is that those with the most expensive lawyers and accountants to work the system can get a better deal.
But actually the United States, with its relatively low marginal tax rates, gets more revenue out of the rich than any other developed country, according to research by the Tax Foundation based on OECD figures. Far more than many European countries that have much higher rates. Over time, and as the success of tax cuts in the 1980s shows, tax cuts can be so economically successful that they increase revenue.
Lower spending and lower taxes, particularly lower marginal rates of tax on your income, have a great track record – established by years of academic research which we’re working to summarise with the 2020 Tax Commission – of delivering greater prosperity. And simple, proportionate taxes are a more reliable way of ensuring everyone pays their fair share.
Campaigning for the tax system to be more transparent and simpler has always been one of the core missions of the TaxPayers’ Alliance.
And so in broad terms we very much welcome the consultation which was launched this morning by Treasury Minister David Gauke entitled Modernising the administration of the personal tax system: Tax Transparency for Individuals.
The opening line of the document states:
“The Government wants to hear views on how increased transparency and accessibility to tax information can build greater awareness and understanding of how the system works.”
Frankly, it ought to read: “Increased transparency and accessibility to tax information DOES build greater awareness and understanding of how the system works – so we are going to get on and do it.”
Frustrations about the pace at which the wheels of government turn aside (the document is now subject to a 12-week consultation, which should at least allow the Chancellor to deliver some action in the Budget next March), most of the substance and direction of it is to be welcomed.
The Government is already looking at how in some other countries there are systems in operation whereby individuals can go online to see how much they are paying in tax month-by-month and year-on-year.
At the event launching the consultation this morning, David Gauke showed prepared mock-ups of what a personal HMRC web page could look like for Britons. This would enable people easily to see how much of their income goes on income tax and national insurance contributions – including the oft-forgotten employer’s element of the NICs. This would show people year-on-year whether they were paying more or less in tax and would indeed be a welcome leap forward in transparency. As the above video produced by the Treasury itself demonstrates, there is widespread public ignorance about how much tax they are actually paying.
Also today, the Government published its latest position on the integration of the operation of income tax and National Insurance Contributions, in response to a consultation it held on the issue earlier this year.
The TaxPayers’ Alliance has called for a complete merger of National Insurance and Income Tax, as explained in our recent report, Abolish National Insurance, and that is what we recommended in our response to the consultation: National Insurance is almost indistinguishable from Income Tax in its function of raising revenue and the current system obscures public understanding of tax on earnings.
It is disappointing, therefore, that the Government has not been persuaded of the merits of this case, concluding as it does that it wishes NICs to “retain an identity distinguishable from income tax” as part of maintaining the so-called contributory principle.
It does, however, accept that “closer integration of the operation of income tax and NICS has the potential to reduce burdens on business, remove economic distortions and improve fairness” – although does not foresee being able to implement any changes until “around 2017”.
At a time when businesses are crying out for red tape to be reduced, five years does seem an extraordinarily long time to wait for any action on this.