Nigel Farage confirmed yesterday that Ukip are not likely to repeat their 2010 General Election manifesto pledge to abolish employee's National Insurance and introduce a flat rate of Income Tax. The policy was to merge employee's National Insurance (then charged at two rates of 11 and 1 per cent) with Income Tax (then three rates of 20, 40 and 50 per cent) into one rate of tax of 31 per cent.
Asked on the Andrew Marr Show if a flat rate of tax was still a Ukip policy, he said:
No, we're going to rethink the tax policy. I think that was badly explained because people thought gosh, we're going to put tax up for the low paid. Well, no. The idea was to abolish National Insurance. What I can tell you for certain is that our biggest tax objective in that next manifesto will be: no tax on the minimum wage. we've got to incentivise people to get off benefit and to get back to work. Now that obviously will cost money...
I think a top rate of tax of around about 40 per cent is the one that will bring in the most revenue into the Exchequer and i think through the 80s and 90s we saw that... anything over 40 and you start seeing people going overseas. But really what we've got to worry about actually are the millions of people there on low pay and, frankly, without sufficient incentives to be in work.
It's a shame that Ukip seems to be watering down their bold policy of tax simplification. But it hasn’t been completely abandoned. Only the aspect of having a single rate was explicitly ruled out and Farage also spoke of raising the personal allowance up to around £12,500 (approximately the amount earned by someone working the average 37.5 hours per week on £6.31 per hour for 52 weeks). He hinted that they will propose abolishing the 45p rate of Income Tax and his language about merging National Insurance suggests that there has not been a change of heart on policy terms there, either. It’s possible that rather than being dropped, the party might wish to present a merger of National Insurance as a separate, distinct policy.
There are three things politicians from Ukip and other parties might like to remember, however:
1. There is evidence to suggest that over a longer time period the revenue maximising rate of income tax is even lower than 40 per cent. Although this might have been the level 20 or 30 years ago, labour is more mobile now and higher labour mobility means lower revenue-maximising tax rates and while a tax rise might bring in revenue now, it often takes years before people fully adjust their behaviour to new rates of tax.
2. The 2020 Tax Commission's Single Income Tax is a plan for major simplification that extends beyond Income Tax and National Insurance to Corporation Tax, Capital Gains Tax, Inheritance Tax and Stamp Duty, too. I explained the policy in more detail for Taxation magazine and I set out in practical steps how to reform tax in two papers: How to fix corporate taxes and How to abolish National Insurance.
3. Farage is right that we need to transform incentives for the low paid. By raising the personal allowance to £10,000 the Government has already gone some way towards this and the Universal Credit's 70 per cent taper could make a meaningful contribution to simplification and improving incentives. But it's not enough. Our 2010 paper Welfare reform in tough fiscal times sets out how a Negative Income Tax could substantially simplify welfare while letting the low paid keep more of what they earn.
The economy is recovering, employment is at record levels and even productivity seems to have stopped falling. But while the public finances are getting less awful, the Government will still rack up additional borrowing of almost £100 billion this year. All while millions of people are trapped on welfare. We need comprehensive tax reform to sharpen incentives to invest and work in the UK and the Single Income Tax is the best plan there is. And we need a more affordable welfare system that encourages people into work and into better paid work. And a ‘Negative Income Tax’ along the lines set in our Welfare reform in tough fiscal times paper is the best guide for how to do that.