Lib Dems should get behind renaming of National Insurance (libdemvoice.org)

Tory MP Ben Gummer is today introducing a 10-minute rule bill “to make provision for National Insurance to be known as Earnings Tax”. It’s a very simple renaming proposal. But branding is important, not least in politics. The Chancellor is “said to be attracted to the idea”, so if Danny Alexander and Nick Clegg were to support it, the change could make it into the Budget.

It’s well known that National Insurance is an extra income tax in all but name. As far back as 1994, Lib Dem policy was “to abolish national insurance contributions and create an integrated tax on income” and in 2006 the party called for a merger “as the contributory principle becomes obsolete”. Some – but not all – flavours of National Insurance Contributions (NICs) do count towards pension eligibility, but even this is based only on the number of years of work. The existence of a separate National Insurance Fund, which pools some ‘contributions’, is little more than an accounting trick.

A liberal tax system would be transparent and comprehensible as well as equitable. While a pragmatic centre-left argument might be that we need a deceptive tax system to fund invaluable public spending, we must consider that the real outcome of favouring opaque taxation has been a shift away from even-handed taxes – and away from groups with the loudest political voice – towards a largely regressive tax that hits only labour income.

Renaming NICs is clearly only a first step. But it would help remove evident political barriers to reform. For example, Liberal Democrats want to cut NICs for low earners and simplify the tax system, but the party doesn’t think it can sell that message sufficiently well. It’s a Catch 22 argument: National Insurance is overly complicated and poorly understood therefore it can’t easily be changed. So parties are pushed into choosing policies that are simpler to explain but are less progressive and usually end up making reform even harder. Renaming would help improve public understanding and policy making, and would also make it easier to trumpet the coalition’s various cuts to employers’ NICs.

There are many options for new names, but I think “earnings tax” is indeed the most accurate for employees and the self-employed. Employer National Insurance should be renamed as a distinct “salary tax” as its long-run effect is to reduce headline salaries. These names would certainly be more accessible than technical terms like “Class 1 secondary National Insurance Contributions”.

With these names entering political discourse, it would become easier to propose cuts to taxes on low salaries/earnings. And it would beg the question of why wages – alone among income sources – are subject to a salary tax, an earnings tax and an income tax!

For added substance, this change could be one of a welcome package of National Insurance changes in the Budget to make the tax system fairer and simpler. CentreForum proposes:

  • Scrapping Class 2 National Insurance, an unnecessary poll tax for the self-employed
  • Aligning the other self-employment threshold with the income tax allowance
  • Increasing the self-employment NICs rate to fund those tax cuts and slightly reduce the tax break for self-employment
  • Aligning the employer and employee thresholds – set to differ by only £1 a week – and ideally raising them both further
  • Moving NICs to an annual and per-person (rather than per-job) basis
  • Looking into extending the new employer NICs exemption for under 21s to those aged 21-24, and whether a threshold of over £40,000 for those young workers was too generous
  • Reviving the plan to send out personal tax statements – another Ben Gummer initiative and once Lib Dem policy. These should include your income tax and ‘earnings tax’, as well as your employer’s ‘salary tax’ (plus an impartial breakdown of public spending and your place in the income distribution).

10-minute rule bills are largely meant to draw attention to an idea. In the case of renaming National Insurance, it’s a good one and should be backed by Liberal Democrats in government, together with other steps to help fix our tax system.

Originally published at http://www.libdemvoice.org/opinion-lib-dems-should-get-behind-renaming-of-national-insurance-38341.html

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