Last month, the independent panel of health experts set up by Norman Lamb published its interim report on “a new deal for Britain’s Health and Social Care Services”. The panel were “unanimously of the opinion that it is necessary to raise additional revenue for health and care through taxation” and Spring Conference seemed to agree. Similar views may partly explain why the Conservatives have so far (sensibly) refused to rule out any headline tax rises in the next Parliament.

The interim report, which may influence the Lib Dem manifesto, concludes with three options: 1) raise Income Tax (e.g. raising all rates by 1p); 2) raise National Insurance (NI); or 3) introduce a dedicated health and care tax. All have their pros and cons, and in the grand scheme of things Income Tax and NI rate increases raise similar revenue and are both very progressive. But in this post I want to highlight a few reasons why the current NI system might not be the fairest vehicle for boosting health and social care – points that are also important for considering what a ‘dedicated’ tax should involve.

Don’t raise employer National Insurance

First up, there’s a question about what forms of NI would be increased under that option. In short, you would want to raise the personal forms of NI that individuals – employees and the self-employed – pay, but not employer NI. That might sound backward – hitting individuals but not companies (though in the long run both just reduce take-home pay). But the existing employer NI system already creates damaging and expensive distortions. Foremost, it creates a large incentive for companies (and you and me) to use self-employed labour rather than employees. No-one seems to be suggesting this but for the avoidance of doubt: unless/until that major problem is solved, don’t raise employer NI further.

Pensioners don’t pay National Insurance

Perhaps the biggest difference between Income Tax and NI is that people over State Pension Age don’t pay NI. There is no good reason for this exemption, let alone exempting pensioners from any new tax increase. This would suggest that raising NI – as it stands – is not a very fair option. But the exemption could be ended, which would raise additional money for elderly care.

There are actually two separate questions here. One is whether working pensioners should pay NI on their employee or self-employed income just as working non-pensioners do: they should. But there is also a very strong case that private pensions should be liable to NI just as they are to Income Tax (perhaps alongside a little pension tax relief reform). And when it comes to funding an improved health and care system, isn’t it reasonable to ask those who have already retired to contribute too? The Barker Commission in 2014 was certainly of the view that older generations should play an important part in any funding increases – and that we should look at wealth taxes as well as income taxes.

Landlords don’t pay National Insurance

Just as NI doesn’t apply to pension income, nor does it apply to rental income or savings interest. Landlords – or those with very substantial savings – would therefore much rather we raised NI than Income Tax. It’s not clear to me why we would ask teachers and hairdressers to pay a bit more for public services but not ask the same of property owners.

Neither increases in Income Tax nor NI would apply to dividends, capital gains or inheritance. The party should seriously consider raising some or all of these rates to the same degree as any Income Tax or NI increase, even if it doesn’t try to raise money from broader wealth tax reforms.

National Insurance starts at a lower income

The Income Tax personal allowance is £11,500 this year, but the equivalent allowance for NI is only £8,200. This means that an NI increase affects workers on lower incomes than an Income Tax rise would. And an increase would be slightly more costly for workers than an equal Income Tax rate rise due to the smaller allowance.

I have been critical of the policy of raising the Income Tax threshold (especially at the same time as cutting benefits). But if the party were to propose raising NI rates, a small increase in the starting threshold would be one way – albeit an expensive one – to offset any impact on low income workers.

Conclusion

I’ve not looked at the politics of these different options (and I’ve skipped some issues such as the weekly and per-job nature of NI, devolution, and the taxing of state benefits and benefits-in-kind). Certainly the public seem to prefer NI increases to Income Tax increases. But Norman Lamb has made clear he favours “a penny on Income Tax” as the short-term solution. I think he’s right. Raising Income Tax (and dividend taxes) would be fairer than raising NI in its current form. It would certainly seem contrary to most Lib Dems’ beliefs to choose to raise a tax that only targets earned income and ignores income from wealth.

But what then of our broken and complex NI system? And what of the longer-term funding option, also favoured by Norman, of a ‘dedicated health and care tax’? Perhaps we can kill two birds with one stone. Scrap the existing employee and self-employed NI system; instead add those NI rates onto Income Tax (in practice); while (on paper) keeping them separate as a ‘National Health and Care Contribution’. This reformed version of NI would cover more forms of income than the current system, have no age limit, have a higher starting point and – of course – have rates that were higher and perhaps flatter than at present (currently they are 12% for most people and 2% for higher earners).

All that still leaves big questions about the proper role of the UK’s vast property wealth and inheritances in funding decent care. Nevertheless, the independent panel and manifesto authors face a tough challenge in crafting tax increases that are sufficiently large, popular, progressive and economically sensible. But from the ideas floated so far – and hopefully some of those above – it seems like that might just be possible.

 

Originally published at http://www.libdemvoice.org/reversing-conservative-cuts-remains-the-big-social-security-challenge-51785.html

The Lib Dem manifesto did propose raising income tax by 1p, raising dividend taxes too, aiming to increase the employee NI threshold, ultimately developing a dedicated health and care tax “possibly based on a reform of National Insurance contributions”, and reviewing “the burden of taxation and spending between generations”.