The New Statesman published a feature on Jon Ashworth, the shadow health secretary this week. It included this comment:
Conservative MPs such as Sarah Wollaston, the chair of the health select committee, former minister Nick Boles and backbencher Johnny Mercer have recently supported a dedicated NHS tax. “It's an interesting debate and it's a debate that we should engage in,” Ashworth told me. “The country needs to have a discussion about the future financing of the NHS for the 2020s and the 2030s.”
It's very hard to describe the degree to which that makes me shudder in horror, both at the danger for the NHS and the lack of understanding of the role of tax in the economy that such a comment reveals. Hypothecation is the last thing Labour needs to do for the NHS. I wrote the following post on hypothecation and the NHS in 2014. I did another this month, but for variety I repeat this old one, because it's vital that Labour understand this:
Reports suggest that Labour is considering hypothecated national insurance increases to pay for additional NHS spending during the next parliament. I have to admit I am disappointed. Hypothecation makes no sense to me. Hypothecating national insurance makes even less sense. I need to explain why.
First, and very obviously, there is a problem with NHS funding. The Institute for Fiscal Studies suggest that in real terms NHS spending per head of population may fall 10% this decade, and when age weighted it might be even more extreme. The idea that NHS spending is, as a consequence, being ring fenced and protected is, just wrong and a complete political misrepresentation of the truth. It is important to note this in the context of what follows: I do not think this cut in spending appropriate, and I would wish the NHS to be protected from such cuts, as I would wish other areas of government spending to be protected because I believe they all represent social need. As a consequence, please do not think that in writing this I am saying that I support cuts: far from it.
That said, the proposal to increase National Insurance for the purpose of paying for the NHS is another wholly misleading political message representation that plays on the belief that many people have that National Insurance either pays for pensions, or the NHS, or both, when in fact none of these things is true. National Insurance is, for all intents and purposes, just another tax. According to this year's budget National Insurance will raise about £110 billion this year whereas the cost of the NHS will be £140 billion and the state pension over £100 billion. Quite clearly NIC can't cover all this.
But there is something more important to realise about National Insurance, which is that it is a deeply regressive tax for two reasons. The first is that National Insurance charge on employees falls from a rate of 13.8% to just 2% when earnings exceed £41,865 a year. This means that as earnings rise above this point the overall percentage rate of contribution paid by a higher earning employee falls as a part of income.
Secondly, National Insurance is regressive because it only applies to earned income. That means that if a person can live off investment earnings, or they can recategorise their earnings as investment income, as many self-employed people do by recording their income through a company and by then paying themselves dividends, then national insurance is not paid and this has the result of making this particular tax in some part in voluntary, and in another part a tax only on labour, and not on capital. Both factors suggest that that the tax is already deeply unfair when every member of society benefits from the tax paid. If, therefore, any tax was to be hypothecated, National Insurance is definitely not the one to use.
That said though, I have a real problem with hypothecation in any event. There are, as is usually the case with me, a number of reasons for this but the most important one by far is that, as a matter of fact, governments do not raise tax for its own sake. They have only ever, throughout history, raised tax because they wish to spend. It makes no sense to raise tax for its own sake: that process would simply take money out of the economy for which a government was responsible to make everyone worse off (which is also why running budget surpluses is also quite illogical). Given that running a tax system always gives any government grief, no one would do it just to make their population worse off, and so it is only the act of spending that justifies taxation.
The supposed philosophy of a hypothecated tax is, however, that a government cannot spend until it can raise money, but in fact this is the wrong ordering of events. Again, throughout history, governments have proved that they can spend without raising taxation. They can borrow, of course (and the present government has turned this into an artform) and they can print money, as the UK government did from 2009 to 2012, during which period it issued debt of £426 billion and repurchased about £375 billion of debt, meaning that in net terms it borrow just £51 billion, and effectively printed money to cover the rest. Hypothecation, then, denies this fundamental truth that the ability to raise money is not a precondition of government spending it. It is therefore premised on a falsehood, and that's never a good basis for taxation.
But the problems only get worse the longer one thinks about hypothecation. If we can agree that in the chicken and egg scenario of tax and spend that it was always spend that came first, and tax was the way in which once upon a time kings tried to reclaim the cost of their wars, and now governments try to reclaim the cost of their commitments to their electorates, then to pretend that spending on the NHS is dependent upon raising tax is simply wrong. The spend comes first. The tax comes second. Hypothecation gets this completely the wrong way round. It's as fundamental a mistake as most people and politicians make about the way money is created, and has to be put right.
What is more though, to pretend that this particular spend on the NHS is dependent upon raising tax from a particular group in society — who are are those who by and large earn less than average, and those who by and large have lower savings, and who are, therefore, in the main, those to whom wealth and income should be redistributed - is little short of absurd. If it is spending that has the priority in any government's agenda (and that must be true) then because no one raises tax without there being a spending priority, then it is ridiculous to raise a tax in a way that contradicts the spending priority inherent in the commitment to the NHS.
And, as a matter of fact, that spending commitment to the NHS is about redistribution; it is about the creation of equality; it is about overcoming disadvantage; it is about equal access for all, and it is about making available to all what would otherwise only be available to some (as the USA proves). And yet, the form of hypothecation that is being chosen achieves the exact opposite result. Those who can already afford healthcare, come what may, will not suffer any significant burden as a result of this additional hypothecated tax and yet those to whom income and wealth should be redistributed will bear additional costs right down to, and including, those who might not even pay income tax. Nothing about that makes micro economic sense, or sense in the context of any form of social justice.
Nor however does this make any sense in macroeconomic terms. If spending comes first, as I believe has always been the case with regard to government, then tax has never been about raising revenue, as such. Tax is, instead, about re-claiming the cost expended by government for a number of reasons. The first, and very straightforward reason for reclaiming that expenditure by tax is to make sure that the government's currency is used as the medium for exchange in the economy which it regulates, and this happens because it demands settlement of tax liability in that currency, thereby making sure that it is the primary medium for exchange in use in the economy, which then, vitally, lets it spend using that currency as the way i can undertake is own spending. Without tax its currency might have no use in the economy, which may decide to use another currency instead e.g. US dollars, and the government could not then spend as it wishes.
Second, the decision as to how much to spend is key to fiscal policy. Deficits have been vital for two purposes. One is economic stimulus and the second is keeping inflation going - which is, again, vital to prevention of recession. So tax is not decided upon to cover spend, it is only reclaimed to the extent considered necessary to keep the macroeconomy going in the right direction.
And third, tax is used to reinforce the social policy inherent in spending decisions. So, it is used to reprice goods and services that the market gets wrong, and it is used to redistribute income and wealth. These are vital roles and in the process tax represents the choice that is available in a democracy, which is perhaps its greatest merit.
Hypothecation, in contrast, puts forward the pretence that we are in the market and that we can only have what we can pay for. This has, quite simply, never been true of government, and never need be true of government, precisely because it can print money, and precisely because it has to run deficits to keep the economy moving in a direction where recession is avoided, full employment is the aim, and sustainability is aimed for in a way consistent with both. The very logical of hypothecation is, in that case, in contrast with the principle of universality on which the NHS was founded.
The Labour Party is making a mistake if it backs hypothecation. It's making an even bigger mistake using NIC for that purpose.
Labour does need to reclaim more of the spending it will make in the economy: that much may be true. But if it is then it is the tax gap it needs to tackle. This is could do. It should not raise NIC.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
You’ve left italics on starting “Reports suggest that Labour is considering hypothecated” to the end of the piece!
Because I am making clear I am quoting something I wrote three years ago
The references are not therefore up to date
And I have other agendas for today
I have never been able to understand how this idea is ‘sold’ to the public with apparently a degree of success even before any understanding of your cogent observations about the nature of tax in general and NIC in particular.
It seems to be based on an asumption that it will somehow automatically guarantee an ‘adequate’ supply of funds for the NHS insulated from governmental interference. Both ideas seem obviously false. I suppose it exploits the perception that the NHS needs to be ‘saved’ from politicians but surely the NHS is an essentially political institution and taking it out of politics means in some sense ‘privatising’ it, which appears to be what the Conservative party (and others?) wants. The hypothecation idea seems to me to be headed towards an eventual acceptance of a need for a commerciallly insurance based system. (What basis is there for the idea that the appetite for commercially profiting from the NHS is confined to providing services?) That I suppose is the ‘new realism’ that all the talk about the ageing population and the supposed limitlessness of demand is meant to make inevitable.
You may well be right
“When will they ever learn? When will they ever learn?” (Pete Seeger, RIP).
On a dark, cold, wet Saturday morning in January it’s easy to be disheartened.
Your erudition, patience and persistence is a beacon of light.
Barista – un caffè lungo per favore.
Happy weekend!
Off for one of those very soon
Make it large….
John D says:
January 20 2018 at 9:19 am
“On a dark, cold, wet Saturday morning in January it’s easy to be disheartened.”
Sun’s splitting the trees here in Scotland. (But it isn’t moving the frost if that’s any consolation to you.)
Governmental stupidity/wickedness emanating from Westminster is still pretty disheartening.
https://wingsoverscotland.com/
There is one good argument for hypothecation of taxes taken by UK government: in order to distinguish between revenues in the same way that expenditures are distinguished, when the UK government is acting in each one of its 2 separate functions, as a truly UK government and as an English government.
It’s great to see reinforcement of the view that only two healthcare models ( US and UK ) are worth mentioning in debates about how it should be structure and funded.
It’s a bit ironic of a pro-European to not make a passing reference to any of the European systems in my simple view.
No European model has the merits of the NHS
I have looked
It appears that to be appointed to the Labour front bench loyalty to the blessed Jeremy and deference to McDonnell are indispensible; a functioning brain is an optional extra. And for those whose brains’ function is to keep their ears apart, Seumas Milne is happy to act as a ventriloquist – but he simply can’t be everywhere. Over 20 years ago when John Major’s government was really struggling but providing far better governance that the current Tory shower Labour was 20 points ahead in the opinion polls.
I couldn’t possibly comment
Paul Hunt says: (among other things)
“….Over 20 years ago when John Major’s government……”
One H Wilson once remarked that ‘a week is a long time in politics’. Twenty years ago is ancient history.
The past is another country. They do things differently there.
That was government of a different people by a different people and for a different people. The tectonic plates have shifted quite a way in twenty years.
Did I say it was an improvement?
I don’t think I did.
The weakness in the Corbyn Mcdonnell prospectus is that it is all too easily dismissed or pilloried as ‘going back to….’
You don’t go back.
Even if we wanted to, we can’t.
Like Lewis Carroll’s Red Queen we must be running; even to stand still.
Isn’t one of the problems with NIC & how it’s perceived, it’s history. (As some may remember) Stamps used to be put on a card to show entitlement to benefits and you still need a contributions record to receive certain benefits, such as State Pension. There is also, I’ve just discovered, (thanks Wiki) a National Insurance Fund which “is intended to be the ‘current account’ of the National Insurance Scheme, holding sufficient funds to even out fluctuations over time in the movement of contributions and benefits and to provide a source of finance to meet exceptional demands”, whose balance at present is £23.7 billion. Hence hypothecation is but a short leap of the imagination, however chimerical that may be.
This is all a legacy of the 1940s that needs sweeping away
‘all too easily dismissed or pilloried as ‘going back to….’ I take your point but it is also a hard gig for the Tories to take such a stance when they fawn over people like Rees-Mogg who so resembles a character which has strayed out of a Jane Austen novel.
Alan McGowan says:
January 20 2018 at 7:29 pm
“……‘all too easily dismissed or pilloried as ‘going back to….’ I take your point but it is also a hard gig for the Tories to take such a stance when they fawn over people like Rees-Mogg who so resembles a character which has strayed out of a Jane Austen novel….”
But the Thatcher creed was ‘back to Victorian values’. John Major yearned (perhaps still does) for the fifties, and ‘back to basics’ and the neoliberals want to keep on taking us back to the values of the Tudors and the all powerful barons. It’s hard wired into the Tory genes apparently. Re-appearance of Rickets testifies to the degree of their success.
And besides…..Jane Austen characters were three dimensional. It’s part of their charm.
Fascinating piece – though how does politely agreeing we should engage in a debate get translated into full endorsement of a pure hypothecated NHS tax?
Thanks for responding Jon
First, my concern is hat Labour has flirted here before
Second, even accepting these terms for debate suggests to me a lack of clarity on your part as to the reasons for taxing, which I explain in the piece
Third, I am repeating an offer of an argument that I would hope Labour knew
Fourth, if it was new, what was wrong with offering it?
More than happy to discuss this Jon
Richard
Very happy to discuss. You may have missed this last week also – https://twitter.com/jponpolitics/status/952489691747532803
I had Jon
Good news
I am encouraged
Thanks
Yes, thanks Jon.
That is a relief.
At any rate I have aways found ear-marked taxes to be a curious bit of nonsense and transparent political trick. They are nonetheless widespread though antiquated in many cases. In the UK the TV license fee intrigues many foreigners. The US is among many that are keen on ‘gasoline’ taxes that allegedly fund road maintenance. Around the world, tobacco taxes are supposedly ear-maked for health funding.
The first part of the trick is all about gaining approval. If the govt. simply introduces a new tax or increases an existing one, that alone,may be unpopular. If they say that it is dedicated to something that people are likely to approve of (better roads, better health, NHS, whatever) then people might approve of the tax. Then there’s the user ‘user-pays’ implication: gasoline buyers are more likely to use roads, smokers more likely to need health system etc.
The idea of this “dedicated NHS tax” proposal is almost certainly stolen from Australia where the universal health insurance system, “Medicare” is supposedly part-funded by the “Medicare levy” which is an additional 2% on income tax. There are some exemptions for low income earners and a “Medicare levy surcharge”, being a further 1 to 1.5%, for higher income earners that don’t have private health insurance ( yep, bad implications on that last one). So don’t be surprised if the Tory proposals start looking a bit like that.
Having noted that I would add that the second part of this hypothecation con-trick is the “part-funding” nonsense. We know that overall NHS spending would exceed the amount raised by this added bit of tax – just as road building costs anywhere would likely exceed tax revenue from motor fuels.
Having acknowledged that we also know that tax revenue, or govt expenditure, more particularly, is fungible – its all one big pool of spending that will be raised or cut regardless of “earmarked” taxes. Spending on health or anything else will be raised or cut regardless. Its just like your Dad giving you £10 when you were a teenager and saying “I want you to put that toward buying some new clothes”. You say “yes” then buy the clothes that you were already intending to buy anyway and spend his £10 on – well, you can’t actually remember because all pounds look the same don’t they?
The supposed ear-marking of hypothecated taxes is a well-known, age-old insult to people’s intelligence that shouldn’t be repeated in 2018. Its the user-pays (in this case NIC-related) aspect that reveals the true intention and that, as Richard says, is an intention to make tax more regressive.
In any case, for those that are interested, here’s a brief but informative article on hypothecated health taxes from the World Health Organisation:
http://www.who.int/healthsystems/topics/financing/healthreport/51Hypothecation.pdf
Thanks Marco
Marco,
I find it interesting that whenever (well, usually) hypothecated taxes are proposed they are put forward as a top-up mechanism. If the idea made any real sense all taxes would be hypothecated.
The popularity of the idea (in so far as it could be described as popular), as you say , relates I think to the idea that you have some confidence that it will be spent as you would wish it. The ultimate hypothecated tax is entirely voluntary and comes in the shape of the National lottery. People actually queue to pay that.
It is very difficult to have rational tax (and spending) policy in a society of non-rational beings who are constitutionally bad at assessing risk. The nuclear deterrent costs huge amounts of money and we intend never to use it, but everyone benefits from health services, from before we are born and we argue the toss about its value. As the Americans say, ‘Go figure’.
I heard a rather odd interview with a left-ish ‘thinker’ who said hypothecation was a good idea because most people believe in & care about the NHS & so would willingly pay a tax that was ring-fenced for the NHS .
Apart from the alarming corollary that most people don’t believe in or care about other Govt services & so would, presumably, attempt to escape those taxes, this ‘analysis’ seemed to ignore a fundamental point about our democracy, which is that we have a lot of newspapers which routinely tell lies.
If, God forbid, we went down the road of having a tax that was ring-fenced for the NHS which was willingly paid The Express, Mail or Telegraph would soon announce that the funds were, in fact, being used to support migrants or for foreign aid. Whether or not there was any truce in the allegation would be irrelevant*, people would stop being so willing to pay in.
Paying tax is a requirement as a citizen, it isn’t voluntary. Ages ago I remember an old lady being sent to nick because she regularly deducted a certain proportion from her Income Tax bill & paid it to charity instead. Her view was that as a quaker she wouldn’t pay for defence spending so she deducted that proportion of her bill that met the proportion spent on defence. Although I had sympathy for her as a person (who wouldn’t?), the Courts were quite right. If all the Gelt I’m required to give HMRC goes on expensive & unnecessary foreign wars well, I’ve got a vote haven’t I ?
[* “75% of the so-called unemployed are so wealthy that they own Daimlers. People rarely discuss this unpalatable fact, which is perhaps because I’ve just made it up. It does, however, speak to a greater truth” The late, great Auberon Waugh. What a shame he died before Trump came to town. History first as satire then as farce,]
high farce
It would indeed be an interesting experiment (albeit disastrous, I expect) to offer the taxpayer a menu of hypothecated taxes.
In a sense this is anyway how our democracy works now. We vote for the party which we believe will tweak spending towards the things we approve of.
I wonder what proportion of the national spending is really discretionary? Without rocking the foundations of our already fragile society I suspect it’s quite small. The neoliberal triumph has been to keep tweaking it in the same direction for forty years.
Very well written Richard and I agree on all points made.
My contribution would be from an excellent article o one of the very few magazines I bought. The explanation was how people and the different wealth classes viewed and used money and how that related to the taxes paid.
To try and summarise the flow of tax money and human beings beliefs re money:
1. Human beings believe that more money is better and that with more money their problems eoud be solved. Sadly the change in amounts of money on makes for a new set of problems.
2. Human beings with the above belief will work more to earn more. Inflation helps this process as the person earns more money but the price of goods has gone up the same. In the persons money is earn’t more so he is happier and keeping up with his rivals.
Flow of tax money simplified.
The wealthy will collect more money from the poor and SHOULD pay more tax back into the system that is then given to the poor to the lose to the rich.
For simplicity the middle class earn and pay in tax and receive tax so no net change.
The challenge regarding the rich is that they are very competitive and with the assistance of tax accountants their game has been both the accumulation of money as fast as possible AND the avoidance of the maximum amount of tax that would normally of been due in the national tax accounts.
Interestingly for the rich this is only a relative game i.e. ranking higher than their neighbour is what is more important. So a fair leveling of tax makes no difference other than slowing the amount of wealth that they are generating. As ever the richest buy political power to avoid losses of wealth whilst fearing the voting power of the mass poor in democracys.
Previously with the ‘true and fair view’ of accounting as a principle the practice had fair profits and fair taxes being paid by companies both listed and private as the watchers abided by this principle.
As seen by Google and Facebook they have bought off in my view 2-20billions
in tax for political facesaving items like employing people they were going to employ anyway. That and Amazon should be the target and tax gap. The proper taxation of those would tax the wealthy and the circles would become complete again. Thoughts?
My problem with this analysis is that it is micro economic focussed and my concern here is with macro issues